Segmented Cumulative UpVol-DownVol | Making of Trend Days

As traders we are always fascinated by trend days, for novices it a great day, for the ones who trade reversions to the mean, its dreadful.

In this post we look at what happens in the underlying stocks on Trend Days.

The indicator that we have chosen to analyse trend days is a % Cumulative Upvol-Downvol for a Segment of Stocks. There are three segments of stocks that I have taken.

Segment 1 - Top 10 Stocks By Weightage - Constituting (60%) - Solid/Red/Green - Top

Segment 2 - Next 15 Stocks By Weightage - Constituting (20%) - Dashed/Red/Green - Mid

Segment 3 - Next 25 Stocks By Weightage - Constituting (20%) - Solid Yellow - Bottom

So what do you see here?

a) You need the Top Segment to be trending.

b) If the Mid segment goes along with the Top good.

c) Bottom Segment unless makes a massive impact , does not really matter.

Figure 1 - 25th Feb’19

Figure 2 - 11th Mar’19

Figure - 3 - 5th Mar’19

Does it matter which Trading Room you join?

Choosing your Trading Room can be as exacting as Choosing your life partner

Are you part of a Trading Room? Or looking at which one to go with but not too confident where to put your money? Well having run a Trading Room and being part of a few well known ones, I’ve come to understand that there are a few things you need to consider before you have your pick.. As they say Birds of a feather flock together, so here’s how to find your nest..going with the bird metaphor!

Your Trading Worldview - What beliefs do you hold dear to you and what are you willing to let go? Gann numbers or Elliot Wave; Market profile/Orderflow or Market Internals? Quant based or Qual based trading...you see where i’m going with this. Seldom have i come across Trading rooms serving all and being good at it. See what aligns with your worldview before joining a Room

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Learning Environment - Telling vs. Learning. Some Trading rooms ‘Tell’ you what trades to take and when, so you are more an implementer of their trading decisions and there are other Trading Rooms which may focus on working through a process that is consistently called out, so you are not just executing trades but also understand the logic behind taking a particular trade. One way to know if it is the later, is to look for consistency in the trading process/rules being followed. Do you understand why a trade was taken or cancelled. How do they rationalize losses? Do they provide reasons?

Metrics & Tracking - What gets measured gets done. Any room that is brave enough to put out their performance chart, every day, consistently , ‘Respect’. Day trading is like any other business, you need to run an end of the day tally, else how would you know which days you do better? whether there is a correlation between your green days and other factors like range etc? Any room which shies away from it , is not being true to the game.

Integrity - Claims vs. Reality. Timing is key here. Tall claims based on Hindsight Analysis are for newbies and seasoned Trading Rooms would stay clear of it and instead would be able to show real time decisions taken in the Room. Bet on that!

Look before you leap - Ask for a trial - any Room that is confident of giving you one, darn sure they know their business. It’s that clear.

Trading Instruments - Jack of all; Master of None. How does that sound? I will be a little hesitant to put my money there. Prefer to work with specialists and experts, in one or two areas . Know your instruments and chose your Trading Room partner. Side note: Did you know : In an Indian context trading Futures makes less sense compared to Options esp. intraday. Just saying, time you get that nuanced in understanding this game.

Trade Setups - What's your Risk appetite?What RIsk Reward ratio are you comfortable with?40 point SL ?30 point SL?10 point SL? And add to that the holding period, and the scene changes completely: Intraday vs Positional or Swing, both approaches have very different risk levels and risk management approaches. Choose a Room that aligns with your Risk appetite ratio

Charting & Live Screencast - This is a kicker. All trading rooms boast of proprietary indicators. Guilty as charged. But hey, there is a method to the madness. Does the Room take the effort to explain these indicator and point out why a certain decision was taken , have user manuals explaining these indicators and finally do they have enough back tested data in support of these indicators..then you have a winner.

Trust this helps you sieve through the noise and pick your Trading Partner. it’s not that you are going to be wedded for life so go ahead and walk down the aisle. Happy Trading.

Kavitha K7 & Sandeep Rao



Putting Losses in Perspective - Structuring a Trading Plan to include the Edge

In the previous post we talked about what an edge is and how do we know if we have one?

If you are beyond that, it means you have crossed a big milestone, as most (90%) of people that I know, can't get past that.

But knowing about an edge is hardly sufficient to make it work. You also need to know how and when to execute trades in the context of that edge. We will not get much into all aspects of execution today, but focus more on the “Rules” for execution i.e the Trading Plan

Think of the following questions before you create a trade plan

  1. What are the prerequisites for you to enter the trade - Meaning what are the the confirmatory elements that you need. It could be defined in terms of factors like - Price Range, Time of the Day, volume levels etc. any measurable variable

  2. Would you wait for a confirmation on all variables or there is a prioritization among them, or weightage.

  3. Would you enter all at once or would you scale in / pyramid into the position?

    1. How much would go in the first tranche and the subsequent?

So you put the trade - and next

  1. What would you do if

    1. You don't get a fill

    2. You get a partial fill

  2. Where would you Stop Loss be?

    1. Is it going to be dynamic or static?

  3. Are you going to Exit in full size or you would scale out in parts?

    1. How would you determine the scale out ratio?

    2. What if the price reaches 90% to your target and does not move beyond? Would you wait for up your Stop loss or Cover?

    3. What would be the buffer/variance where you will cover your trade even if it does not hit the target precisely.

      1. On what basis would you cover or hold?

Having answers for all these questions, answers informed by data i.e. - ought to be your next milestone

Putting Losses in Perspective - Do you have an Edge?

One of the fundamental reasons for losses in trading can be traced to lack of an “Edge”. But then you would ask me what is an Edge?

To me a trading edge is -

An ability to isolate a condition or a set of conditions among a market variable or a set of market variables - that has a non random way to evolve over a specific period of time.

I remember reading somewhere, but I cannot place it where - it said - “If you can’t explain your trading edge, you don’t have one” - Let me take it to the next level

If you do not know the statistical a) probability of the set of (prerequisite) condition/s that need to occur b) the probability distribution of the outcomes once the conditions (a) occur.

If you cannot articulate both then in my world you do not have an edge.

It’s quite possible that you are a veteran and even though you cannot articulate your edge, you have internalized it over a long period of time. But that according to me is a long winded route and I would personally prefer to be in the know of my edge.

So coming back to losses, the reason we need to be able to articulate our edge is - in the event of a loss, we need to know if its a part of our larger probabilistic framework or is it something which is beyond that. We need some objective reference. For example if you have a loss streak of 5 days, you need to know its statistically “normal” in your trading system or is it an anomaly.

In other words, your understanding of the variables of your edge helps you put your trading outcomes in a measurable context.

In the same breadth, it also helps us understand if the market regime itself is changing, and helps us adapt better.

So the next time you make a loss you know who to catch first?

Putting Losses in Perspective | Introduction

“I just want to breakeven”

“I just need to recover my last loss”

“I just need one move in my direction and I will be in profit”

“Let me widen my stop loss I’m sure the price will turn in my favor”

How about these lines?

“I should have stuck to my strategy/my rules”

“I should to have got out earlier with little losses and instead I stuck around”

“I should have closed my trades than choosing to go positional…big mistake”


Sounds familiar? The ongoing chatter in a loss making mind. Sometimes it’s there during the trade and more often, after a loss making day!

As much as we credit ourselves as rational beings capable of making sound decisions, literature proves otherwise. We are just a Rider on the Elephant, and if and when there is a disagreement the Elephant usually wins.

But then in the real world, sometimes it's not just the rider and the elephant, it could also be the terrain, the skills of the rider, or the elephant itself, and a whole lot of other factors.

This is an introductory post of our month long exploration on dealing with losses, we will look at the genesis of losses and what is it that we can do manage, minimize and make peace with it.

Losses in trading can happen due to a lot of reasons, sometimes they can be point one specific focus area like emotions etc? but most often they are combinatorial. It could be emotions plus an infra issue. or execution plus a trading strategy issue.

To look at losses, and to be really at peace with it, you need to isolate the causes, you can make peace with your losses only and only if you are damn sure that it’s a part of your system, and adheres to your trading system’s win/loss rate and size.

Its like this, you have a headache, and you wonder why do I have this headache - on a spectrum of causes, on one end it could be dehydration and on the other extreme it could be a brain tumor. Now for you to be at peace and ignore the headache you need to be damn sure it’s only dehydration and not a malignant brain tumor. (Sorry if that sounds morbid, losses can be equally bad)

Dehydration in trading will be a “loss that is part of the trading plan” and Brain tumor will be everything else.

In the coming weeks Kavitha and I will spend some time on strategies, methods and models to manage losses both behaviorally and financially.


Through the Looking-Glass, & what NiftyScalper found there | Market Internals - Part 3

This is the third and last post in this series,

Part 1 - Here

Part 2 - Here

**Read about what RSI is over here

In this post we will look at the good old RSI Indicator which has been re-purposed to be used as, both a trend indicator and an oscillator.

The math - We took the top 25 stocks (by weight-age) of NIFTY 50 and Averaged their RSI Value. So we have a Average RSI of the top 25 stocks vs. RSI of NIFTYFUT or RSI of 50 Stocks. Since the 25 stocks have close to 80% weight-age the cross over of the Average RSI and NIFTY RSI acts as a trend Indicator.

Notice the RED colored (NIFTYFUT RSI) Crossing over the Yellow Dotted line of (Average RSI).

We also back-tested for ideal Oversold and Overbought levels - you will see it marked with Blue colored markers in the images below. Typically a RSI Absolute Difference of 10 - 12 i.e (NIFTY RSI - Average RSI)

So here you have a Market Internal based Trend Indicator + Oscillator all built into one since indicator.

There are several other setups for trading pullbacks using this indicator, but thats for another day..

Please do not ask for the RSI Period settings on this one, but its no rocket science. Also, at NiftyScapler we don’t use any of these three indicators in Isolation.

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Educational Explainers - Lead Lag Effect - NIFTY

Last week we looked at what Indexes are (Over here).

This week we are investigating the lead-lag relationship between Spot price and Future prices in NIFTY.

So what does academic research and years of observing the market tell us? The verdict is out..

Allegory of the Cave, Order-flow and Price Discovery

There is this interesting story called “Allegory of the Cave” by Plato.

The story in a way describes what happens to people when they are blinded by a context and fail to see the world outside of it.

I was reminded of it as I saw my twitter feed yesterday.

Instance one below

Next one here

Both the posts allude to the idea that

a) We spotted big buying at that level thanks to Orderflow.

b) Big buying led to the turn in the price.

Point b) is the key. One needs to get an handle on that, and one needs to ask fundamental questions there.

So the question to ask is -

Did the buying happen because the price turned or the price turned because the buying happened?

Yes, that question sounds a lot like Socrates’s Euthyphro Dilemma.

But let me not deviate.

Back to the question.

“Did the buying happen because the price turned or the price turned because the buying happened?”

To answer this question we will turn to what the researches say,

The idea is to understand the location of “Price Discovery” - If price discover happens in the Futures, then we can say - Price turned because buying happened.

However, if the location of price discovery happens to be Spot/Cash market, then it’s the other way round - Buying happened because the price turned.

So what’s the case with NIFTY, where does Price Discovery happen in NIFTY - Spot or Futures ?

Read this post for the evidence - https://www.niftyscalper.com/blogs/2019/1/21/lead-lag-volatility-spillover-effects-some-evidence-from-academic-literature

Kavitha and I will talk about it in our upcoming Explainer tomorrow.

As I sign out - Don’t for heaven’s sake look at the shadows and imagine a non-existing world.

Lead-Lag / Volatility Spillover Effects | Some evidence from academic literature

One of the most fundamental concepts one needs to understand as an Index Trader is that of Lead-Lag effect. I have been reading through several academic papers to get a grasp of it. Here are some that stood out.

Notice the difference between NIFTY and the other markets, I rest my case here.

Price discovery on the S&P 500 index markets: An analysis of spot index, index futures, and SPDRs -  Quentin C.Chu, Wen-liang, Gideon Hsieh, YiumanTse

Price discovery in the German equity index derivatives markets - G. Geoffrey Booth , Raymond W. So , Yiuman Tse

Domestic and international information linkages between NSE Nifty spot and futures markets: an empirical study for India Sanjay Sehgal Mala Dutt

Announcement - Educational Explainers - Trading Indexes - NIFTY

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Over the past few months, we received several emails asking us to explain the whole idea of “Market Internals”, and in our attempt to explain things we typically had to start with the basics.

This series is a conversation, where Kavitha is asking all the basic trading questions you would ask and my response to them is an attempt to help you ease into what it means to trade the markets.

We are calling it Explainers, as the word suggests we would get down to the brass tacks of why the Market Moves. Our attempt to explain would be evidence-based and we would avoid conjectures as far as possible.

In the initial few topics you would have access to, is a three part explainer on trading indexes in India.

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While we have a set of topics we think will add value, to both absolute novices and developing traders, understand the nuances of trading indexes, do suggest other topics that you think NiftyScalper should add to the mix.

Happy trading!

Here’s the first one from the series - What is an Index and how do we trade them?

Through the Looking-Glass, & what NiftyScalper found there | Market Internals - Part 2

In the previous post here we looked at the NiftyScalper Advanced Relative Strength Indicator which is a Price based internals indicator, in this post we will look at the next piece of the puzzle ie Volume.

If you read about internals for the US Markets you will come across something called NYSE UpVol and NYSE DownVol, more about it here.

Unfortunately our indexes don’t broadcast this info. But what do you do when you need something badly and cant get it, you build it.

Yes, that’s what we did, we created our own NIFTY UpVol-DownVol indicator for the top 25 stocks.

Do note that, instead of a ratio we decided to look at the Net Volumes as we would also get a sense of liquidity/participation along with the direction.

CumValue - Cumulative UpValue-DownValue; CumVol - Cumulative UpVolume-DownVolume

As you can see in the above image, there is a massive net sell in the volumes of the constituent stocks, now follow the price action in the next 30 to 45 minutes. Lets move to the next idea.

Based on a suggestion from a fellow trader and friend Navdeep we came up with a variant of NIFTY UpVol-DownVol which we call NIFTY UpValue-DownValue, here we look at not just the volume but Value i.e Volume * Price. This helps us normalize for situation where the volumes could be skewed due to higher or lower face values of stock prices. It also helps us recognize situations where only a few key stocks try to pull the index up or drag it down.

Look at the image below

You an see there was buying that was initiated, perhaps in a few stocks (quite heavily) hence reflecting in the Up-Down Value but Up-Down Vol remains in the red. As you would imagine this was a narrow range day with a tug of war between a few heavy weights and rest of the index.

As I sign off, I must contend that I these Internals based Indicators have really saved me a lot of head and heartache. I am able to filter out contexts that I don’t want to trade, quite well.

Update: 16th Jan’19

I found a similar spike in the CumVol, this time on the upside as discussed in the first image. Notice the price action after that.

Trend Day - 15th Jan’19

Life as a Resource Allocation Problem | Year End Musings - Delivered late!

The missus and I were off to Bhutan this year end, and while I was there, I was receiving some calls to attend a trading conference. So there began a discussion on the value of attending conferences and my view on it.

My view is that trading or anything of value has to have a lot of nuance, which comes from years of experience and practice, and expert is an expert because he/she has developed that nuanced skill/intuition.

With that said, ask yourself as to what would you like to focus on, depending on were you are on your learning curve -

If you are a beginner - It would help immensely to find a mentor, and work with him/her to develop core skills, in other words try to be an Apprentice - Takes at least 8 to 10 Years

If you think you are at an Intermediate level - At this point, it would help to connect with more experts to understand what others are doing, and and build your skills by borrowing ideas and adapting them to your context, as Cal Newport says - this could be the Creative Active phase. - Beyond 8 to 10 years

If you think you are an expert - It would again help to engage with others in the space, to continuously learn and understand the space at a more macro level. This is at a point when you have reached Mastery - 15 + years of experience

Now the reason I called these things out is to help you contextualize - what would help you at a given point of time. I personally believe a lot of our adult life is a Resource Allocation Problem, the better we get at it, the better would be the outcomes.

We have these three fundamental resources which feed into one another - Time, Energy (Cognitive & Physical) and Money.

Money can help us buy Time a bit, but Energy determines how well we can use that Time.

Hence we need to ask ourselves where would you like to allocate your fundamental resources so as to achieve your goals.

You can use your time, money and energy to either attend a conference or perhaps buy a few books or may be fund a trading account. Which one these would help you get to your goals faster, and that depends on where you are on the learning curve.

Lastly think of it this way, if you have to choose a heart surgeon, which one of would you choose, the one who has spent 10,000 hours doing surgery or the one who has attended 100 conferences.

To flip the context - So which category of surgeon would you want to be?

Its the same with Trading.

Coffee table chat with Sandeep | Alpha

Come join my little coffee chat with Sandeep where we talk about everything from Alpha (not the male type) to Amygdala…

~K7

Welcome aboard K7!

I am excited to announce that Kavitha (K7) is joining NiftyScalper as a Performance Coach!

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K7, a former Global Learning Manager in the financial industry, she played a huge role in embedding a coaching culture within the organization. She is a unique blend of a Coach who can also trade.

Drawing on her experience to ask tough questions and take NiftyScalper in a new direction and roll out Trading Performance focused offerings, I welcome her to join the team.

“Trading is such a performance oriented profession, but people focus a way too much on the mechanics to the extent of completely ignoring the role that one’s ‘mind’ plays.” - Kavitha (K7)  

Content creation and curation is another forte that K7 will leverage at NiftyScalper. I look at K7 to re-create that performance magic for serious traders who would like take a more holistic approach in their journey to become better traders.

I am super excited to have her aboard. Welcome K7!

Pullback vs. Reversal | Can Market Internals Help?

Those of you who follow the blog regularly know that we at NiftyScalper have been working on creating tools to look at NIFTY Market Internals as a way of understanding the index moves better.

In this post I will spend some time on one aspect which if learnt can make a massive difference in your p/l.

We will look at understanding what is a Pullback and how do we know that its not going to turn into a Reversal.

What is a Pullback?

A pullback is a micro-counter-trend within a macro trend. Micro and Macro are time references, and for scalpers and day traders it can be 5 to 10 mins for Micro and 45 to 60 minutes for macro.

Pullbacks can be great opportunities to scalp so long as the macro trend continues.

What is a Reversal?

A reversal is a move which starts like a micro-counter-trend move, however does not go back to the initial macro trend and can potentially be the beginning of a counter-macro-trend.

I don’t want to hear your stories as to how many times what you thought was a pullback turned into a reversal, and that was the end of it, for some people I know that was the end of their trading account. Especially if you don’t have your stops in place instead have ‘hope’.

Given such grave and potentially devastating outcomes of what was essentially a misread price pattern, we at NiftyScalper thought why not check if Market Internals can help us with increasing our odds of identifying ‘potential’ reversals.

If you have questions about the market internals based indicator that I am referencing here, read this post.

Look at this image below. If you notice from the point which I have marked with a blue dot, the % of stocks below 1SD of VWAP which is the red line has been inching up, along with price also rising, almost crossing over the green line (% of stocks above 1SD of VWAP). Which is obviously a sort of divergence. From that point onwards, I would be wary of pullbacks as the strength of the move, in terms of the number of stocks supporting it is waning. So this was one way of looking at it.

NIFTY Futures 28t Nov’18

Lets look at this next chart, same day, same time frame. The blue dot is a common time reference across both charts.

The Red and Green line here are from a slightly different Market Internals indicator where we look at Standard Deviations from a 45 Minute Mean Price. As you can clearly see here, this one is far more pronounced, the % of stocks above 1SD of 45 Min Mean has been downward sloping as the price makes new highs and peaks.

You can see or yourself, as the support from internals declines, the probability of a pullback being just a pullback also declined.

To me it looks like there is a story here, something to follow up on.

I will keep you all posted. Till then Trade safe folks!

Finding 'edge' through Data Curation

When we talk of ‘edge’ in trading it essentially means, what is it different that you or your system has which would lead to an ‘alpha’ in terms of returns. One way to extend that question is to ask ourselves, as to what are the sources of that edge?

To me having a more deeper and nuanced understanding of the contexts and setups that I trade, exponentially adds to my edge. To get a better sense of my contexts, one of the practices that has massively helped me in my trading, is curating setup specific data. This is a lot of work, let me tell you. Sometimes it’s very difficult to train the computer to do what we humans can do intuitively, which means a lot of it is manual labor.

Let me try to give you a sense of what I mean, if you follow my blog you would know that, these are the three setups that I trade.

NIFTY - Scalping Set-up - 01 - Opening Spikes & Opening Drive

NIFTY - Scalping Set-up - 02 - Mid-Day Mean Reversion

NIFTY - Scalping Set-up - 03 - Afternoon Range Extension

Now each of these setups have their nuances and details, like

a) At what time did the entry get signaled? Is that time range bound? Is there a seasonal skew to it?

b) Range breakouts on VIX? Time and Amplitude.

c) What is the average size of the pullbacks that in the setups you trade?

d) What is the ideal holding time for your some of your setups, based on the length of the trends?

A lot of these computations are possible only if you have specific data. Therefore, this is a practice that we follow in-house and for our clients - i.e. to capture such data so as to run tests on it.

Here is a mini snapshot of the data. (Disclaimer : The snapshot may make no sense whatsoever without context)

This practice when followed over long periods of time can give you a gold mine of data, which (I believe) can add to your trading expectancy.

Through the Looking-Glass, & what NiftyScalper found there | Market Internals - Part 1

In this earlier post here we talked a bit about what moves an index, specifically what moves NIFTY, in today’s post we will take that idea a bit further and look at the internals from different lenses.

Long back I came across this idea on the Traderfeed blog. I thought of testing it out for NIFTY and see if it helps understand the market moves any better.

So here is a brief about the idea.

1) Identify a basket of stocks - In case of NIFTY I choose to use the top 25 stocks by market cap, which constitutes close to 80% of index by weight-age.

2) The math - I extended Brett’s logic a bit by including not just VWAP but also (+/- 1) SD (Standard Deviation) from VWAP as reference points. The idea is to see the % of stocks above and below these references. I have also added % of stocks above or below their PDC (Previous Day Close) as well.

The concept is as simple as that, now lets see if helps us understand the index moves better.

We will look at three types of days. First a Trend Day, Second a Mean Reverting Day, and Third a Low/Narrow Range Day

Trend Day

Here is how the internals looked like on this up trending day. As you can see the lines are all clear.

The blue line is % of stocks above VWAP, Green is % of stocks above 1 SD of VWAP and Red is % of stocks below 1 SD of VWAP, and the yellow line is % of stocks above its Previous Day Close (PDC)

NIFTY Futures 12th November’18

Look at how the Blue and Yellow lines are quite stable around the 60% level and 90% level. The way to read this is 90% of the basket stocks were trading above their PDC all through the day, and 60% of stocks were trading above their VWAP all through the day. And around 25% of stocks were trading above 1SD of VWAP largely all through the day.

While this is how the basket constituents behaved, we would need to test if all trend days demonstrate similar patterns, more importantly we would need to identify ‘markers’ which occur in the first hour of the day that could further point to a trend day.

However the +/- SD Lines can offer good short term trading entries.

Mean Reverting Day

Compare this with Trend Day image above, and you will see clearly the Blue Line is not holding up as it did earlier. Here the Red line (-1 SD) crosses both (+1 SD) and VWAP (Blue) line multiple times, indicating a dispersion in the basket stocks which perhaps leads to a more Mean Reverting day. Again the crossovers and divergences offer good entry points for trades.

Narrow Range Day

In this chart, you can see a large part of the day is extremely constricted, all lines overlapping with a minor downside bias in the early part of the day and a minor upward bias during the last hour.

We are still back-testing setups on this indicator, to isolate high probability contexts. But nevertheless its interesting to view the index almost like an X-ray to see what is happening and this gives you a far better and nuanced sense of the Market Internals than the usual Advance Decline indicators.

Do write to me if you have some ideas to improve this, or any thoughts for that matter.

ATR (Average True Range) vs. ADR (Average Day Range) | What they don't tell you

I was having this conversation with a coachee of mine, who was bent on using ATR instead of ADR as a reference for trading and I had to help him understand the difference and the context as to what is relevant where, and why I lean towards ADR. Below is an excerpt of what I told him.

The case for ADR

First things first - What is ADR - ADR is simply the average of intraday (High-Low) value. This excludes Gaps.

So - What is ATR? - Here is a better explanation. Essentially ATR is a range calculation which includes Gaps as it calculates from PDC (Previous Day Close).

So it essentially boils down to the significance of Gaps.

Let’s digress a bit to understand why do we use Range as a reference.

To me Range is a good indication (of / or a proxy for) volatility. You will see that for yourself, if you follow VIX, as VIX increases, so does range (Ref. the plot below). By including Gap in the calculation we may get an incorrect and irrelevant view of the intraday volatility.

Based on Past 60 Days’ data - NIFTY Futures and INDIAVIX

As an Intraday trader I am concerned only about what happens between the Open and Close. That is what is my playing field. I am not a positional trader to take advantage of or get affected by Gaps.

So the next question to ask is? Is there a correlation between the size of the gap and the ADR for the day? This would determine if including GAP data helps us in any way.

I did a quick math by calculating the Correlation Coefficient with Gap size as an independent variable and (ADR) Range as a dependent variable and I get a score of 0.36. Take a look at the scatter-plot below.

Based on Past 60 Days’ data - NIFTY Futures

As you can see there is no linearity in there.

So given that there seems to be no correlation between Gaps and ADR, I would recommend using ADR and not ATR,

ATR is relevant in markets or products were Gaps have a correlation with Range, which does not seem to be the case with NIFTY.

However, I do keep an eye on the Gaps, but that is more from a perspective of understanding if there is a visible change in the market structure, more on it later.

Here is a snapshot of the data that I reference during the day. It gives me a clear sense of the developing range with references of Previous day and a 20 day Look back period.

Snapshot of NS-RangeByTime Indicator for NT8

Mastery by Robert Greene | Book Excerpt & Summary

I am not much into reading books as much as I listen to them. Given my schedule these days, I have very little time on me to explore book ideas, so I leave that job to the missus. One such recommendation that came from her was this book called Mastery by Robert Greene. And what a recommendation it turned out to be.

Being one who believes in singular focus and specialization, I got deeply influenced by the book.

Here is a visual summary by Ste Davies.

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A longish Google talk by the Author here.

The book made me think about a few things

1) Are you deeply interested in what you want to master? Are you more interested in the process or the outcome? Learning vs. Money

2) Who inspires you? Do you know the degree of effort they had to put in to get where they are today?

3) Are you willing to go through at least 10,000 hours of Deep Observation, Skill Development and Experimentation?

4) To what extent are you willing to endure pain on the path to mastery?

5) Do you have faith in the process, that you would get there?

These are the questions that I reflect on. Let me know what you think.

Market Profile & Order-flow Charts | Revisited

A few days back I received a comment on the blog about Market Profile and Order-flow as a tool which offers an edge in the market.

Here is the comment.

And here are my previous articles about the same.

Part 1 & Part 2

I thought it’s important to explain to novices as to how the “information flow” in stock market works and which is what is the foundational reason behind price moves in an Index.

Disclaimer: My comments here are only in the context of Indexes and specifically about NIFTY 50 and NIFTY FUT

So let’s start with the basics

What is an Index? - An Index is a Collection of Stocks which are weighed together to arrive at an aggregate value. This weightage is based on market cap of the constituent stocks for NIFTY. If you want to have a look at the constituent stocks and their weight-age, this is the place.

What makes an index move up or down? - Say the average range of the index is 100 points, why does it move so much? It moves because its constituent stocks move. Say for instance if the top 5 stocks by market cap - Reliance, HDFC, HDFC Bank, ITC, Infy etc. move down the market will move down, and visa versa.

Now that we know what is an Index and why does an Index move up or down, lets get to some nuances here.

What is “Information Flow” and what is its relevance here?

Information flow is about the direction of causality for price discovery in a given market. If that sounds a bit wonkish - it essentially means, in the context of an Index, what moves first, and what causes what. Does the future prices move ahead of Spot? or it is the other way around. There are different statistical ways of measuring the the strength and direction of causality, but that is beyond the scope of this post, look up “tests of causality” if you are interested, if you are even more interested look up Judea Pearl’s work. Oops! Sorry for that diversion, back to Information flow and price discovery.

So to repeat, there can only be two types of informational flows

a) (Stocks) Spot -> Index Futures - Spot prices lead Futures

b) Index Futures -> (Stocks) Spot - Futures prices lead Spot

Like everything else, its more about which type of information flow is more dominant in a given market. Its not necessarily binary.

As I pointed out here, for NIFTY its type (a) which is more dominant (Image below from 2) Reference). Which is not true for all markets though, for instance the S&P 500 works on type (b) logic.

If you are wondering as to why does it happen, well there are tomes of academic papers on that, but it boils down to two factors largely, one is cost/barriers to trading in a given product, and relative volumes.

So to sum this point while type (a) is a fundamental reason for index moves, type (b) can also happen and may provide a minor edge to the participants.

Hope you all are still with me.

So far we looked at

1) What is an Index? 2) Why does it move/What causes its moves?

Now lets get to the topic of this blog post.

Market Profile and Order-flow Charts. I will not spend time in explaining the basic concept of Market Profile and Order-flow, that I did in the previous posts, do refer to them for the basics. But here I am going to explain Order-flow more than Market Profile. Both are unrelated but for some reason a lot of sellers and vendors offer them together. Let’s move on.

Let’s understand the process flow of an order, i.e. an order you put to buy or sell one lot.

  • Buy/Sell Order Placed by you ->

  • Order goes to Broker’s OMS (Order Management System) ->

  • Then goes to Exchange’s OMS ->

  • Finally reaches the CLOB (Central Limit Order Book) ->

  • Order now gets queued based on Price and Time priority (Depending on Market or Limit Order type) >

  • Finally once it matches another Buy or Sell order it gets executed.

If you notice I have not used the word order-flow anywhere yet in this sequence of events. The reason being, only after an order is executed we get to see the Order-flow Information i.e. Bid/Ask Volume traded at a given Price.

To reiterate Order-book (LOB - Limit Order Book) comes first and Order-flow later.

^LOB is the information that you see in the Market Depth window of your trading platform

So in a way Order-flow is stale info. Its all done and over by the time you see it (*Assuming what you see is what it is).

If someone claims that there is a “Predictive Edge” in Order-flow they are essentially claiming that “if X volume at bid or ask happens at a given Price” it means the price will go further up or down.

For a second ignore predictive edge, even a statistical edge will do? Show me one Order-flow based back-test and I would be happy to update my views here.

If this is not enough, you also need to understand how Level 1 Data Feeds work.

None of the feeds in India give you tick by tick data, we don’t have the infrastructure as retail traders to receive it, what data-feed providers like TrueData, GDFL and E-signal give is a Per Second Aggregate of Ticks. So what you see in an order-flow is an *aggregate information for a second or as some call it “Snapshot Data”. Which can never be accurate, to put it differently its not meant to be, there will always be “missing” info. in it.

And lastly always ask yourself, if Order-flow info had such an edge, why wouldn’t these indicator sellers keep it to themselves and print money.

Personally, I have used and tested both Order-flow and Order-Book information to the extent it’s possible with retail level latency and infrastructure and have not found any edge there.

So to sum it all up, Order-flow, if at all has an edge, it would be in a market with type (b) information flow, which we are not. And secondly, in markets with type (b) information flow, you might-as-well use Order-book Info. why would you want to look at stale order-flow info.?

This is all I had to share, hope it helps you, saves a bit of your time (by helping you avoid rabbit holes) and more importantly your money.

References

1) Does Index Futures Dominate Index Spot? Evidence from Taiwan Market - Ching-Chung Lin, Shen-Yuan Chen, Dar-Yeh Hwang and Chien-Fu Lin

2) Domestic and international information linkages between NSE Nifty spot and futures markets:an empirical study for India - Sanjay Sehgal & Mala Dutt