As most of you in the slack group know, this year my focus is on finding indicators which would help us get better, more refined entries and exits in our existing setups.
And I was sure that these indicators either have to be some sort of visualization of the Limit Order Book (LOB) activity or at least must signal the change in state of the book, even if it takes inputs from executed orders.
In this post we will look at the concept of Trade Rate/Pace of Tape/Trade Intensity - these are conceptually the same. Essentially we are looking at the time taken for the price to move from 1 tick to another or volume acceleration in a given time.
Let me tell you how I landed on this idea – After having watched the market depth (L2) for years, I knew for sure that the beginning and the end of a micro-trend usually happens with a flurry of orders and then the pace comes down and the price retraces a bit or coils around for a while. Being a visual person, I wanted to chart it and that’s where my search for such an indicator began.
I did find several mentions of it for different platforms but didn’t find one for NT8.
To read more about it, some good soul has collated all the information here
https://www.sierrachart.com/SupportBoard.php?ThreadID=345
Similar Indicator for a Different Platform
https://www.jigsawtrading.com/2018/03/26/jigsaw-smartgauge-pace-of-tape/
I later found this one
https://readtheprospectus.wordpress.com/2009/04/16/sponsored-indicator-davinci-trade-rate/
Since it had a selection for both Volume and Trade rate I thought it would be better to play around with. So I got this one coded for NT8
Now let's see how to use this indicator. If you have read the links above you would have guessed by now that this indicator is used mainly to identify the location of a trend or micro-trend change. As always it cannot be used in isolation and without relevant context of the market structure.
Now let’s look at a an example from NIFTY Futures
Look at the areas marked with a rectangle, what you see in the above chart is Price (100 Tick)/Volume Rate/Trade Rate (Green Line Chart)
You will notice that trend reversals coincide with the Trade rate being in the upper band. You will also notice that it coincides with the spikes on the Volume Rate. More importantly one needs to observe what I call the “Trade Rate Cycle” and look at turning points in the Trade Rate, which is easy to identify as it operates within a range/band.
Again, this is no holy grail, but at least offers information that is behind the veil of price.
Note – I am still testing this and would in future do some back-tests as well.