Market Profile

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



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

Market Profile, Order-flow, Footprint - Demystified - Part 2

In the previous part - here - https://www.niftyscalper.com/blogs/2017/12/7/market-profile-order-flow-footprint-demystified - We got an overview of what these concepts are and how they fit in together.

Now in the part 2 - I am going put together my views on the relevance of these tools, in the context of Intraday trading and Scalping.

Does following the market profile concepts like POC, VPOC, IB, VAH, VAL give you an edge in your trading?

In all fairness, I must say conceptually these make sense, but are of no value in the context of trading decisions if you do not have back-tested probabilities to work with. In other words these things make for good reference values, but that does not help in trading. What you need is probabilities off the references. For example you need to know - % of time POC acts as a support, or once the price crosses IB, you get an extension of y points more than 70% of times. So bottom line, no back-tested probabilities, no use of these concepts.

Does following the ORDER FLOW / FOOTPRINT give you an edge in your trading?

This is a difficult question to answer, it has several parts to it

a) Quality of Data Feed - Like all other things in data analysis, garbage in is garbage out - Though you may have the best of the charting software, if the data feed sends garbage to it, its not going to be of any value. That is one reason, if you compare two foot print charts with data feeds from two different vendors, you should not be surprised to see different data in both the charts. Then there is a larger issue of the quality and nature of the data that the exchange shares with these data feed providers, this is where protocols like ITCH and OUCH come into picture, without which your order-flow becomes less reliable. I seriously doubt if NSE provides such granular data. Read the excerpt below from the book  - Machine Trading: Deploying Computer Algorithms to Conquer the Markets - by Ernest P. Chan

b) Back-testing Order-flow Data - Again, you need some references to work with even if you have Orderflow, for instance any buyer of greater than x size leads the trend by y %. This back-testing, is not easy at all given the quality of data that we have. As shared in the excerpt above.

c) Smart money & Orderflow - This one really gets my goat. Let me give you a few examples of what some "experts" claim.

Now let me share something from the horses mouth, ie the makers of these charts. - https://www.sierrachart.com/SupportBoard.php?ThreadID=2119 - Read the text again. 

This is like the drivers who claim that their cars can fly, but the manufacturer of the car says you cant. Who do you trust? - I leave it up to you. 

However, I do think there is evidence for the use of Cumulative Delta Divergence, but again not without back-testing it. 

So to sum it up, I believe if you have backtested price data, that in anyway subsumes volume, if you want you could do correlated backtests along with volume data, even better, but you don't need anything more.

At the end of the day, you also need to understand that we humans cannot process so much of information that multitude of charts and indicators offer, we need to in a way simplify our decision making, by focusing on probabilistic models/frameworks fewer markets and instruments.

With that I rest my case on this. 


Market Profile, Order-flow, Footprint - Demystified - Part 1

It's been close to a month since I started my trading room, and the response has not been bad I must say, close to 116 members and counting. To me more than the numbers what matters is the collective wisdom which is both created and transferred among members, more so because trading esp. the way retail traders operate, is a very lonely business and one has to find like minded people to work with. So on these fronts, I am pretty happy with the way things are progressing. Oops, I think I went on a tangent.

Coming to the topic, incidentally two members in the room asked me

a) Why I don't use Footprint charts? Wouldn't it give us better entries and exits? 

b) Why I don't you use Market Profile? Isn't it better to look at the markets from that perspective?

Two more members didn't ask me, but told me something

a) I was in a room where they claimed to use Market Profile/Orderflow and Footprint charts, but I lost 30% of my capital by following their trades, I hope your system is better.

b) I was a in room where they claimed they tracked "Smart Money" - But I didn't see any value in it in terms of their win rates.

That made me realize people really need to be educated about what this whole thing is. All these things are becoming some sort of "Snake Oil" to be honest.

Lets start with what is Market Profile.

There was this guy by the named Peter J. Steidmayer who was a trader at CBOT, and later had a management position as well at the exchange. He developed this approach to view the markets, in the form of a normal distribution. As you can see below, the middle area is the area where 70% of trade happened. 

 

Next he developed a way of representing Time, Price and Value - "Value" here means the price region where more than 70% of trades happened.  

Then there are concepts like POC - Point of control, POC represents, as you can see above, the the price at which trading happened for the max duration of time. VPOC is slightly different but related concept from Volume Profile, its the price at which max volume was traded for a given time frame. We will refer to Volume Profile at the end.

He also defined certain day types based on how prices get distributed on a given day. 

http://www.marketcalls.in/market-profile/market-profile-different-types-of-profile-days.html

The link does a good job of explaining, the concept of day types. At a very basic level what it means is if the day was Trending, Range Bound etc. with reference to something called IB - Initial Balance which is defined as the range of the first 30 mins or 1 hour.

So if the price keep holding above IB it obviously means buyers are in control and visa versa if price keeps below IB. I like these concepts, IB, Open Drive types etc. But they need to be tested for specific markets. So from a perspective of looking at the markets its good to use some of these concepts.

Now coming to the other two things Orderflow and Footprint

Orderflow - The interaction between the buy orders and sell orders and the price discovery at a given moment - Which happens with the combination of limit and market orders.

http://optimusfutures.com/tradeblog/archives/order-flow-fundamentals/

Read the above link irrespective of whether you are interested in the blog post or not, its very important for any trader to understand how and why price moves happen. But the bottom line is, a visual representation of orderflow is called Footprint/Number bars, depending on the company/software provider.

Below is an example of how it looks like

So how your next question would be how is Market Profile connected with Orderflow/Footprint Charts? - The short answer is they need not be connected.

You can trade with just Market Profile concepts and Profile charts like the one below, but it makes more sense only on time frames larger than 30 mins. Below is a day wise profile. But as you can see its not really intuitive to trade based on this, its good for post facto analysis though.

Now let me confuse you a bit more, by adding one more concept - with the advent of Internet and the easy access to volume data, a related field of Volume Profile and a lot of volume based indicators came into existence. The below chart gives you both Market Profile and Volume profile in the same view. You get to see the price at which the max volume was traded as a profile (VPOC), you can also get to see Cumulative Delta Divergences another interesting volume based indicator - https://marketdelta.com/delta-divergence-chart-signals/ 

Now, each of these things, Market Profile, Orderflow Charts, and Volume Profile can be used in combination or by themselves to make a trading decision. You can mix them up and create your own system based on a combination. 

In the next part I will share my perspective on the practical use of these tools. The key is - Do they have any predictive capabilities? 

Think about it, will see you with the next post soon.