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jperl
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Posts posted by jperl
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Moon, I think this method presented by Jerry here is a good hint, but like any other method it is not a miracle. In fact price often bounces from or crosses VWAP and SD's in a "wrong" direction, no matter what Skew bias is. What seems to be important is also the slope of VWAP (i.e. the strenght of daily trend), the real statistical Skew which I wrote about a few posts above, S/R areas (or HUP's), etc. I believe that one must able to judge price action near possible entry/exit points as well as the "big picture". This might give him the answer whether to scale-in or exit.Just my guess, Jerry please correct me if I am wrong.
No you are not wrong Head. In fact you have some good ideas, especially about the skew. I think you should start a new thread on trading with the skew. I have some ideas about this that might be useful
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Jerry, please for give me for nagging…If price goes to the +sd1, we are actually at what you called DMZ (The area where the price is near the PVP and the PVP is sandwiched between the VWAP and the SD)
Also, at this point the skew is negative (VWAP<PVP) and trend is bullish (Price>VWAP) – so why: “I would have most likely doubled up on my contracts at the 1st SD away from the entry and tried to exit the trade close to break even.” ?
The +sd1 doesn’t seem to be a good place to enter short (at slow or fast market)
Doesn’t it make more sense to admit the loss and look for another trade where chances are in our favor?
With a lot of appreciation,
moon
You are correct moon. The +sd1 price is not a good place to enter a short. If I were not already in a trade, I would not short at that point. However, given the circumstances you outlined, with a trade in progress, you have three choices: a) exit the trade at +sd1 and accept the loss b)scale in and try to exit the trade at break even or c)reverse the trade at +sd1 with possible increase in position size. A good trader should be willing to consider any of these options at any time. A new trader would only consider option a) all the time. My point is, that new traders are limiting their capabilities for trade management by only considering option a). When you allow yourself the option to consider options b) and c) as well, you will find that a whole new vista of trading is open to you.
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Hi JerryThanks a lot for your answer.
Main reason for my previous question comes from what you wrote few pages back at this thread (as an answer to Trader333)
“Also think about what you would have done if the trade at the VWAP had not gone your way. Would you have exited the trade at the PVP or done something else?”
Trader333 answered:
I would have exited at either the PVP line or 1st Standard Deviation away from entry whichever was nearer at the time.
And you wrote:
That is what most traders would do and in my opinion leads to a slow bleed of your capital
By this answer I assume you would have stayed in the trade although market conditions changed. (?)
Can you please advise what would you have done?
Thanks!
moon
The answer moon depends on several factors: a)what my position size was at the initial entry, b) what my profits look like up to that point, c)how fast the market is moving. So there is no unique answer.
So let's assume this is my first trade of the day, and I enter light (well below my contract limit) and the market is moving slowly. I would have most likely doubled up on my contracts at the 1st SD away from the entry and tried to exit the trade close to break even.
If the market is moving fast (fast and slow are of course about individual perception), I might have reversed the trade at the 1SD away from entry and doubled up on the number of contracts.
If instead I was close to my profit target for the day from previous trades, I might have simply exited the trade at the PVP.
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Hi Jerry,Thanks for the great threads!
I was thinking about two things you mentioned in the treads:
1. Risk tolerance vs. Stop-Loss: If I am using risk-tolerance of 2% of account of 100K (i.e. my risk tolerance is 2K) and I am trading a specific market (e.g. YM), then actually the risk tolerance can be translated to 2K/5 = 400 points for every trade.
Do you enter a trade with default SL of 400 points away?
2. After examining the VWAP/PVP/SDs and their relationship you decide to enter a trade Long. Your risk tolerance is still far away, but the market conditions changed (e.g. vwap and price are now below PVP) - would you exit the trade? Stay in the game till your risk-tolerance is hit?
Thanks,
moon.
Moon, your calculation is correct for YM. This does not mean that you simply enter a trade without managing it. If, as you point out the price action is such that the trade no longer makes sense to you, then you simply exit it or reverse it. The point about using risk tolerance, is that you are not locked in to a course of action which takes you out of the market too early because a stop was hit. Rather, it gives you the opportunity to adjust the trade by either adding size to it or reversing it without the fear that a pre-set stoploss creates.
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Jerry,First of all thahks for your posts--very informative. Secondly, are the ensign indicators that you use available with the software, or did you develop those by yourself?
Thanks,
Ron
The volume histogram is available in Ensign. When I started these threads, VWAP and SD were not available, so I wrote them myself. Now both are available in Ensign.
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Thanks,The screenshot he showed looked very nice. I think Ensign isn't too expensive, and it works with Infinity AT, so maybe I'll give it a try.
Does TS do this same thing well? If so do you know the indicator name?
thanks again,
Ron
Ron, before you get too deep into TS, you might want to check the new thread by Frank in the [thread=4230] coding forum [/thread]concerning TS and market profile problems.
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So the Ensign computes the volume distribution the same way as I do. on 7/15 I compared the PVP, VWAP and 1st SD's computations on ES from differnt time frames (i.e. bar intervals). Here is the result (All for RTH 9:30 - 16:15, 1st SD's are named VAH and VAL):5 min graph: VAH 1227.03, VAL 1210.78, VWAP 1218.91, PVP 1225.00
1 min graph: VAH 1227.07, VAL 1210.65, VWAP 1218.86, PVP 1218.75
100 tick graph: VAH 1227.06, VAL 1210.62, VWAP 1218.84, PVP 1223.25
50 tick graph: VAH 1227.06, VAL 1210.63, VWAP 1218.84, PVP 1223.0
20 tick and 10 tick graphs computations resulted in the same values as the 50 tick graph. 1 tick graph was too much for my computer to handle.
You can see that while VWAP and SD's being averaged values are not much sensitive to the calculation base interval. Yet PVP being a peak level is very sensitive to any kind of averaging. For ES 50 tick data provide the base detailed enough for an accurate calculation.
I realized I am unable to determine dailly PVP from 1 minute database and that brought me to alternative ways of calculation.
The difference you are seeing in the PVP is most likely due to two peaks with almost the same volume. This will cause the PVP values to jump around from one time frame to another. This is an example where a visual of the total histogram would help you out.
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Jerry, I wonder how do you determine the exact PVP level. In fact, I started to dig in the skew stuff only because I was unable to determine an accurate PVP position. With my data feed I don't get volume per price but only volume per bar (i.e. per time unit). To approximately determine the volume per price I take the volume per bar and divide it by the number of prices the bar crosses to obtain the volume unit which I add to every price level that the bar crosses. Now that was an awful sentence but I hope you know what I mean. The problem is that this is an averaging process and every averaging process smooths peaks. To get an accurate volume per price I would need to run the computation on tick database and that would be unusable in real time. On ES I observed that the data base with sufficient accuracy would be 50 tick or less data. That was too detailed for my computer to handle in real time so I started to look for another way to determine the skew. The comptutation of the 3rd central moment is an averaging process itself so it is not so sensitive to the averaging of volume per price. Still, the PVP, as a major HUP, is a significant level and whatever the Skew(3CM) is, you don't want to take your trades across the PVP because it can block the desired price movement.I use ensign software for my charts. The volume histogram with the PVP is one of the studies provided. As you point out, for an exact value of the PVP you would need to compute the volume distribution for every tick. Ensign doesn't do this but uses the volume for each bar distributed equally among the tick increments for the range of the bar. This of course is an approximation.
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Ok, I uploaded screenshots. These are 2min charts for ES for the last 3 business days, counting today. VWAP is the thick yellow line, PVP thick turquoise line, Skew Line (VWAP + Skew * SD) is the thin light blue line. The dark blue area is the area between the 1st SD's, the Value Area in terminology of MP.If the Skew Line is above VWAP the skew is positive, below VWAP negative. The distance between the Skew Line and VWAP tells you how large is the skew compared to SD. To distinguish the two different methods to determine the skew, I will use terms Skew(PVP) and Skew(3CM).
While Skew(PVP) flips (or jumps), the Skew(3CM) is continuous. By the time Skew(PVP) flips the Skew(3CM) Line crosses VWAP, that means Skew(3CM) crosses zero. In other words, if the skew is positive and price action is above VWAP, Skew(PVP) rises while Skew(3CM) decreases. By the time the Skew(PVP) flips, the Skew(VWAP) crosses zero.
Hence the first use of the Skew(3CM) is to warn you before the PVP flip. Another use, surprisingly,
is to determine the real statistical skew. The Skew(PVP) has the greatest absolute value right before the flip. That might lead you into some bad trades. If you look at Skew(3CM) you will recognize that the real skew is very small.As you can see from the charts, it looks like the Skew Line is a minor HUP itself. But I have been watching this only for a couple of days, so I don't want to make any conclusions yet.
Nice job Ondrej. It looks as if using the exact definition of the skew can provide some useful trading information not available in the approximate Pearson evaluation.
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First let me thank you for these amazing threads, being a newbie I find them very useful. Second I apologize for my poor English.Now to the computation of the third central moment. I am not educated in statistics, so I needed to read a few articles in Wikipedia. So please correct me if I am wrong:
CM3 = sum(PROBi * (Pi - VWAP)^3),
where
i is going through all prices in range (i.e. all rows in Volume Distribution Function)
CM3 ... the 3rd Central Moment
PROBi = Vi / V ... ith price probability (Volume per ith price / Total Volume)
Pi ... ith price in the Vol. Dist. function
Then the Skew would be calculated as
Skew = CM3 / SD^3
If this is correct, the computation doesn't seem too CPU intensive to me. I programmed such a computation in AmiBroker and I plotted a line on a chart. The line is VWAP + (Skew * SD). Watching this line together with PVP-to-VWAP relation can be very useful. Now I don't have time to elaborate, but if somebody is interested I can write more later.
Ondrej
Very good Ondrej. You have the skew computation properly weighted. What makes this computation cpu intensive is in real time you have to update the value of PROBi as you add more volume data. Should be okay for a fast machine.
Perhaps you can show us some charts with your skew computation drawn in along with the VWAP and PVP.
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Jerry do you pay much attention to the symmetry of the distribution? In particular I am thinking of taking a trade when the market is actually balanced but the distribution is still asymetric. Here is an example from today. To me long side seemed right even though the market was in balance. Interestingly the 2 minute chart showed +ve scue. The pvp seems quite sensitive to how the data is sampled. Funnily enough the slight smoothing you get by using say a 2 minute bar often seems to be helpful.Symmetric distributions (PVP ~= VWAP) are tough to trade especially when you have multiple peaks as in the example you show. My initital reaction would be to let it pass.
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I attach a screen shot from your first video. It shows what I believe is a valid SD1 trade. Two questions.
1) Is there anything that might tip you off that price might be heading back to the PVP?? on this chart I think not, maybe the last few days or last weeks stats or other HUPs might have held clues.
You are correct. From this chart alone there is nothing that would tip you off about a short failure. Which is why I introduced the concept of HUP. If there were a HUP just below the short entry, you might have passed up the short trade.
2) If price finds it's way back to the VWAP and you already have a contract on from SD1 would you use the shapiro effect at the VWAP? I might be inclined just to pull the trigger. If price zooms through as it did here would you be inclined to think OK we are done with this trade lets close it out?
Here is where trade management becomes important. If you were a NEWBIE, you most likely would set a stop at the VWAP and be stopped out.
If you were a more advanced trader, you might pull the trigger at the VWAP and enter a second contract short PROVIDED doing so was still within your risk tolerance.
The other scenario and one that I have never discussed but probably should have is as follows:
You enter the short trade based on the Shapiro effect. But then the trade starts to fail. If price moves above the high of your entry bar, reverse the trade and go long. A very aggressive trader would not only do this but also increase size.
Keep in mind all of this is possible PROVIDED you are within your risk tolerance.
You can see how using risk tolerance rather than stoplosses gives the trader considerably more flexibility.
There is another difficulty with averaging in (apart from accepting the risk) and that is psychological. If I already have a position and that is short I find that this can give a 'bias'. Actually the bias is justified probably as the skew is in our favour (VWAP<PVP) and the trend is in our favour (Price<VWAP) furthermore we have a plan to add 1 contract at the VWAP.Yes, the psychological aspect of the trade is one that is difficult to control.
Everything seems to be in your favor for the short, and your emotions tell you that this trade can't be wrong.
In fact you must think differently. When you enter the short, the first thing that you must do is decide exactly what you will do if the trade moves against you. Will you wait for the price action to move to the VWAP? Will you reverse the trade? Will you increase size?
The easiest thing to do is set a stoploss and forget about it. In my opinion this will never lead to profits.
Active management is the key to a successful outcome of every trade.
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Jerry how is ER2 nowadays since it changed to ICE?ER2 hasn't changed to ICE yet but will do so at the expiry of the September contract.
All of the equity indexes seem to be enjoying a lot of volatility nowadays. Do things work 'better' for you when volatility is slightly less or is it solely about risk tolerance?I prefer larger volatility. Gives me large profits/trade. Of course more risk too, but still within my risk tolerance.
Risk is simply a function of the width of the bands and the PVP right? Assuming you are well enough capitalised the best markets to trade are those that trade heaviest as there is more statistical data?Risk is determined by what percentage of your capital you can afford to lose on each trade. This is typically 1 or 2 %. You can use the width of the SD bands to determine how far you can expect the market to move against you. If the bands are wider than your risk tolerance then you might not want to trade.
The more data of course the better the statistics. But this does not determine the width of the SD bands. It's the price action that does
Do some markets just tend to behave "better" due to other factors (persistence, more consistant volatility etc.)?If by behaving better, you mean not jumping around a lot, I have no idea what determines that, but I really don't care. I just follow the statistics. It's the only thing that really matters. I've quoted this before from Nihabaashi: "To fear volatility is to fear profits"
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If I understand this statement correctly taking a daily sample and computing its closing VWAP and SD bands is far more statistically valid for next days trading than using VAH & VAL?
VAH and VAL have no statistical significance. They are purely heuristic values based on a percentage of the volume data above and below the peak. The choice of that percentage was based on the incorrect assumption that the volume distribution is normal. It rarely is. The statistically valid values are the standard deviation of the data from the VWAP. For finite data, this is always definable regardless of the shape of the distribution.
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if there are 2 boobs in one day ,you bet that it returns to the cleavage,deepest spot between the 2 nips,on a bar chart that would most likely be a gap fill,that shows a market imbalance and both buyers at upper nip and sellers at lower nip feel they were wrong and a high percentage of the time it goes back to the middleAmmo, you present an intriguing scenario which needs to be investigated further. The question is: Can the shape of the volume histogram be used to determine price action? You've presented one example, but there are many more. For instance, in your terminology, what happens if there are 3 boobs? How about 1.5 boobs, where 1 boob is larger than the other? How about a p or b shaped histogram, where the boob is split in two? There are clearly many examples. Perhaps you should start a new thread on this subject?
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Hi Jerry,Do you always deploy the Shapiro effect (excepting break outs)? My thinking is this:- if the bar that touches your your entry 'line' is long you might add 1/2 SD risk and reduce your potential profit by 1/2SD risk or even more. It's the old traders dichotomy trade location or confirmation. I guess one option is to use slightly smaller bars maybe 1 minute. Any thoughts?
I think I may have mentioned this before but going through the videos it struck me again that the extra risk and lesser reward can be quite costly to buy some conformation.
Edit: With the recent volatility we have seen this maybe less of an issue. It is noticeable in the videos though.
You're quite correct blowfish. Any kind of confirmation scheme, reduces reward and increases risk. As to whether I use it or not, it depends on what kind of trading I'm doing. For position trading, I do use it. For scalp trading I don't. For everything in between, I will use it on a fast time scale chart (such as a 15 or 20 sec) to gauge entry.
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Hello Jperlsi still available this 32 min. video? I cannot open it!
Thanks
Alban
Alban, the video demonstrates how to trade at other points beside the VWAP. If you are having problems opening it, download the swiff player at the following link and use that to open the video.
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Thank you for a lovely discussion, Jperl. I find a lot of validity and usefulness to your methods. I do have one question, though. Since the skew of the volume distribution is such an important part of your analysis, why not use other methods for estimating it. Rather than rely on the position of the mode so much, one could use the median or better yet, compute it in the classical way as the third moment of the volume distribution. The reason I ask is that a lot of times in the markets we have the PVP but also another price with almost as much volume. Also, sometimes there are clusters of volume that don't neccessarily include the PVP but could also act as a HUP. The point I am trying to make is that the relative position of the PVP and the VWAP is not always a reasonable estimate for the actual volume distribution skew and I was wondering if you have looked into it.You are perfectly correct, that the exact definition of the skew requires a computation of the 3rd moment. The problem with it is the computation is very cpu intensive. I therefore settled for the approximate value due to Pearson as discussed in the skew tag. The advantage of this is you can visualize the skew just by looking at the volume histogram with the vwap superimposed. The problem is as you point out, when you have two large volume peaks, you don't quite know what the skew is. Nevertheless since you can visualize the volume peaks in relation to the VWAP you can approach the market with caution when this occurs.
As far as HUPs go, you are correct again that peaks in the volume distribution are HUPS. Which HUPS you wish to use in your trading is of course a function of your trading style. Keep in mind that HUPS are just that, hold up prices. They are places for you to be cautious as to what to expect.
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Exactly what I was looking for. Any chance you could screenshot the settings and PM or post em here? I have a demo of ensign I want to try and tinker with but honestly get lost in all the options and settings.
Much appreciated.
Here are the screen shots of the ensign price histogram property windows.
The first one plots the combined volume histogram and the second one plots the daily volume histogram. You run both at the same time.
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Can ensign do a complex merge like this? I really need this capability but can't afford the more pricey platforms yet.
Is this what you are looking for MC? Chart is ES from May 22 to June 12 with
daily volume histogram superimposed on combined histogram for the entire period.
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Hmm...now I'm confused. Ensign has a check box for the FORMULA used for 3 types (on the volume histogram properties window) : volume, price, candles. I always thought it was VOLUME you were using in your videos. Please correct me if I am wrong.Thanks.
That's correct. I've always used the volume histogram. There are situations where you have to use the price histogram instead. For instance if the contract you are trading has no volume data.
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One other question, for volume histogram FORMULA, are you using the VOLUME setting or the PRICE setting. I am 99% sure it is the volume setting in ensign. I don't think we want price but just want to make sure before I start training myself on these indicators.You can use either one. But be consistent. If you use the volume histogram, be sure to use a volume weighted average price to compute the histogram average. If you use a price histogram, you don't need to use a volume weighting to compute the average. You might want to ask Howard Arrington at ensign if he would include this on the properties window for the histogram.
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Jperl, would you agree that your trading-methodology works best if we have a trend(day) ?You don't need a trend day for market statistics to "work". What ever the day is, market statistics will reveal it by the the shape of the volume distribution function. How you use this information will be different for different traders.
I've just given a few examples of how you might employ it.
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I would have exited at either the PVP line or 1st Standard Deviation away from entry whichever was nearer at the time. Is that how you would have played it ?
That is what most traders would do and in my opinion leads to a slow bleed of your capital. To avoid that you have to have a complete change of thinking about stop losses. You might want to reread the thread on [thread=2189]"Scaling in and Risk Tolerance"[/thread] to get a different perspective.
Also when you said that I could have entered at the retrace back to the 1st Standard Deviation, would you exit if the trade went against the position at the 2nd Standard Deviation ?Not sure I understand what you are asking. If you had entered at the 1st SD and the trade went to the 2nd SD then I would have exited at the 2nd SD for a profit. If I didn't exit at the 2nd SD, I would have not allowed the trade to become a loser. I would then have exited 1 tick below my short entry.
On the other hand if I entered at the 1st SD and the trade went immediately against me, I would have scaled in another contract at the VWAP.
Wide Range Bodies or 'big' candles
in Volume Spread Analysis
Posted
Agekay, I trade mostly the mini Russell2000 index futures which are 3 month contracts. So for instance if you want a 1 year VWAP, you have to have a continuation chart which shows 1 years worth of contracts on 1 chart.
I use Ensign software which does this automatically.