[joshdance]

Anyone who read my above explanation of the delta calculation versus the open interest calculation should find it clear that logically, they cannot be so easily interchanged over long periods of time. You may think you're seeing "inventory," but the very calculation of delta precludes it from being used as such. You can go buy a compass and call it a "santa claus finder" too, but it will only do its job, which is to point north. Likewise, delta will do only one thing: measure contracts traded at the offer less contracts traded at the bid. There is nothing in the calculation which has a notion of inventory. There is no "memory" from one trader to the next. That is what open interest is for, and it's calculated as such.

For long term inventory tracking, use the tool that's designed for that: the commitment of traders report. That will tell you who's long and who's short. I use delta quite a bit, but I use it on short term time frames, from a second or two to an hour or two. But for long term tracking, why would you use something that does not calculate it correctly, when you have a perfectly accurate COT report?

[FulcrumTrader]

The COT report is frequently inaccurate at providing hints towards structural moves in an instrument - and that actually does not surprise me.

Newly initiated trade open interest (positions not yet closed) is absolutely a component of price movements. When price leaves one level and trades to another, there was definitely newly initiated inventory (open interest) as a component of the price directional change and continuation (to the next level). The predominance of directional trade by large liquidity participants is through market order driven order flow - the tracking of this order flow and the price levels where order flow changes took place (to change the direction of price) are created with newly initiated inventory (open interest). If you are tracking the Cumulative Delta your are tracking ongoing organic open interest (always changing - the ratio of those holding SHORT positions in relation to those holding LONG positions). Of course Cumulative Delta will never tell you exactly how many contracts are held "open" at any moment of time, but that is not needed. All I need to see with Delta, is where order flow bias created changes in the direction of price - to see where (the price levels) the change in the ratio of the held open interest was affected by newly initiated trade.

I am not tracking the expansion or contraction of the overall open interest, but the ratio of those holding open SHORT inventory to those holding open LONG inventory - this ratio does change as the market trades up and down day to day and that is the key. In my over 8 years of tracking Delta and working through this order flow tracking process, with my friends who trade within firms in Chicago, it is the ratio of the open interest that I want to follow. Also, the price/delta levels where obvious newly initiated directional trade caused the directional movement of price (price changing directions or the pivot points of price activity throughout the day) are the other critical items to track (what I call Delta threshold levels - turns in Delta that align with pricing levels). There is a reason why commercial participants track the levels of price tied to turns in the BID/ASK differential (Cumulative Delta) - so they can see areas of price and what possible supply may be held there as open inventory. When a large liquidity participant is working new directional trade order flow into the market, they already want to know where there are possible exits (price areas where held open inventory was initiated - these are seen as areas of supply that may be used to cover into for their trade - or what could be called potential profit taking supply zones, where a winner can cover into a loser without a lot of slippage).

I could go on for another hour about how Commercials track order flow / open interest and why, but in the end everyone has to form their own opinion. All I can say is, try to establish contacts within the large liquidity firms and you will be fascinated by how well they play the order flow game.

[TheNegotiator]

Delta can be used in a simple or in a complicated way. I prefer the simple. Using cumulative delta helps me track the level and continuation of imbalance and acts as an additional piece to the picture I use in my decision making arsenal.

If something you use which been well thought through works, use it. If it stops working, change it. Everything we understand in life is best guess only. Don't ever let anyone tell you something is wrong if it really does work for you. No matter who they are.

[PJK2]

Originally Posted by Enigmatics »

Within the last couple of weeks, I've missed pops on stocks I was waiting for creek entries on. Most notably was today (GMCR). I was waiting for a break of that .84 level on my chart, but low and behold it popped much earlier than that on what appears to be a symmetrical triangle.

Again, this has routinely happened to me while patiently waiting. Then I just stay away from the trade all together because the stock is already up too much on the day and I don't want to chase .... especially in a situation like GMCR's where there's an immediate "demand test" in the creek area.

E: How are you defining or identifying "the creek area" in your planning/analysis?

[Enigmatics]

Originally Posted by PJK2 »

E: How are you defining or identifying "the creek area" in your planning/analysis?

Typically after the first bounce of a sustained drop & selling climax. Once that bounce peaks, that is the level or "creek" I'm looking to break after some accumulation.

[PJK2]

Thanks E - I've seen the term a few times but never understood what it referred to...

[Enigmatics]

Originally Posted by PJK2 »

Thanks E - I've seen the term a few times but never understood what it referred to...

Welcome. Ya whenever you get a big drop, the first legit bounce is considered an "automatic reversal" .... that's typically an area where shorts start cover. It's also one of the most volatile times to trade IMO so that's why I like to wait for the accumulation to develop under the creek.

[Muir]

Wyckoff preferred the climax, of course.
And so do I.

However, your questions speaks of risk, rather than technique.
You want confirmation but then find that in order to have the comfort of that confirmation, you are unwilling to pay the price: (a higher price.)
In the end, you end up paying anyways: a low cost / low risk opportunity passes by you.

The answer lies in understanding the nature of risk and fortunately there is a book with that very same title: The Nature of Risk.


p.s. I hate to pass judgement on a chart without having more background, but that long tail seems to have been a golden opportunity, so yes, you may also be weak technically, which would explain your hesitation.