Podcast | CWT | Mike Bellafiore

This is one of those podcasts' which should not just be listened to, but should instead be understood and assimilated. That's all there is to trading, esp. day trading.

Behind the ‘veil’ of Price | Indicators that signal market microstructure dynamics | Part 2 of 4

Previous part here 

In this part we will explore the second indicator that I use which helps us in understanding the dynamics which happens as price action unfolds, i.e. points where price turns, also known as "Imbalances". Adam Grimes in his book "The Art and Science of Technical Analysis" says something interesting about Imbalances.


Imbalances happen in the Limit Order book (LOB), however in the absence of LOB info. we can use executed order info. as a proxy to access LOB imbalances. The indicator known as “Volume Delta” tries to do just that. It looks at volumes executed at ask vs. volumes executed at bid to make an assessment of an imbalance.

Delta here is defined as - The net difference between the buying and selling (volume) at each price (footprint delta), each bar (bar delta), or the entire day (cumulative delta).

All that you need to know about delta is here - and it makes no sense to reinvent the wheel, what I think is of more value to the readers here is to know how to use it in the context of NIFTY.

Delta becomes important only at points where there is a divergence, meaning price moving in one direction but delta getting skewed in the opposite direction or in other words – More aggressive buying as the price goes down and more aggressive selling as the price moves up  Such divergences point to a possible change in trend or a reversal.

Now it’s important to understand that this indicator measures divergence caused by aggressive buying or selling i.e. through Market Orders, but in reality passive limit orders could also cause both reversals and continuations and in NIFTY the ratio of market orders to limit orders would be close to 30:70, so one has to factor that in.

At this point I want to categorically say that as far as I know there is no programmatic way of determining if an execution is a market, limit, or a stop order. So the idea that attributes “aggressiveness” to market order driven (long/short) at that price point is not correct, it could always be stop’s being hit as well, or for all you know it can also be marketable limit order. This is the reason why divergences per-se can be both a point of reversal or continuation.

Let’s look at the following chart.

In the image above – The Red colored candles mean (Greater than “x” size volume at Ask compared to Bid) and the Green candles mean (Greater than “x” size volume at Bid compared to Ask) in that specific bar. X can be set to a User defined value or you could ignore it totally and let the indicator point you to every imbalance that occurs. This is an illustration of "Per Bar Delta" which is what I use.

As you can notice there are some divergence signals which act as points of continuation and some act as point of reversal, meaning some Red markers which don’t lead to a fall instead cause further up-move and some green candles which don’t lead to a raise but instead cause a further fall.

I repeat this, because a lot of novices buy into the fact that this (Indicator ie not the idea of Imbalance) is some sort of a holy grail and all that they need to do is follow the divergence signals and buy or sell accordingly, twitter traders and indicator sellers don’t make life any easy either.

That’s the reason we really need to use this indicator within the probabilistic context of the market structure of a given product.

There is another nuance in terms of the input factor for this indicator usually Volume Delta Indicators come with two modes of inputs – Up/Down Tick and Bid/Ask, choosing either of these can also alter the output.

At the end, like all other indicators this is no holy grail stuff, however can be an extremely useful reference if you can combine it with market statistics and other indicators referenced in this series.

Book Excerpt - "Most investors would prefer Intraday Strategies"

Reading the book - Machine Trading - By EP Chan. An I am not surprised when he says this. One may argue, machine trading is different from discretionary trading, but you can become more systemic, by creating rules. But the underlying premise of risk and reward does not change.


George Angell and his methods of Day Trading

When I started trading, esp. day trading, a whole lot of people told me, don't do it, it's the most risky form of trading. Then when I would ask them why is it more risky than say positional trading, they would not have convincing answers. That was a good starting point for me to build my conviction around the possibility of success in intraday time-frame. 

Likewise, when I started studying technical analysis, I was always surprised by the way traders at large perceive it, to be a predictive tool. If there is a crossover buy or sell. But they never told me why should the price move further if there is a crossover. That uncertainty brought me to the fundamentals, i.e. time, price and probability. 

So in my search for people who view the market price action in these fundamental ways, I chanced up on George Angell. You can search more about him and his books, but here I am going to post a selection of videos which he did I guess in the 90's. Its a part of a larger series and I would recommend you watch most of them.

What to look for and be mindful of when watching the videos?

1. Focus on the larger contexts and broad methods, not really the specifics.

2. His definition of "Scalping" is different from how I refer to the word. Over here I use the Tasty Trade definition. Keep that in mind as he may come across as if he is against scalping.

3. His methods are pretty relevant to NIFTY and its nature/market structure, hence good to back-test the ideas if you are serious about using them. His recommendations about order execution may not be relevant as NIFTY is far more liquid today than what ES/S&P would have been then.

The first video explains the fundamentals of price and time. You will understand the causes of price movements. Why you get pullbacks? Why does a breakout happen? Understanding price equilibrium? Side note - He looks at 1 min. bars.  Notice his emphasis on "Time" - How long does it take to get from point A to B, something most people overlook.

The second video is on day trading - Here he talks about the advantages of day trading and a lot more. In fact there is a series of videos that he seems to have done on the topic of day trading, watch them all. Most of what he says is absolutely right. 

Lastly, don't take anyones word (including mine) when it comes to what works and what doesn't. Think for yourself, apply your mind, try, experiment. At some point that "ah ha" would happen. 

Article Review - Intraday Path Length | Kim Zussman

While rummaging through the blog some time back, I landed on this gem.

Just read it. Re-read it, and try adapt it to NIFTY, you would see immense value in it.  I've always intuitively used the concept of "Path Length" in my trading, didn't know its something which the biggies also look at.

How to analyze markets on an Intraday basis? - Damon Pavlatos

I have been following Damon for quite some time now, he is a market veteran and has been in the broking business for decades now, he also happens to be married to another favorite trader of mine Linda Bradford Rashke.

In this short video he gives us a glimpse of how he looks at the market on an intraday level and that should tell us, the novices, what to do.