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Jperl's Trading With Market Statistics Summary

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This summary thread will feature Jperl's 11 part series of Trading With Market Statistics. The series can be found in the market profile forum.Many thanks to Jperl (Jerry) for making this thread possible and for the great contributions.


The summary will feature mainly posts made by Jperl as well as videos, charts, and commentary to provide a comprehensive summary of the 11 part series of Trading With Market Statistics.


For any edits, suggestions, or additions to this summary please use the discussion thread located here.







[multipage=I. Volume Histogram]Original thread by Jperl located here.


This thread and succeeding threads will describe my use of market statistics as an intraday trading tool. I wanted to write this down some where for my own edification and perhaps introduce some new ideas that have not been expressed before. Perhaps some of these thoughts may be of use to those of you who are mainly interested in price action, and what market statistics implies about it.


We are all aware that price action is all about probabilities. One can ask the question, what is the probability that at any moment in time, prices will move higher rather than lower. To answer this question requires a knowledge of the probability distribution of prices or volume. The shape of the distribution, and where present price is in the distribution function, suggests in which direction to trade. If price is in a low probability region, enter a trade in the direction of higher probability. If price is presently in a high probability region, don't trade.


Sounds simple, but it's fraught with difficulties. Look at figure 1. This is a 2 minute candlestick chart for the E-mini Russell 2000 index futures for June 22, 2007. The volume distribution function is drawn on the left along the price axis with bars extending out to the right. The length of the bar is determined by how much volume was traded at that price. The longer the bar, the more volume traded at that price.


Looks a lot like a Market Profile. In fact Market Profile is a subset of this more general probability distribution function.

Several things to note about it as follows:


1)The distribution of volume is roughly symmetric about the peak volume price occurring at 840.20 (indicated by the red line in the center) with some smaller peaks occurring both above the peak(at 842.30 and 843.60) and below the peak (at 837.20 and 836.60).


2)The distribution shows very low trading volume, in the high price area and low price area.




I point out this symmetry in the distribution mainly because it is unusual. It doesn't occur very often. More often than not, the peak volume price does not occur in the center of the distribution.


I've also shaded in light blue, the region outside what is called the value area for you Market Profile fans. The green region is the value area, the area where 70% of the volume has traded. I suspect that 70% was chosen as the value area because it is close to 1 standard deviation of a normal distribution ( 68.3%). The normal distribution is symmetric about the peak volume price. There have been lots of prognostications about how to trade when price moves back and forth across the value area, especially value areas generated the previous day. For a more or less complete list of these trade setups see the following sticky thread or this site


Simply entering a long where the volume distribution is low (below 836.60) and exiting the trade when price moves back into the high volume area (near the peak volume price) doesn't hack it, the reason being, that what looks like a low volume area now, could become a high volume area later on in the day. In actual practice, one never knows what the distribution will look like later on in the day.


Take a look at figure 2, which shows the same 2 minute chart of the Russell at 12:16 EST, 106 minutes after the open. The peak volume is at 842.30, and the last bar has closed in a low volume area at 839.90. The distribution looks pretty much symmetric. What do you do? You pull the trigger and go long. Would this have been a good entry? Apparently not. Price action drops the market like a stone as shown in figure 3. By 12:34, price has dropped to 835.80. You exit for a loss of 4.1 pts ($410).








So what happened?


What happened was, the distribution function decided to expand. It would evenutally expand so much, that the peak volume price would eventualy move down to 840.20 (figure 1). In fact, you should NOT have taken the trade described above, for reasons which will be mentioned in a future thread, when we introduce the concept of the volume weighted average price, the VWAP in part II.


[multipage=II. The Volume Weight Average Price]Original thread by Jperl located here.


In a previous thread, Part I I introduced the Volume Distribution Function in the form of a volume histogram plotted along the price axis (see figure 1 of that thread). The length of the bars extending out to the right represent the amount of volume traded at that price during the day. The distribution has a peak which I call the peak volume price or PVP ( also known as the Point of Control in Market Profile Analysis, but I won't use that term here in order to avoid any confusion). . The volume distribution is a probability function, thus trading occurs less often in the low volume regions of the distribution compared to the high volume regions. However I also stated that the distribution function is dynamic and that the shape of the distribution changes during the day such that the PVP may change abruptly as the trading day progresses. As such, if price action is in the low volume region, it does not mean that there will be a reversal back to the high volume region. The distribution function could simply expand itself and continue moving in the same direction with an eventual abrupt change in the PVP. This was shown by the price action in figures 2 and 3 of the previous thread.


In order to shed more light on this, I want to introduce the concept of the volume weighted average price or VWAP. The VWAP is a well known quantity used by institutional traders to gauge there trading performance. It's use as a day trading tool however has not been fully explored. The VWAP is simply the average of the Volume Distribution Function. The figures below show examples. The red line is the PVP of the distribution and the light blue line is the VWAP for the distribution. To compute it, take the volume Vi for each bar i in the distribution, multiply it by the bars price, Pi, compute the sum, SUM(PiVi) and divide by the total volume, Vtotal, for the whole distribution:


VWAP = [sUM (PiVi)]/Vtotal


The VWAP has the following characteristics:


1) Being the average for the entire distribution, Volume traded above the VWAP is identical to volume traded below the VWAP.


In terms of the distribution function as a probability function, it means that when price action is at the VWAP, there is equal probability for price to move up as there is for price to move down.


As corollaries then we have:


2) if the VWAP is above the PVP, then more volume has traded above the PVP than below it. The distribution function is thus skewed to the upside and the expectation is that at the PVP, price action should move up.

Take a look at the figure below, the ER2 for June 28,2007.




At the end of the day, the VWAP (light blue line) is at 847.98 and the PVP at 846.60. The VWAP > PVP hence more volume was traded above the PVP than below.


3) Conversely, if the VWAP is below the PVP, then more volume has traded below the PVP than above it; the distribution function is skewed to the downside and the expectation is that when price is at the PVP, price action should move down. You see this in the following figure for ES on June 11, 2007.





The VWAP is at 1525.32 and the PVP is at 1528.75. VWAP < PVP. Clearly the amount of the skew will be a function of the difference between the VWAP and the PVP.


4) If the VWAP approximately equals the PVP, then the distribution function is symmetric. In this case when price touches the PVP, there is no expectation of price movement in either direction. Instead, expect to see small oscillations about the VWAP. The next image shows this for ER2 on June 22, 2007.






VWAP = 840.44 and PVP = 840.20. Oscillations about the VWAP occured for most of the afternoon starting at 13:30.


5)The VWAP and its relation to price also determines the trend of the market as follows:


a)If Price >> VWAP, the trend is up

b)If Price << VWAP, the trend is down.


6) Finally it doesn't matter on what time scale you plot the distribution functions and its associated VWAP. The chart could be a 1, 2 ,3 minute etc time chart, or a tick chart, or a range bar chart or a volume bar chart. The distibution and hence the PVP and VWAP are all the same. You need only take a quick glance at the VWAP and its relation to price, to decide the trend of the market.


In future threads I will present some examples of how to use this information for entering a trade. In part III we will start with the newbies, since they need the most help. After that we will look at more complex situations using only the distribution function and the VWAP.


Original post by Jperl located here.


With regard to ES for today: I will only comment as if I were a NEWBIE trader since that's as far as I have taken the discussion in these threads. There are videos in PART III which show how NEWBIEs trade using market statistics, so I will look at today's ES only from that point of view. There were more trades that an advanced trader could have taken using only market statistics.


a)There were no long trades that NEWBIE could take


b)For short trades, NEWBIE takes a position only when the VWAP < PVP AND price action is below VWAP. So look at the first image. At 13:08 EST, VWAP (1563.12) < PVP (1564.25). Price action dropped below the VWAP, so NEWIE would have entered short. If he was aggressive enough he could have entered just below the VWAP. His stop loss would be just above the PVP at 1564.50. His profit target is undetermined. NEWBIE is still trading by the seat of his pants with regards to profit. Most likely he would have stayed in for 1 point (4 ticks).




c)Look at the second image. At 15:16 EST NEWBIE would have entered short again. Why? VWAP (1561.74) < PVP (still at 1564.25). He would have entered 1 tick below the VWAP and stayed in for 1 point. So his entry would have been 1561.50 and his exit would be 1560.50.




d)Note in the third image that at 15:54 the PVP changed abruptly to 1560.75. After that occurred, NEWBIE would only take long trades. But clearly this occurred to late in the day




[multipage=III. Basics of VWAP Trading]Original thread by Jperl located here.


In this thread, we will present several videos to demonstrate how to use the volume distribution function and its associated Peak Volume Price (PVP) and its Volume Weighted Average Price (VWAP) as a trading tool. This thread will concentrate on entries and stops only for new traders. Our trader for this is named NEWBIE. We will show how NEWBIE should use the relationship between the PVP discussed in Part I and the VWAP discussed in Part II to determine a) the region of the price action where he could be trading, b)the direction of his trade (long or short) and c)a possible entry point for the trade.


So lets get started. Below is the first video. We have a very raw newbie, who knows nothing about market statistics. He's trading the Emini Russell 2000 index futures by the seat of his pants. He thinks he knows the market direction from the premarket open and the first half hour of trading. He's heard something about trend lines and "The Trend is your Friend" , so he enters a long trade, sets a profit target and a stop loss. Watch the video and see what happens. If you are a newbie yourself, see if you recognize any of NEWBIE's traits in yourself. The video ends with a short discussion of what NEWBIE could have done if he had used market statistics instead of the seat of his pants.


Link to Video: http://www.traderslaboratory.com/Trading%20Videos/Newbies_First_Trade.swfNEWBIE is now ready to take trading a little more seriously. After a minor disaster trading with the trend and getting stopped out, he's decided to look at the "Trading with Market Statistics" Threads and has read Part I and Part II at least a half a dozen times. He doesn't know much about statistics but he is willing to learn if it will help him with his trading.


What he has learned so far or at least should have learned is that market direction is reflected in the relation of price to the VWAP AND the relation of the VWAP to the PVP. Market data is skewed to the upside when the VWAP is above the PVP, skewed to the downside when VWAP is less than the PVP and symmetric when VWAP ~= PVP.


NEWBIE should be trading only in the high volume region of the price action

so for NEWBIE to enter a trade, the following conditions should prevail:


Long Entry:


VWAP > PVP and price action above the VWAP


Short Entry:


VWAP< PVP and price action below VWAP


No Trade:




NEWBIE is going to embed this in his brain so that it becomes second nature.


Download the following video and see how NEWBIE fairs by following market statistics.




In the next thread, part IV, our newbie will learn about other points where he can trade.


Original post located here.


I am trying to understand the logic here. the VWAP is a very logical. the PVP seems irrelevant to me. why is the PVP a meaningful number? seems like a marginal difference as to what it might be at any given time...


As we will see later, the PVP is one example of a hold up price, HUP for short, prices where the market slows or reverses. More importantly for NEWBIE now, its the relationship between PVP and VWAP that is important for determining market skewness. When PVP and VWAP are close together, there is no skew. Volume distribution is then symmetric about the mean ( VWAP ). It's when they are further apart producing a market skew that things get interesting.


Origianl post located here.


NEWBIE wants to test his new found trading knowledge for other contracts besides the emini Russell 200. In this video he trades the Emini S&P500 for July 9, 2007. As usual, NEWBIE trades shorts when price action is below the VWAP AND the VWAP < PVP. So follow along as NEWBIE takes this ES short trade.


View video here.


Original post located here.


NEWBIE is on roll. He now has the PVP , the VWAP and their relationship down pat. He keeps his entries simple by trading short when Price Action < VWAP < PVP and trading long when Price Action > VWAP > PVP. He wants to test his new found knowledge on other contracts, like the Emini NASDAQ 100 ( NQ ). So here is NEWBIES NQ trade for today July 18, 20007. Watch the video and see how NEWBIE does it.


View video here.


[multipage=IV. Standard Deviation]Original thread by Jperl located here.


Throughout the previous threads ([thread=1962]Part I[/thread],[thread=1990]Part II[/thread] and [thread=2008]Part III[/thread]), I have described the use of a probability distribution in the form of the volume distribution function as a trading tool. The shape of the probability distribution is dynamic, changing with time throughout the trading day. Nevertheless all information relating to price and price action is contained within this distribution function. Anything you want to know about price and price action can be obtained by analysis of the distribution function itself. No extraneous information from other sources is required.


We have so far analyzed the distribution in terms of two properties, a)the peak volume price ( PVP ) and b) the volume weighted average price ( VWAP ), which is the mean for the distribution. Both of these are dynamically updated throughout the trading day as the volume distribution function dyanmically changes. In [thread=2008]Part III[/thread], we showed how the relationship between the VWAP and the PVP could be used for an entry technique in a simple newbie VWAP trading strategy.


But there is much more that is needed to advance beyond the newbie strategy. In this thread and succeeding threads, we will address the following issues:


1)Given an entry point, where should the profit target be set?

2)What other entry points are there beside the VWAP?

3)How can you tell when a reversal may be imminent?

4)When is a breakout imminent?

5)How do you trade the opening?

6)When should you be looking for scalps.?

7)How do you set stoplosses ?

and related to this

a)Should you set stoplosses?

b)when do you scale in?

c)when do you scale out?

d)When do you reverse a trade.?



While we won't address all these questions in one thread their answers can be obtained by analysis of the volume distribution function. To do so requires that we introduce a third property of the volume distribution function called the Standard Deviation of the VWAP, SD for short. SD is computed from the following equations:



where the summation subscript i, runs over all prices in the volume distribution

pi = ith price in the volume distribution

Pi = vi/V is the probability of occurrence of price pi

vi = the volume traded at price pi from the volume distribution

V = total volume for the entire distribution


That's a mouthful. If you would like more details about the variance and the standard deviation, see the wikipedia reference

http://en.wikipedia.org/wiki/Variance and references therein.


So what does the Standard Deviation tell you?

Well for starters,

SD tells you how far you can expect price to move away from the VWAP.


It can be shown (but we won't prove it here ) that computing the SD with respect to the VWAP gives the smallest expectation of price movement.


Put another way, if our newbie trader were to initiate a trade at the VWAP (which he/she already knows how to do from [thread=2008]Part III[/thread]), then the obvious place to put his profit target is 1 standard deviation away from his entry price. This is the least he should expect the price action to move price.


SD is thus a measure of market volatility for the time period over which the VWAP is computed. This gives NEWBIE a very powerful handle for his trading. If the SD is too small, he should stand aside. If it is too large, requiring a large stoploss, he might stand aside as well, if this frightens him. Too small and too large are of course qualitative terms which NEWBIE will have to decide for himself, but at least now he has a quantitative measure of market volatility and what he can expect when he enters a trade.


Watch the attached video ESlongJuly23.swf and see how adding the SD helps NEWBIE set his profit target.


After using the SD for profit targets, a light bulb goes off in NEWBIE's head. He realizes something about entry points that he didn't know about before. If he believes what he is thinking, it will totally change his way of trading now and forever. Can you tell what it is?


Check out [thread=2130]part V[/thread] to see what it is.


Original post located here.


NEWBIE now has an arsenal of tools to trade with, all generated from the volume distribution function. He knows how the distribution is skewed by comparing the VWAP to the PVP, and he knows how volatile the market is by including SD bands above and below the VWAP. The SD now determines is exit strategy. If he enters at the VWAP, his exit will be 1 standard deviation above the VWAP (for long trades ) or 1 standard deviation below the VWAP (for short trades).


Here is an example from today's ER2 price action of a trade that NEWBIE takes with a VERY LARGE SD. Watch it to see how NEWBIE trades it. In this video NEWBIE has the opportunity to make 4 or 5 points because of the large SD. But he doesn't. He properly exits early. Watch it and understand why he exits where he does.




Original post located here.


The PVP serves two purposes:

1)It acts as a Hold Up Price or HUP for short. A point where the market pauses before continuing on or reversing

2)Along with the VWAP it defines the skew of the market. How much the market deviates from a symmetric distribution.


For a NEWBIE trader, the skew of the market is his lifeblood. He needs to know how skewed the market is before he will enter a trade. And he will only enter a trade in the direction of the skew.


The extent of the skew is defined by the difference between VWAP and PVP

skew = VWAP - PVP

so if the skew is positive NEWBIE takes long trades only

if the skew is negative NEWBIE takes short trades only

and if there is no skew (skew close to 0) no trade


It doesn't get any simpler than this.


Eventually NEWBIE will learn how to take trades against the skew. But for now he needs to understand the basics.


Original post located here.


First, regarding the VWAP, PVP, and SD do you use the previous day value for these? For example, at the open what values do you use and when do you adjust the values for todays trading in real time?


The thread on position trading [thread=2423]Part X[/thread] describes how I use the previous days volume distribution to take a position trade near the open. Today's developing volume distribution is simply added onto yesterdays. Once the position trade is completed, I then switch to using todays volume distribution for further day trades.



Second, you mentioned to stay away from trading around the PVP as market indecision takes place. I have been using the POC as a potential support/resistance the entire time and found this concept quite interesting. Could you care to elaborate on this?


I pointed out in this thread that the PVP is a dividing point between a high volume trading zone and a low volume trading zone. Consider for example a distribution with a negative skew. Several things can happen around the PVP as follows:

a)Price can break out into the low volume zone above the 1st SD, in which case you want to go long or

b)Price can break back into the high volume zone below the VWAP in which case you want to go short or

c)Price action may simply oscillate between the 1st SD and the VWAP, in which case you might consider a short after a bounce off the 1st SD or a long after a bounce off the VWAP.

So at the PVP itself you have no idea of any expectation until one of the above 3 conditions occurs

Trading at the PVP thus becomes a slippery slope as I described in [thread=2232]Part VII [/thread].


Third, when the skew is negative but price is trading above the WVAP, do you not fade a retracement back to the VWAP to SD1? Or would you wait to fade the SD1 above the VWAP and a target back to the VWAP?


Not quite sure what you meant in the first part of this question. With a negative skew (VWAP<< PVP) and price action above the VWAP, wait for a breakout to occur above the 1st SD for a long trade. If that does not occur (if for example price bounces off the SD) then go short with the VWAP as the profit target. As I indicated above you might get oscillations in this region between SD and the VWAP.

Once the breakout occurs say above the SD, you would only consider long trades away from the VWAP. example a retace to the SD, go long, or if price action is above the 2nd SD, again go long on a retrace to the 2nd SD. Such trades should be viable as long as the skew is negative. Eventually however the skew will become zero as the breakout continues. It's at that point you would take a countertrend trade TOWARD the VWAP. This is described in the thread on counter trend trading [thread=2285]Part VIII[/thread]


Fourth, do you play the range between SD2 and SD3?


Above SD2, you are on your own. I usually don't take trades above SD2, mainly because continuation to SD3 is not that viable. And as I say that, you realize that in the last two months trades to the SD3 and beyond have become quite common.


Is any price movement extending beyond SD3 a fading opportunity? I have been using your concept to observe the Nikkei and have found price to break out of SD3 at times and never fall back.


Beyond SD3 is no mans land. When I see the market extend beyond SD3, I just shake my head in amazement, take a break and go have a cup of coffee.


Original post located here.


Thank you Jerry. Regarding the skew, a long position would be the option in a negative skew and a short for a positive skew? I think I may have these two definitions mixed up as I had though a negative skew with price action below VWAP would be a short and vice versa.

Your initial thought was correct

The sign of the skew tells you where most of the trading has taken place. Positive skew: Most of the trading has taken place above the VWAP

Negative skew: Most of the trading has taken place below the VWAP.


Your first order of business when looking at a volume distribution is to determine the sign of the skew. Once you have done that, see where the price action is.

a) If price action is above the VWAP and skew >0, look for long trades only.

b) If price action is below the VWAP and skew <0, look for short trades only.


These are the best trades to look for and Newbies should only do these to begin with. When you take these kinds of trades, you will be trading in the high volume zone of the distribution.


It's when price action is BELOW the VWAP and skew > 0 or

price action is ABOVE the VWAP and skew < 0

that things get interesting and exciting. Then your looking for breakouts into the low volume region with range extension. "Exciting" means "Living on the edge". If you like the rush of living on the edge, then look for trades in the low volume zone. These types of trades are described beginning in [thread=2232]Part VII[/thread]


[multipage=V. Other Entry Points]Original thread by Jperl located here.


NEWBIE has come a long way since his early days of using technical analysis. He no longer trades by the seat of his pants. He has a good quantitative feel for market statistics and he simply follows the statistics wherever it wants to take him. He knows that the volume distribution function contains all the information that he will ever need to institute a trade. He knows about the peak volume price, PVP, and can pinpoint that with good precision on his charts. He knows about the distributions average value, the VWAP, and he can follow it as it slowly evolves during the day. He knows about market volatility and he can quantitatively measure it using the standard deviation, SD, of the VWAP. He knows how to determine the market's skew from the difference between the VWAP and the PVP (skew is proportional to VWAP - PVP). He has a simple entry technique, entering at the VWAP in the direction of the skew, a good profit point measured by the SD and a good stoploss point at the PVP.


(As an aside, a discussion of distribution skew, also called kurtosis, can be found at this Wikipedia site. http://en.wikipedia.org/wiki/Skewness

We use the Karl Pearson definition of skew which is (VWAP-PVP)/SD )


But he wants more. He's discovered that trade entries at the VWAP don't occur all that often throughout the day. He knows the market can give more if he just knew where else he could enter a trade beside the VWAP.


NEWBIE is about to have an epiphany.


Suppose he enters a short trade at the VWAP, exits the trade at the 1st SD. Then what does the market do? If it rarely returns to the VWAP, then the only other thing it can do is drop below the 1st SD. Now here is the epiphany.


Another entry point is at the 1st SD itself.


NEWBIE knows this has to be a good entry because the volume distribution function being skewed to the downside, (VWAP-PVP<<0) will remain skewed to the downside only if the price action stays below the VWAP. Only two conditions will change this, a)The market stalls near the 1st SD such that the PVP abruptly changes to near the 1st SD or b)the price action takes the market back up to the VWAP and higher. We will discuss these two conditions in later threads, but first things first. Watch the 31 minute video and see how NEWBIE takes a trade at the 1st SD. Where is his profit target? The volatility is still in force. His profit target can only be one place, the 2nd SD.




NEWBIE is about to have a second epiphany. He's about to learn how he might change losing trades into winners by changing his ideas on stoploss placement. Check out part VI to find out how.


Original post located here.


Thank you Jerry for the summer lessons :) I came back from vacation found that you have really done some interesting work. My question for this video is you said "there is no reason why it {target} shouldn't hit the 2nd standard deviation, the volatility of the market says it should". How exactly are you calculating this? It seems to newbie and me that 95% of the prices have occurred within SD2, so going beyond 95% is not a high probability trade. Are you basing this on skewness calculation? (eg, higher the skewness, the greater probability of exceeding SD2). Is there a skewness risk involve in this trade? http://en.wikipedia.org/wiki/Skewness_risk


Very good questions thrunner and good observation as well.

First let me clear up one poorly understood idea about the SD. Most traders think that 68.3% of the data falls within 1 SD and 95% falls within 2 SD. This is only true for the normal or gaussian distribution. For skewed data, that is data that deviates from normal behavior, the best estimate can be obtained using Chebysev's inequality, which states that no less than 50% of the data falls within 1.4 SD, and no less than 75% falls within 2 SD. No less than 89% falls within 3 SD. These numbers are quite a bit different than that for the normal distribution.


These numbers are of course lower limits. The exact values could be computed from the distibution function. But I don't think there is much to be gained knowing that say 55% of the data rather than 50% of the data fall within 1.4 SD.


Another important point which I stated as a theorem in the SD thread, is that for any arbitrary distribution, computing the SD with respect to the VWAP yields the smallest SD possible. What that means in practice is that if you compute the SD with respect to any other price (eg the 1st SD price), you will by the theorem get a larger value for the standard deviation. This implies yet a larger volatility at the 1st SD than it does at the VWAP.


These two pieces of information taken together suggest to me that getting to the second SD (computed with respect to the VWAP) is not all that unreasonable although of course with greater risk than trading at the VWAP. Getting to the 3rd SD however is problematic.


I will discuss in the next thread, about what to do when you take a trade at the 1st SD and the price action does move against you. There is still room for pulling a profit out of the trade.


Original post located here.


Maybe you could also share some of your path, how did you discover your style. I believe most of us will appreciate it.

Thanks for great videos and sharing your experience.


My style is something that developed over many years. I was initially a strong proponent of classical technical analysis and traded futures and stocks for quite a number of years using classical methods. I oscillated back and forth between swing trading and daytrading, but was never satisfied with the results. Some years were profitable, other years were not. There was no consistency. I slowly came to the realization that classical technical analysis was not going to yield a consistent picture of market behavior. It was too heuristic. I wanted day to day consistency. I looked very carefully at market profile analysis. Realized that there was something there but it was woefully incomplete and in some cases just plain wrong. I wanted to be able to write my own software, but there were no good charting packages for doing that until ensign software came along. Being a student of molecular simulation theory, I knew enough about statistics to realize that the logic of the market could be found in a proper statistical analysis of the data. That coupled with understanding risk tolerance and trade management is where I am today. My trading is now quite consistent and I am happy to say has become quite enjoyable. I am both a teacher and student. I've been both my whole life and I am happy to share with you what I've learned about market behavior. There is still much about market behavior that I don't know and learning about the markets will be a lifetime experience.


[multipage=VI. Scaling In and Risk Tolerance]Original thread by Jperl located here.


In Part V of this series on trading with market statistics (click here for Parts I,II,III, and IV), I posed the question in the video about what TRADER should do if upon entering a trade at the 1st SD, the market should move against him. I suggested that based on the data given there was only 1 correct answer. That answer we will now discuss in this thread.


Before we address the answer, we need to discuss a related topic called risk tolerance. First what risk tolerance is not. It is not a stop loss that you set for each trade based on some support or resistance point you arbitrarily choose on the price chart. More often than not, this kind of stop loss is in the wrong place. These stop losses are not based on market volatility, but rather on some price point that "looks like it ought to hold", usually some local minimum (for long trades) or local maximum (for short entries). That they are wrong probably accounts for the large number of losing trades that new traders have. Unfortunately, most trading books tout these stoploss points as if they are written in stone. Phrases like, "you should only enter a trade such that your reward/risk ratio is 2:1 or greater" forces the trader to choose a stop loss which has nothing to do with the known volatility of the market.


So what should you as a day trader do about stop losses? Well for starters, you should set a "system stop". This is an in the market hard stop far from your market entry which protects you in case of system failure (eg, your computer crashes, you cable modem dies, you lose electric power in your neighborhood, etc.). It has nothing to do with the trade itself. Any other stop you wish to use you keep in your brain as a mental stop.


And where is this mental stop? Your mental stop should initially be a percentage of your account. Typical values bandied about range anywhere from 1% to 2% of your trading capital. So if you have a 50K account, you should be willing to risk up to 1K on every trade. The mental stop is flexible, it won't increase, but it certainly can decrease depending on the price action. For example if the price action makes the trade profitable, your mental stop can become a hard trailing stop.


TRADER is now about to have a second epiphany. He is about to realize that by using risk tolerance instead of some fixed stoploss, he will be able to scale-in to a trade and not feel any angst about it, if the scale-in is within his risk tolerance limit.

If it is not within his risk tolerance, then he should not have entered the initial trade to begin with. TRADER should always have a plan to either scale-in or to reverse a trade (to be discussed in a future thread), and the scale-in price should be a point where he could have taken a trade in the first place.


Risk tolerance and scaling in may make you feel queasy, because it requires a paradigm shift in your thinking about what trade management is all about. It is not about setting fixed stoplosses and profit targets and then sitting back and watching. It requires your active participation. Like the baby bird who is kicked out of the nest and told by its mother to either fly or die, if you are losing money from stoplosses and your account is slowly bleeding, you need to find a better way.



Now that our trader has some idea about risk tolerance, what does TRADER do when after his 1 contract entry at the 1st SD, price action takes the market backup to the VWAP rather than down to the 2nd SD? In the old paradigm of using fixed stoplosses, he probably would have been stopped out. In the new paradigm of replacing stoplosses with risk tolerance, you know what he has to do! He's done it many times before. The market is still skewed to the downside, he normally takes short entries at the VWAP. So why not this time? Indeed why not? TRADER pulls the trigger a second time and enters with a short at the VWAP because he knows that his risk tolerance is still quite large. He is now 2 contracts short. This is called scaling in. His expectation at this point is that the market will move back down to the 1st SD. Is this a reasonable expectation? Yes! Nothing about the volatility has changed. The SD is still where it was before the 2nd entry and that's the measure of volatility. Nothing's changed. TRADER should feel confident in pulling the trigger a second time. He is going to actively manage this trade. He still has a mental stoploss at his risk tolerance level. Where is his profit target? He has three choices now that he is short 2 contracts: 1) He can take 2 contracts off the table when price action hits the breakeven point-1 tick, 2) take 1 contract off the table at the break even point-1 tick and the 2nd contract off at the 1st SD, 3) hold both contracts and exit at the 1st SD. In all cases he ends up with a profit instead of a loss. Watch the video and see how TRADER manages his trade.


Scale-in Video


What TRADER did in the video is of course controversial (For previous discussions on this topic see the thread "Doc, my passion gives me much stress" beginning at post 13916 where Dogpile expounds upon his firm belief in hard stops and my response. Also the discussion in the thread "Scaling In and/or Out" where I discuss the difference between scaling in and averaging down (or up for short trades) beginning at post 13142.


Controversial or not, it is my firm belief that a trader needs to understand what scaling-in is all about. I personally didn't become profitable until I understood this and I use it as one tactic in my trading arsenal. If stoplosses are bleeding you, then consider this new paradigm.


Original post located here.


If you have followed the details for scaling in, you should be able to answer the following questions. Take a shot at them and post your answers here


1)Assume your account is 50K and that you have a risk tolerance on any trade sequence of 2% of your account including commissions. A trade sequence is a group of related trades involving scale-ins and scale-outs and/or reversals (which we haven't discussed yet).

Let's say you trade the Emini Russell 2000 index futures where 1 tick is worth $10 (0.1 points) and your roundtrip commission/contract is $5.00. You enter a 1 contract trade long at the 2nd SD, but the market moves against you back down to the 1st SD where you scale-in another contract long. The market is relentless and it continues to move down to the VWAP where again you scale-in an additional 2 contracts long. Again the market continues it relentless move down. You finally hit your risk tolerance at the 1st SD below the VWAP, so you exit your entire trade and are flat.


Question: What is the value of the SD in ticks?


2)When you scale-in at the VWAP in the above scenario, the market finally rotates and starts moving back up. You exit the entire trade at break even +1 tick.


Question: Where is your break even point including commission measured in ticks above the VWAP?

How much money did you make on the trade?


If you were able to answere these questions without too much difficulty, then you are ready to become a full time trader with all the rights and privileges granted thereto. You are also ready for part VII.


Original post located here.


its hard for me to relate to this 'scaling in' thread given the example in the video. the location of the initial short is just a location I wouldn't ever consider shorting NQ -- and I trade NQ every day. I am not saying this method isn't profitable, just that personally -- I place a premium on having good trade location and use a hard but reasonable stop against that -- then often re-enter if I believe my initial read was correct and my stop just wasn't wide enough. I can see the logic in your approach Jerry but I just don't think that is optimal trade location -- hence my question above.


Well Dogpile, I wish I had traded NQ today instead of ER. There were at least four good long entry points including 1 scale-in point. In all trades, the VWAP was above the PVP, so distribution was skewed to the upside as you can see in each of the charts below.


Here are my NQ charts


#1 Enter long at the VWAP 1933.50, exit at 1st SD 1938.25 profit 4.75 pts




#2 Enter long at 1st SD 1939.75 exit at 2nd SD 1945.75 profit 6 pts




#3 Enter long at 1st SD 1943.75

Scale-in at VWAP 1937.25 giving Break even at 1940.50

exit at 1st SD 1944.00 or higher profit 7.00 pts





#4 Enter at 1st SD 1945.00, exit at 2nd SD 1952.00 profit 7.00 pts.



Total profit for the day 24.75 pts


Pretty good I'd say using just simple statistics.


[multipage=VII. Breakout Trades at the PVP]Original thread by Jperl located here.


We are now in a position to discuss trading aspects at points in the volume distribution function near the PVP.


WARNING!! This is not for new traders. If you have not read and understood threads I,II,III, IV, V, and VI, and practiced with entries, exits and scale-ins using simulation mode until you are comfortable, then entries described in this thread are not for you (click on the thread numbers to see them). This is a dangerous place to be entering a trade. Anything and everything can happen and you can be caught with your pants down.


You are probably asking, why is JERRY telling me about this place to trade if it is so dangerous? Two reasons. If you are a basic trader taking entries at the VWAP and 1st SD, you might find yourself caught in this trap and not know what to do.

Secondly, if you like excitement and like living on the edge, like the bikers in the first attachment (a picture I found on the internet), and if you have a correct entry, there are lots of bucks you can pull out of the market by trading here.


So what's this all about? Well it has to do with price action at and around the PVP. The PVP as you've learned in part I, is the dividing line between the low volume zone and the high volume zone. All of the trades we have discussed so far have been in the direction of the skew at the VWAP or its 1st SD in the high volume zone. When price action is around the PVP, it's decision time for the market. The market has to either move back into the high volume zone and continue trading there, or look for new territory in the low volume zone. Thus like the bike riders in the picture, you as a trader will be riding a fine line between the safety of the high volume zone, and the sudden fall into the abyss.


How does price action end up at the PVP anyway. There are only two ways: a)the PVP suddenly jumps to where the price action is or b) Price moves there. In either case, if you are in a trade, you are going to want to know what to do. If you are not in a trade, but want and exhilarating experience, here's your chance to do or die.


In case a) the skew suddenly flips its sign from positive to negative or vice versa. (Remember the skew is proportional to VWAP - PVP). While skew flips can occur anytime during the day, they usually occur early in the trading day when the volume distribution is beginning to form. Sometimes this is a sign of an imminent reversal. What should you do if you are in a trade and find yourself in this situation? Simple answer: GET OUT!, Dump the trade, win, lose or draw.



When price action is near the PVP, price is sandwiched between the VWAP and an SD or betwen 2 SD's. You might notice that price will tend to oscillate back and forth for a while between the VWAP and the SD, across the PVP line or oscillate between the 2 SD's. The market is thinking. Do I want to go back to the safety of the high volume zone where most of the trading has taken place or am I adventurous and want to discover new territory in the abyss of low volume. Don't trade in this region unless you are a scalper. Just wait. Wait for the market to decide what it wants to do, before you decide what you will do.


In the first video, we see price action in the PVP area with the VWAP on the downside. The Video shows when to take a trade to the upside on the break out of the 1st SD.




In the second video, we again see price action in the PVP area, but this time price breaks through the VWAP. We show how to apply the Shapiro Effect discussed in post 16541 to enter the trade.




And finally in the third video, we show a skew flip, where the PVP suddenly jumps to the price action. A trader may have taken a trade just before the flip as shown in the video and exited before the flip occurred, but if he didn't he should exit at the flip price.




Regardless of whether price action has moved to the PVP or the PVP has moved to the price action, the effect is the same. You are now looking at a zone where trade entry is precarious, so be cautious.


In the next thread Part VIII, we will discuss what to do when the skew is close to or equal to zero and the volume distribution.


[multipage=VIII. Counter Trend Trades in Symmetric Distribution]Original thread by Jperl located here.

In the discussion about VWAP in Part II, we introduced the concept of skew, a measure of how the volume distibution deviates from a symmetric or normal distribution. The sign of the skew allowed a new trader to decide in which direction he/she should look for a trade setup. Positive skew meant look for long trades only. Negative skew meant look for short trades only. We have yet to consider trading aspects in markets with symmetric distributions. Like breakout trades discussed in part VII, trading symmetric distibutions is an advanced concept. Not for newbies to be dabbling in.


A symmetric distribution is one in which the skew is very small or zero


Skew = (VWAP-PVP)/SD ~= 0.


There are a number of implications of this definition as follows:


1)a small skew means the VWAP is close to or equal to the PVP

2)Given a small or zero skew, it means that price action has moved across the VWAP at least once, otherwise the volume distibution could not be symmetric.


Now comes the kicker:

3)If the distribution is to remain symmetric, it must continue to oscillate across the PVP and hence the VWAP.


This implies trades of the following type:


If price moves to the 1st or 2nd SD above the VWAP pull the trigger SHORT.

If price moves to the 1st or 2nd SD below the VWAP pull the trigger LONG


WOW- that's completely opposite to everything you've been told in the last seven threads. Up until now, every trade was taken moving AWAY FROM THE VWAP. Now you have to learn to take trades moving TOWARD THE VWAP.


To trade a symmetric distribution, everything you have learned in the preceding threads is turned upside down. To complicate the situation, the condition for a symmetric distribution is fuzzy. It's defined with skew approximately but not necessarily 0. There is also no guarantee that it will remain small. For example, suppose the skew is slightly positive and price action is around the 1st SD below the VWAP. You would look for long trades back toward the VWAP. But it is also possible for the price action to continue on down with the VWAP crossing the PVP and continuing on down. Like the breakout trade, trading a symmetric distribution has to be done with great care.


By its very nature, a trade taken toward the VWAP in a symmetric distribution is a counter trend trade. For example, when price is below the VWAP, the trend is down as defined in Part II. If you trade toward the VWAP then, you are taking a long entry in a down trending market.

Similarly for shorts.


Look at the first video and see if our trader can decide if the distribution is symmetric.


Symmetric YM Trade


Advice: If you want to counter trend trade in a symmetric distribution, use the Shapiro Effect discussed in post 16541 to decide on the entry. If the countertrend trade is taken at the 1st SD below the VWAP and the trade fails (price action drops below the 1st SD) you have two choices. 1)reverse the trade and take your profit at the 2nd SD or 2) hang on and scale in at the 2nd SD for the counter trend move back to the 1st SD.


Our trader in the first video was so sure that he would not want to take a short trade. But now watch the second video and see what our trader thinks now.


In the second video, our trader takes 3 trades, the first a standard breakout from the PVP area as discussed in Part VII, the second a counter trend trade, and the third in the trend direction after a retrace. The last two trades demonstrate the use of the Shapiro Effect when the distribution is symmetric.


NQsymmetric trades


Clearly trading symmetric distributions is as difficult as trading breakouts. The choices can be quite contradictory.


[multipage=IX. Scalping]Original thread by Jperl located here.


If you have followed and understood all the "Trading with Market Statistics" threads, from the very basic VWAP trades in Part III, and the SD trades in PartV to the more advanced trade types involving breakouts in Part VII and counter trend trades in Part VIII, then you are ready to apply your new found knowledge to the fast and furious world of scalping

Scalp trading has many definitions depending on whose doing the scalping. The usual definition is trading for ticks rather than points. But this is a purely heuristic definition. My definition is more quantitative and is based on when I start my volume distribution computation as follows:


a)If I start my volume distribution computations at the opening bell and continue until the closing bell, then that's a normal non-scalping trading day


b)If I start my volume distribution at any time after the opening bell, and watch it for short periods of time, then I'm scalping.



You know what a) means from the previous eight threads. What does b) mean?


Until now, I have talked about the volume distribution when it starts from the opening bell, and runs until the closing bell, that is regular trading hours.


However, there is no reason why you could not start the volume distribution computation at any other time during the day, let it run for say 15 minutes or so, trade off of it, and then restart it again. That's what b) means, and that's what I call scalping.


By doing this you are essentially looking at the market statistic over a short time frame and asking the same questions with the same responses as given in the last eight threads. The net result will be, you will be taking many more trades and trading smaller standard deviations. This is what is meant by "trading for ticks rather than points".


Scalping requires entries, exits, scale ins, scale outs, reversals and closes with one mouse click, otherwise you will miss the opportunity. To do this, you have to use a DOM (Depth of Market) or something equivalent as part of your trading platform.


Watch the video and see how I do scalp trades using the DOM.




Addendum: I was going to present a thread on the use of Hold Up Prices (HUP) which I've mentioned many times in these threads. I've decided not to do it now because it's quite complicated and I haven't yet found a simple way to present it. So I am going to delay that presentation until another time.


[multipage=X. Positiion Trading]Original thread by Jperl located here.


Position Trading is generally described as a trade which you enter and expect to hold for a considerable period of time during the day. Such a trade can be entered at any time after the open. My personal preference for a position trade is at the beginning of the trading day using market statistics from the previous day as my guide for determining entry, profit target, stoploss and scale in points if necessary. The direction of the trade is based on interpretation given in the last 9 "Trading with Market Statistics" threads but using the previous days statistics as the starting point. Position trading is thus no different than any other type of trading that I have previously described.


Here is the idea:


a)Set up a chart with yesterdays volume histogram, PVP, VWAP and SD's on it. Leave sufficient room to the right of yesterdays close so that at the open you can continue to add to the statistical data as todays market begins to unfold. In effect you are continuing to update yesterdays volume distribution as more data is added to the chart.


b)Before the open, decide on your trading plan. Pick a direction for the trade, an entry point, profit target and stoploss based on what you see in the volume distribution function. It will help to reread the previous threads to determine what you should be looking for.


c)When the market opens, execute the plan.


In the following video on trading the ER2 (Emini Russell 2000), you will see that the previous days volume distribution ended the day in a symmetric state with the VWAP = PVP. I then concluded that I should look for a countertrend trade back toward the VWAP as described in "Trading with Market Statistics Part VIII".


Watch the video to see what I did on September 06, 2007.




This trade was a good position trade which would have been even better if I had traded more than one contract. After having climbed up to the 2nd SD above the VWAP, the price action continued on down below the VWAP to the 1st SD and then evenutally to the 2nd SD, a very typical signature of a symmetric distribution.


[multipage=XI. HUP]Original thread by Jperl located here.


This is the Market Statistics thread that some of you advanced traders have been waiting for. This is the "how to trade anywhere, anytime" thread otherwise called the "when not to trade thread", but not for NEWBIES. If you are a NEWBIE, back off and read the first ten threads on this topic starting here.


One of the properties of most markets is the up and down motion that price action displays on virtually all time frames. Some traders call this the market volatility, others call it the natural market rotation. Newbie traders don't like this motion, because when they enter a trade they want the market to continue moving in their direction. Newbies fear volatility. Advanced traders love it. What ever you wish to call it, it is this motion that is tradeable. In the words of Nihabaashi, "To fear volatility is to fear profits".


The main purpose of this thread will be to show how you can use market statistics to determine the most probable times when the market will rotate and when it will not. Once you know this, you can then enter a trade either in the same direction that the market is moving or take a contertrend trade in the opposite direction. If you have read the previous market statistics threads, you already know how to do this. Here I want to start to put this all together in terms of a generalized concept which I call HUP.


HUP stands for Hold Up Prices. As the name implies, HUP are those prices where the price action tends to hold up, that is where the market slows down, pauses, then either reverses (read rotates) or continues in the same direction.


There are two kinds of HUP, static and dynamic. Static HUP are those prices which are fixed for the day. They don't change with market development. In contrast dynamic HUP change as the day progresses. As new data is added, dynamic HUP will readjust to reflect the new data.


Below are some examples of HUP that can be used in daily trading





Yesterdays High,Low,Close

Overnight High,Low

Any computations based on these

such as classic pivot points





Yesterdays PVP,VWAP and SD's

2 day PVP, VWAP and SD's

1 week(5day) PVP, VWAP and SD's

2 week PVP, VWAP and SD's

1 month(4 week) PVP, VWAP and SD's

2 month PVP, VWAP and SD's

1 year PVP, VWAP and SD's


You can of course come up with other examples of HUP, such as previous bars highs and lows, or 2 day or longer static HUP, or dynamic HUP that are in between the ones I have listed. It really doesn't matter. More important is to realize that these HUP points are prices where the market will tend to hold up.

What HUP doesn't tell you of course, is how long the market will hold up and/or how far it will continue in the same direction or if it reverses, how large the reversal will be. Getting the direction correct doesn't mean you can sit back and do nothing. You still have to manage the trade.

In the video that follows you will see a 15 second chart with HUP lines drawn on it..

Green lines are SD's above a VWAP. Red lines are SD's below a VWAP. VWAP are dotted blue. PVP are purple lines


Now watch this video to see where these HUP lines come from and how the market reacts to them.

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This summary thread will feature Jperl's 11 part series of Trading With Market Statistics. The series can be found in the market profile forum.


Thanks for this wonderful Summary


Until I discovered this, I was trying to read the individual threads, but what a nightmare that is !

So many distractions as people argue needlessly over this setting or that setting, and meanwhile missed the whole point of JPerls wise words.


Thanks to him for sharing, and thanks to you for putting this together.

I have to say, it's the most interesting and informative stuff I have ever read about trading.

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