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 3 of 4
In this part we will explore the third indicator that I use which helps us in understanding the dynamics that happens in the Limit order-book before large moves, in a way this is one those “predictive” indicators as it signals oncoming volatility a few minutes before it actually does – The Average Bid-Ask Spread.
In the slack room, I call it SOS – No not “Save our Ship” but “Spikes on Spread” – Which indeed is an SOS signal if you have any positions on, as it signals one to be alert.
Before we get to the mechanics of this indicator, one needs to have a basic understanding of how the Limit Order book (LOB) works.
So if you look at the L2 market depth, this is how it would typically look at a given moment (Graphically i.e.)
Now let’s see what happens when a Market Order hits the book. In this example a Market Buy Order hits the book.
The contracts marked in Yellow are the one which are consumed by the Market Order. Now do compare the spread in the two illustrations. In the first one we have a spread of 1 and in the second, because of the market order coming in the spreads doubles to 2. Now let’s see what happens next.
As you can see in the above illustration, the limit orders (Bids) come in to fill the spread. This Expansion-Contraction of spread due to market orders coming in can happen and can be observed over different timeframes. But the concept remains the same.
Microstructure academicians also call this the Liquidity Cycle or more specifically the Make – Take Phases
Typically you have shorter “Take Phases” and longer “Make Phases”, which fits in with the fact that we would typically have lesser market orders compared to limit orders.
With theory covered now let’s move to practice.
Look at the NIFTY Futures 1 minute time frame chart (Date – 8th May’18)
On the top pane is NIFTY Futures Price, the second pane has Average Bid-ask spread as a Histogram aggregated for each minute. On the Second pane is a 5 minute (Orange) over 45 minute (Grey) SMA of the Spread, the last pane has Volume rate which we’ve looked at already in part 1 of this series.
If you notice the spread for NIFTY Futures oscillates in a range of 0 to 2.
So how do we use this indicator?
Observe the spread from 12:05 to 12:45 – If you see the price has largely been range bound but the spread moved from the upper band to the lower band – Remember the concept of “Take Phase”?
My conjecture is this is a period where liquidity takers are sort of sweeping the book, the price remains range bound up till the point where adequate liquidity exists, the moment there is an imbalance we see large moves or volatility come in, and as these initial bursts come in, perhaps herd and threshold behaviour takes over causing extensions of these moves.
Since this indicator is like an oscillator with a fairly defined range – it’s easy to spot deviations and be prepared for an upcoming move, however one must remember this indicator does not predict direction all that it does it predict volatility.
As of now I am still testing and collecting data to do back-tests on this indicator, so I do not have any statistics to support my claim, but people in the slack group know – how often I call out an ‘SOS’ and how accurate or inaccurate it turns out to be.
The usual disclaimer applies to this indicator as well – this indicator is to be used within the context of the market structure and in combination with other indicators discussed in this series.
Update - Another screen shot of NIFTY FUT 10th of May'18
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 - https://marketdelta.com/what-is-delta/ 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.
Behind the ‘Veil’ of Price | Indicators that signal market-microstructure dynamics | Part 1 of 4
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.
Honest Serving Men | Finding Indicators that work for you | Part 3 of 3
In the previous two parts of this series, we looked at aspects like
a) How to go about looking for Indicators?
b) Do Indicators have any predictive value?
In this part we will explore the idea of leading vs. lagging – the concept of leading vs. lagging can get confusing if you compare it with the previous post on “predictive value” of Indicators.
I look at it this way – Any indicator that uses “Price” or “Volume” as the input is lagging, simply because a given price point does not cause another price point and a given level of volume does not cause another level of volume.
That is the single biggest reason indicators like Moving Averages or Volume Underlays look so elegant in retrospect but are not tradable as such.
For something to be categorized as “Leading” – We would need to look behind the “veil” of price and volume. Market microstructure aspects like (Simple - 'Executed Order Info.') Bid-Ask Spread, Delta Divergence, Executed Trade Rate - and more (Complex - 'State of LOB Info.') Limit Order Book (LOB) Slope, Relative Depth of the LOB, LOB Volume/Order Arrival Rate etc. are the factors that “lead” to the midpoint of the spread a.k.a “Price”.
Again, one has to understand that irrespective of whether the input for the indicator is Leading or Lagging, one has to do backtests to check for validity, and predictive effectiveness.
That brings me to the end of this 3 part series. In the coming posts, I will explore some such (Simple) Indicators and see how they work for NIFTY.
Podcast | Dr Brett Steenbarger | Three Powerful Techniques for Changing Your Trading Psychology
Those of you who follow the blog would know that I am a big follower and fan of Dr. Steenbarger and his Traderfeed blog.
A few days back I came across this Podcast which highlights several things one needs to understand and be reminded of when developing one's trading skills. Do listen to the the full episode, he answers several relevant questions.
I particularly agree with the idea of "Pattern Recognition" and "Analytical Ability" that he stresses upon. Something that I have shared in the blog here and here.
Honest Serving Men | Finding Indicators that work for you | Part 2 of 3
In the previous post we look at two issues a) What are Indicators? b) How do we go about finding Indicators that would aid in our trading process or strategy?
In this part we will look at the question - Do Indicators have any predictive value?
Since we discussed that indicators are essentially representative of past, lets re-frame the question. Can past data predict future?
In other words, if I tell you that in 2016 - Monsoon started in June and in 2017 it did in May. That is past data. Will the mere knowledge of past data help you predict the future? Will knowing the above 2 data points tell you anything about the chances of Monsoon this year?. The answer is obviously No.
However, what we can do is to analyze past data of adequate number of occurrences and then calculate the probability of an event occurring in the future. Remember we are only calculating the "chances" that X would happen given that it has happened Y number of times in the past.
But it still does not mean, X will happen for sure.
So if you can create an Hypothesis based on the Indicators or without them even, you can test it for its validity.
So to sum it up, Indicators by themselves are not predictive in nature, however, you can back test the Setups or Hypothesis-es to know how often a particular Cross-over or a breakout leads to a specific outcome that you are looking for - So it's the back-test which determines the probability of an event happening not the Indicator itself.
Of course there could be different indicators with varying degrees of accuracy for a given hypothesis. Our attempt should be to test them all and find what works best for us.
Honest Serving Men | Finding Indicators that work for you | Part 1 of 3
When it comes to indicators, there is one significant difference I have noticed between novice traders and experienced ones.
The novice trader will put an indicator on the chart, scan it for a while, and would get an orgasmic high - Oh that cross over, oh that divergence, that's all I need to catch. And, those of us who have been through it know, that looking at charts in hindsight is different from trading them on the go.
So what is the way out? Abandon them all? Trade naked charts? Which one's to use and which one's to leave?
In this short series I will share with you some perspectives on Indicators and and their use.
Let's start with the Question - What is an Indicator?
An Indicator is nothing but an analysis of historical market data, I use the word historical because its "past", we cannot calculate or analyze an event till its done. If you are looking at a Moving Average crossover it will calculate only after an event ie Open or Close of a price point. So essentially its history, its an analysis of the past data.
Does it have any predictive value? Hold on to your horses, we will come to that later.
Question 1 - How do we go about choosing indicators that would aid our trading process?
Not many know, but I am a PhD program dropout not once but twice, and one good thing that happened because of that is, I ended up attending the basic research coursework twice, and one of the things that they drill into you in that course is about the idea of Inductive vs Deductive reasoning.
So basically this is how we would apply this idea to Indicator selection -
Deductive Approach - Hypothesis first! -> So we would form an hypothesis, say you have been observing the markets for a long time and you see some pattern occurring several times - Lets say you have seen that once a crossover of 10 period EMA and 60 period EMA happens it stays that way for some time. So what you have is a hypothesis that you have arrived at based on observation - Now you need to use data to test it to see its validity - If it holds well, then you use that indicator to trade.
Inductive Approach - Data first! -> So lets say you have historical data, and you see a pattern in the data based on tests that you run, you see that the average trend duration is 60 minutes in the market that you trade, now if you want to trade that pattern (in that data), you could use an indicator to help you catch those trends - A a crossover of 10 period EMA and 60 period EMA could be one of the ways of doing it.
So these are two broad approaches to getting to indicators, but as you can see in both approaches a "back-test" is a must.
In Part 2 we will explore the question - Do Indicators have any predictive value?
NiftyScalper | StatShot - 03 | High Low Markers
One of the reference points for Mean Reversion and Range Extension trades is the High and Low reference of the day w.r.t time. Here is a set of stats which helps us take a probabilistic view of the day structure.
The hypothesis that we tried to test here was - How often does the High or Low marked x minutes after the market open remains so for the rest of the day?
Y axis in % | X axis in Minutes - Data - 847 Trading days till Nov'17
Podcast | CWT | Jeff Davis
This is one of those podcasts in the CWT collection that I may have listened to perhaps 10 times and made notes every time.
So here is how I recommend you listen to it,
1. Listen to the podcast 2. Make notes of what he is saying 3. Think of why does he say - what he say's 4. Compare it with your Day trading strategy 4. Repeat.
Happy listening!
NiftyScalper | StatShot - 02 | Volatility Clusters
StatShot 01 - Here
In this post let's look at the time segments within the day when NIFTY is more volatile. If you ask what is the relevance of this? Then perhaps you would need to dig a bit on the Internet to understand the relevance of volatility in the context of day trading, but for those in the know, here are the time segments which offer you the "meat" of the day.
The idea is, your return on time invested would increase exponentially if you avoid trading in time segments that are not volatile.
A through F stand for an hour of trading time and G for 15 mins. 9:15 to 15:30
The light blue colour represents moves of 3 points / min; light pink represents 5 points / min; and dark blue represents 10 points / min.
If you are wondering as to why segment "D" has the maximum number of 10 point moves well, here is some hint.
All standard disclaimers apply, trade safe!
NiftyScalper | StatShot - 01 | High/Low Time Segment
Starting a new series here on the blog called "StatShot". The idea is to bring to you statistics based snapshots of NIFTY. Be warned that you cannot use these in isolation for your trading, it has to be used in a specific context while creating your strategy or setups.
Coming to our first 'StatShot' in the series. Let's took at what I call the 'High/Low Time Segment'. As an Intraday trader one of the key things is to determine your supports or resistances, and to do that you need to know when (at what time i.e.) does an index mark its high or low during the day. Of course you could slice and dice the data to get to more nuanced stats and probabilities.
So heres's how it looks like for NIFTY
Based on NIFTY Data (2014 to 2017) - A through F constitute 1 hour each and G is 15 min
With this info. you can take a probabilistic call as to where your supports and resistances lie.
Hope this helps.
Trade Safe.
NIFTY - Scalping Set-up - 03 - Afternoon Range Extension
This is in continuation with the scalping set-ups series.
The first one being (https://www.niftyscalper.com/blogs/2017/11/8/nifty-scalping-set-ups-01-opening-spikes-opening-drive)
The second one was (https://www.niftyscalper.com/blogs/2017/12/12/nifty-scalping-set-ups-02-mid-day-mean-reversion)
The third setup we will discuss is called the Afternoon Range Extension (ARE)
1. What determines entry?
There are two key factors to consider when entering this trade
a) Range - You need to check the pre noon ie pre 13:30 range. The mean of which is around 60. There are three possibilities, one is we had a very narrow range in the first half or we had a super normal / very high range in the first half. While the former is good the latter obviously reduces the probability of an A.R.E. Lets take a look at both these conditions.
If you look at the figure 1 below the day had a narrow range of 27 till 13:30 post which we got an over all range of 63.75. So if you look at it you will see that 42 % of the range was formed in the morning and balance 58% in the afternoon.
So the key factor to consider for entry is the morning range.
2. What determines the target and exit?
Now lets do some basic arithmetic, the mean % of range that forms in the first half is 71%. So if you work that backwards 27 * 100/71 = 38. Which means (38-27=11) a 11 point extension is possible even if the the index remains in low range at large.
You could use other statistics to guide you? For instance
a) What has been the mean extension on days with under 30 range in the first half?
b) How many days in a given year does the index remain within the range formed in the first half? Of which how many days does the index remain in a narrow range within 30 itself? Is it an event day? Is it an expiry day?
c) On days when range extension happens in the second half? At what time does it peak before it pulls back or reverts to mean again?
NIFTY FUT - 19th Dec'17 - Fig. 1
Getting these numbers right helps us form a probabilistically informed structure to work with.
That is exactly what we attempt to do collectively in the NiftyScalper Trading Room.
Hope you found this useful. Back test it if you would like? I am sure you will see an edge here.
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.
NIFTY - Scalping Set-up - 02 - Mid-Day Mean Reversion
This is in continuation with the scalping set-ups series.
The first one being (https://www.niftyscalper.com/blogs/2017/11/8/nifty-scalping-set-ups-01-opening-spikes-opening-drive)
In this post we will look at the next most frequently occurring set-up (Close to 85 % of days). In the previous post we looked at Opening Spikes and Opening Drive, now this setup is the third play of the day.
1. What determines entry?
There are two key factors to consider when entering this trade
a) Range - Its recommended that you enter the trade once we cross the mean high low range for the pre europe open time segment. For instance this week the mean morning range has been 62.88 SD being 11.5.
b) Time Segment - Mean is again 11:52 (Hrs) SD being 44 minutes. So its good to attempt this play post 11:00 pm.
2. What is the probable - max favorable excursion - reward?
Since we are targeting the mean or the VWAP, we would need to consider where the low is. Typically it will be 25 to 35 points from the mean, so that is the path length that you are intending to capture. You should also factor in the usual time that it takes for price to traverse that length, which is around 1 hour. Please do note that we publish these figures for reference on a daily basis in the trading room. Have a look at the snapshot below.
3. What is the probable - max adverse excursion - risk? - Now that you know the possible target for your trade you can define the risk the way you prefer. Given the high probability of this setup you can have a fixed 1:2 risk reward and in an even where the stop loss does trigger you can re-enter again once the new low is formed.
4. Trade Management Approach - While a fixed R:R is one way, there are people who scale in and out as well, usually with a hedge on the opposite side. Of course that is a more aggressive way of playing this set-up.
On a closing note, I was surprised that this setup is pretty common in other indexes as well. Do have a quick read of the blog post below.
http://traderfeed.blogspot.in/2006/08/trading-by-mean-reversion.html
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.
You can read the posts here and here. And some more updated info here about various vendors you can use for Data feeds and Orderflow /MP Indicators.
NIFTY - Scalping Set-up - 01 - Opening Spikes & Opening Drive
Context - As a Scalper / Day trader, mornings are very important for me. Some of you would have noticed in the room that my position sizing in the morning is at max, the reason for that is simple - The probability of range extension + linear price moves (Opening Drive) is more in the morning than in the afternoon.
Now lets delve into the specifics of a setup. Remember the moment we use the word setup you need to be sure of the following elements before hand
1. What determines entry?
2. What is the probable - max favorable excursion - reward?
3. What is the probable - max adverse excursion - risk?
4. Trade Management Approach? Is it
a) Fixed Size Buy - Scale Out
b) Fixed Size Buy - Fixed Size Sell - All in / All out
c) Scale in - Scale Out
d) Scale in - Fixed Size Sell/All out
While we would visit each of the above issues by themselves, we will now see how visually how does the opening spikes look like and is it worth trading them?
Look at the image below, it's a NIFTY slight ITM Strike - These are two days of Opening Spikes
Do you see a trading opportunity here? Scalpers typically would do their "Johnny One Lot" as Tom Sosnoff calls it here. Knowing very well that the direction of the spike may or may not be the Opening Drive. If you can afford to loose no harm in warming up with a lot or two here. Typically this Occurs between 9:16 to 9:30 IST
Next comes the main Opening Drive trade which is where we expect around 50 to 60% of the day's range to form. The high of this Opening Spike or the Day High till that time becomes an important reference for a breakout trade for the Opening Drive. Typically this occurs between 9:30 to 11:30 - Read it as 1 hour of up move + 15 mins of consolidation at top / retests of high + 45 mins of Mean reversion. The below pictured represent the above two days and their Opening Drives.
Coming to the specifics of the setup
1. Entry Criteria
You define the candle closing time, for entry, you can define anytime, like close of 9:16 candle? - esp. if you want to trade the Opening Spikes. For Opening Drive its better to wait for 10 to 15 minutes at least. So the entry for Opening Drive would be the high after 15 or 20 minutes, you can define it or take it based on momentum at that time. Whatever approach you choose, understand that this is a breakout trade and its safer to enter a bit higher instead of lower, a bit higher would mean 1 or 2 points on NF.
Since this is still the open, the probability of a range extending is fairly high. (In this para I am talking from a Options Long perspective, it can be CE or PE)
Also look for any previous day's price levels which can act as support/resistances.The following are the key - Previous Day High/Low/Close/VWAP - If you are keen you may also want to mark similar levels for the previous week - High/Low/Close/VWAP. (In this paragraph I am referring to NF Nifty Futures)
The reason its important to keep these levels as a reference, is because larger time frame traders would use these levels as references (for Buy or Stop Loss) and that may create a flush/volume spike.
2. What is the Reward - Max Favorable Excursion?
Now that we have defined the entry criteria, the next thing we would need to know is, what is the best and worst that can happen. Lets start with the best things first. Here I would borrow John Sweeney's concept of MFE (Maximum Favorable Excursion) which mean's if the trade works in our favor what is the max gains that we can expect from it. To understand that let me take you through some back-tests that we have done.
The first / second images tell us - what to expect if the price crosses the day high or day low formed till 9:17 on Nifty Futures?
Price crosses Day High till 09:17
Since we are direction agnostic, lets see what happens when the price crosses the Day Low till 9:17
Price crosses Day low till 9:17
The above data tells us what is it that we can target, obviously if you are using options as a trading instrument you would need to factor in delta of the strikes which you are trading. Nevertheless, we now how a probabilistic sense of what to expect.
The above information is relevant more for trading Opening Spikes. In the next update to this post, I will share the MFE for Opening Drive.
When thinking about Opening Drive we need to keep three factors in mind to understand the market structure at that point in time.
1. Define a reference - In our case we will use the mean or ATP or VWAP as a reference.
2. We need to understand the mean excursion from the ATP/VWAP- Look at the chart below. Which gives us an important data point -
This chart tells us the mean percentage of the intra day range that gets formed before 1:30am . As you can see it says 60%, if for e.g. the intra day mean (high-low) range for the index for a given period of time is 70. 60% of 70 i.e. 42 is what gets formed before 1:30pm.
3. The next aspect that we need to determine is, how does the 42 points range gets formed (between 9:00am to 1:30am).
In the chart below, what we see is, it takes about 83.4 minutes (apox. 1.5 hrs) from 9:15am to the point of Max excursion (high or low) during the first half .
So we have 3 references to work with, a) We know the mean/ATP/VWAP at a given point of time, b) We know the mean (H-L) range that gets formed in the first half 42/25 ish. c) We know that it happens in about 1.5 hours. Creating probabilistic frameworks like this is the key to scalping, its helps us understand where we are at a given point of time and how the odds of wins stack for or against us.
Feel free to comment and ask questions in the room. Would be happy to clarify.
Thoughts on Scaling into Positions
I was reading an article "Advanced Scale-In Strategies For Short-Term Traders. by David Penn"
The closing remarks caught my attention.
Part 1
Part 2
This runs absolutely against the one of the golden rules of trading "Never add to a loosing position". But the more professionals I met, the more I got convinced that, like all things in life, reality and edge has its nuances. So scaling-in in a given context is perhaps a good trade management strategy.
The key is - one has to know the context in a quantified sense, which is what is highlighted in the second snapshot above.
My back testing on NIFTY tells me, Pullbacks in the trend and Mean reversion setups are the ideal candidates for this approach. If you are new to this, remember this can be a double edged sword, but then almost everything in trading is.
More on it that I have written previously.
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.