Trading with Market Statistics VIII. Counter Trend Trades in Symmetric Distributions

[jperl 11]

In the discussion about VWAP in [thread=1990]Part II,[/thread] we introduced the concept of skew, a measure of how the volume distibution deviates from a symmetric or normal distribution. The sign of the skew allowed a new trader to decide in which direction he/she should look for a trade setup. Positive skew meant look for long trades only. Negative skew meant look for short trades only. We have yet to consider trading aspects in markets with symmetric distributions. Like breakout trades discussed in [thread=2232]part VII,[/thread] trading symmetric distibutions is an advanced concept. Not for newbies to be dabbling in.

 

A symmetric distribution is one in which the skew is very small or zero

 

Skew = (VWAP-PVP)/SD ~= 0.

 

There are a number of implications of this definition as follows:

 

1)a small skew means the VWAP is close to or equal to the PVP

2)Given a small or zero skew, it means that price action has moved across the VWAP at least once, otherwise the volume distibution could not be symmetric.

 

Now comes the kicker:

3)If the distribution is to remain symmetric, it must continue to oscillate across the PVP and hence the VWAP.

 

This implies trades of the following type:

 

If price moves to the 1st or 2nd SD above the VWAP pull the trigger SHORT.

If price moves to the 1st or 2nd SD below the VWAP pull the trigger LONG

 

WOW- that's completely opposite to everything you've been told in the last seven threads. Up until now, every trade was taken moving AWAY FROM THE VWAP. Now you have to learn to take trades moving TOWARD THE VWAP.

 

To trade a symmetric distribution, everything you have learned in the preceding threads is turned upside down. To complicate the situation, the condition for a symmetric distribution is fuzzy. It's defined with skew approximately but not necessarily 0. There is also no guarantee that it will remain small. For example, suppose the skew is slightly positive and price action is around the 1st SD below the VWAP. You would look for long trades back toward the VWAP. But it is also possible for the price action to continue on down with the VWAP crossing the PVP and continuing on down. Like the breakout trade, trading a symmetric distribution has to be done with great care.

 

By its very nature, a trade taken toward the VWAP in a symmetric distribution is a counter trend trade. For example, when price is below the VWAP, the trend is down as defined in Part II. If you trade toward the VWAP then, you are taking a long entry in a down trending market.

Similarly for shorts.

 

Look at the first video and see if our trader can decide if the distribution is symmetric.

 

Symmetric YM Trade

 

Advice: If you want to counter trend trade in a symmetric distribution, use the Shapiro Effect discussed in post 16541 to decide on the entry. If the countertrend trade is taken at the 1st SD below the VWAP and the trade fails (price action drops below the 1st SD) you have two choices. 1)reverse the trade and take your profit at the 2nd SD or 2) hang on and scale in at the 2nd SD for the counter trend move back to the 1st SD.

 

Our trader in the first video was so sure that he would not want to take a short trade. But now watch the second video and see what our trader thinks now.

 

In the second video, our trader takes 3 trades, the first a standard breakout from the PVP area as discussed in [thread=2232]Part VII,[/thread] the second a counter trend trade, and the third in the trend direction after a retrace. The last two trades demonstrate the use of the Shapiro Effect when the distribution is symmetric.

 

NQsymmetric trades

 

Clearly trading symmetric distributions is as difficult as trading breakouts. The choices can be quite contradictory.

YMsymmetricAug14.swf

NQsymmetricAug16.swf

[BlowFish 10]

Getting really interesting now. I thought with all the questions you might not have time for this weeks lesson! Great stuff as usual.

[steve46 12]

For anyone interested, I emailed Howard (Ensign Software) and asked that he program the SD (as Jerry pointed out, the VWAP is available as a DYO study). Unfortunately he declines citing other committments. I am not a programmer so I will look in Esignals code library and if I cannot find it there, I will find a programmer to do the work using that platform (efs). I will try to make it available to all TL members.

 

Steve

[BlowFish 10]

A couple of questions. Do you always like to see both conditions before considering a counter trend trade? (flat distribution & PVP aprox equal to the VWAP).

 

I just wondered if there are other situations where a return to the mean/mode might be anticipated.

 

Cheers,

Nick.

[jperl 11]

A couple of questions. Do you always like to see both conditions before considering a counter trend trade? (flat distribution & PVP aprox equal to the VWAP).

 

I just wondered if there are other situations where a return to the mean/mode might be anticipated.

 

Good question Nick. Short answer is there are other situations where reversion to the mean might occur. Example being a skew sign flip does do it sometimes. But other than that I don't know what else would.

[jperl 11]

For anyone interested, I emailed Howard (Ensign Software) and asked that he program the SD (as Jerry pointed out, the VWAP is available as a DYO study). Unfortunately he declines citing other committments.

 

Steve

 

I'm surprised at that Steve. Howard is usually receptive to DYO studies.

[dbntina 10]

Thanks JPERL I am going through the videos.

 

Yesterday the NQ and ES both had great breakout

trades against the skew (long) at the PVP/1SD

at 1357/1412 Central and they both hit the 2nd SD!

Granted they were probably risky since the PVP was

at the 1SD but still nice. Of course that means you

would have been stopped on the 2nd short skew trade

if you shorted one contract at VWAP on both ES and NQ

waiting for shapiro effect.

 

I have to say I am amazed...granted only been following

for a few weeks but there has to be something to this

statistics stuff!

 

dbntina

[dbntina 10]

Jerry,

 

Went through the videos...very nicely done thank you for posting!

 

Its starting to sink in a little better, couple points if you could confirm are correct for me:

 

1) Your definition of trend is price in relationship to the VWAP.

 

Price above VWAP the trend is bullish

Price below VWAP the trend is bearish

 

2) PVP in relationship to the VWAP tells you what kind of distribution you are looking at.

 

VWAP above the PVP tells you we are currently in a positively skewed distribution to the long side

VWAP below the PVP tells you we are currently in a negatively skewed distribution to the short side

VWAP close to the PVP tells you we are currently in a symmetric distribution.

 

If the above statements are correct, I have a couple of questions.

 

1) My thinking is that skewed distributions tend to indicate trend movements and symmetric distributions

tend to indicate reversions to the mean or a congestion type of environment. This is of course only relevant

to the current situation as the VWAP and PVP relationship can change in the future.

 

2) It would make sense to me that overall bias (whether you want to take long trades only or short trades only)

would be determined by the VWAP/PVP relationship. Assuming that looking at the volume histogram gives you a pretty good idea that the current bias is not going to change soon:

 

A) If the VWAP is above PVP you should only be looking for longs (assuming that current bias stays the same). This is regardless of location of price. If price is above VWAP you are trading with trend. If price is below VWAP you are trading counter trend.

 

B) If the VWAP is below PVP you should only be looking for shorts (assuming that current bias stays the same). This is regardless of location of price. If price is above VWAP you are trading counter trend. If the price is below VWAP you are trading with the trend.

 

C) If the VWAP/PVP is close it is a big assumption that current bias stays the same unless price moves rapidly back towards the VWAP. So when in a symmetric distribution it seems to make sense to me that you would only trade at 2nd and 3rd SD's for safety reasons in expectation of a move back to VWAP. However, it must move quick or you will not continue to have VWAP/PVP close (symmetric distribution).

 

 

Given the above, the first trade on the YM does not make sense to me. We are in a symmetric distribution, why short at the 1SD below VWAP expecting a move to 2SD. If you expect the symmetric distribution to hold, then you are not trading with that expectation. It is more probably to get a move back to VWAP and other side of distribution, then to extend further against the VWAP toward 2SD and 3SD. The only exception would be if you are expecting the VWAP to continue down below the PVP and quickly turn into a negative skew.

 

You have given examples of 3 main types of trades:

 

1) Trading a positive/negative skew (non-symmetric distribution) in direction of the trend (defined by relationship of price and VWAP) with risk tolerance and scaling in. This one makes sense to me.

 

2) Trading a breakout at PVP against the skew in a non-symmetric distribution in direction of the trend (defined by relationship of price and VWAP) without risk tolerance (using tight stops and quick breakeven) makes sense to me because you are trading against the skew (which could change in the future) but you are trading with the trend.

 

3) Trading a symmetric distribution (assuming it holds) at the 2nd and 3rd SD's with the expectation of a QUICK move back to the PVP or other side of the distribution. It does not make sense to me to take trades at the 1SD with the expectation of a further move away from PVP in this type of distribution. If you are expecting a skew to appear...seems it would be better to wait for the skew then take this type of trade. Now if you are trading for a reversion to the mean at 2nd SD with the expectation of a move back to PVP or other side of distribution then risk tolerance doesn't make as much sense to me because the move is going to have to happen quickly because skew will appear if it stays out there and especially if it starts to move against you out towards the 3rd SD. Then you are going to have to exit (can't reverse positions in between 2nd and 3rd SD I wouldn't think. So I would think you would want to use a tight stop not risk tolerance.

 

Thanks for sharing the information Jerry...very interested in hearing where I am off base,

 

dbntina

[jperl 11]

Its starting to sink in a little better, couple points if you could confirm are correct for me:

 

1) Your definition of trend is price in relationship to the VWAP.

 

Price above VWAP the trend is bullish

Price below VWAP the trend is bearish

 

This is correct as defined in [thread=1990]Part II[/thread]

 

 

2) PVP in relationship to the VWAP tells you what kind of distribution you are looking at.

 

VWAP above the PVP tells you we are currently in a positively skewed distribution to the long side

VWAP below the PVP tells you we are currently in a negatively skewed distribution to the short side

VWAP close to the PVP tells you we are currently in a symmetric distribution.

Yes, this is also correct

 

If the above statements are correct, I have a couple of questions.

 

1) My thinking is that skewed distributions tend to indicate trend movements and symmetric distributions

tend to indicate reversions to the mean or a congestion type of environment. This is of course only relevant

to the current situation as the VWAP and PVP relationship can change in the future.

 

This is approximately correct. You can get reversion to the mean in any environment including a skewed environment. In a skewed environment you would look for a trade at the VWAP. In a non skewed symmetric environment, do nothing at the VWAP.

 

2) It would make sense to me that overall bias (whether you want to take long trades only or short trades only)

would be determined by the VWAP/PVP relationship. Assuming that looking at the volume histogram gives you a pretty good idea that the current bias is not going to change soon:

Almost but not quite. You have to know where the price action is relative to the VWAP and PVP. For example for a positive skew your bias is long provided price action is above the VWAP. If price action is at or near the PVP, even if the skew is positive you don't have a bias until the breakout occurs.

 

A) If the VWAP is above PVP you should only be looking for longs (assuming that current bias stays the same). This is regardless of location of price. If price is above VWAP you are trading with trend. If price is below VWAP you are trading counter trend.

This is incorrect. Look for longs only when the price action is above the VWAP. Below the VWAP, wait for the price to move above and retrace before taking a long. Otherwise wait for the break out at the SD below the PVP and go short.

 

B) If the VWAP is below PVP you should only be looking for shorts (assuming that current bias stays the same). This is regardless of location of price. If price is above VWAP you are trading counter trend. If the price is below VWAP you are trading with the trend.

Also incorrect as mentioned above. You trade short if price is below the VWAP, otherwise wait for a breakout.

You might want to reread [thread=2232]Part VII[/thread] concerning break out trades.

 

C) If the VWAP/PVP is close it is a big assumption that current bias stays the same unless price moves rapidly back towards the VWAP.

Don't know what you mean by current bias. If the skew is close to zero, there is no bias.

 

So when in a symmetric distribution it seems to make sense to me that you would only trade at 2nd and 3rd SD's for safety reasons in expectation of a move back to VWAP. However, it must move quick or you will not continue to have VWAP/PVP close (symmetric distribution).

Well this depends on your trading style. In a symmetric distribution you have a dilemma, in that you don't know how long the symmetry will last. This means you could take a trade at any of the SD's either long or short. In one case you would be trading countertrend, the other with the trend. That's why this is not for newbies. Using something like the Shapiro Effect will help.

 

 

Given the above, the first trade on the YM does not make sense to me. We are in a symmetric distribution, why short at the 1SD below VWAP expecting a move to 2SD. If you expect the symmetric distribution to hold, then you are not trading with that expectation. It is more probably to get a move back to VWAP and other side of distribution, then to extend further against the VWAP toward 2SD and 3SD. The only exception would be if you are expecting the VWAP to continue down below the PVP and quickly turn into a negative skew.

I think you meant the NQ video, the first video was a YM long.

In any case the first NQ trade was a legitimate breakout trade into the low volume zone. It doesn't matter how close the VWAP is to the PVP, only that price action is in the PVP zone. Dangerous? yes, but nevertheless workable.

 

 

3) Trading a symmetric distribution (assuming it holds) at the 2nd and 3rd SD's with the expectation of a QUICK move back to the PVP or other side of the distribution. It does not make sense to me to take trades at the 1SD with the expectation of a further move away from PVP in this type of distribution. If you are expecting a skew to appear...seems it would be better to wait for the skew then take this type of trade.

Again, this will depend on your trading style. An advanced trader would take the trade if he thinks the VWAP is going to continue on down. Why miss the opportunity? If the Shaprio effect indicated the price action is going to continue down, pull the trigger.

 

 

Now if you are trading for a reversion to the mean at 2nd SD with the expectation of a move back to PVP or other side of distribution then risk tolerance doesn't make as much sense to me because the move is going to have to happen quickly because skew will appear if it stays out there and especially if it starts to move against you out towards the 3rd SD. Then you are going to have to exit (can't reverse positions in between 2nd and 3rd SD I wouldn't think. So I would think you would want to use a tight stop not risk tolerance.

Yes, I would agree witht this interpretation. You would either exit the trade at a hard stop if the trade moved against you, or possibly reverse the trade for a further move down depending on how far below the 2nd SD you did the reversal.

[dbntina 10]

Jerry,

 

Thanks for the replies...

 

One more question....

 

The VWAP/PVP relationship determines the type of distribution (skewed/symmetric). Ignoring for the moment that as price moves around and volume trades that the VWAP and PVP change and the distribution will probably change. Let's just say we were pretty sure that the type of distribution was not going to change for the next hour.

 

The point I am trying to clear up is that price in relationship to VWAP determines trend. I don't think it does. I think the distribution function itself tells you the trend bias and strength based on the strength of the skew. Who cares where prices are in relationship to the VWAP. I am thinking in terms of statistics and occurences in relationship to the disribution function.

Where price is located in relationship to the distribution function is what is important because it tells you what kind of a move you can expect...an example might help:

 

If we were in a symmetric distribution:

 

If price is at the higher 2SD or 3SD or the lower 2SD or 3SD we would want to trade short or long with the expectation of prices moving back to the VWAP/PVP correct? The closer that price is to the VWAP/PVP the less of an edge we have....because price is where it should be in a symmetric distribution near the VWAP/PVP. So we definitely wouldn't want to take trades with the expectation of price moving away from VWAP/PVP towards 2SD/3SD or farther with the expectation of trending movement correct? Price location only tells us the edge we have and what we can expect to most likely occur within that distribution. The closer price is to VWAP/PVP the less of an edge we have and we don't want to take trades...the farther away from VWAP/PVP we are the better edge/opportunity we have to trade in direction of mean reversion toward the VWAP/PVP correct?

 

If we were in a positive or negative skew distribution:

 

Is this not indicating that we are in a trending type environment and we want to trade in the direction of the skew (assuming it doesn't change anytime soon)? So I should not care where price is only that it tells me the level of opportunity I have. If we have a positive skew I want to take any trade where price is at the PVP or lower! Because in a symmetric distribution I would fade a 2SD expecting a move back to VWAP/PVP. Even stronger in a postive skew...I am even more confident that it will move at least back to the VWAP and probably the upper 1/2 SD. In a negative skew just the opposite.

 

It seems to me that the most important thing is the type of distribution you are in. In a positive skew environment I would think you wouldn't want to take any shorts period. And the same with no longs in a negative skew environment. In a symmetric distribution fade extremes on both sides. Of course this is not that easy because the distribution can flip/flop and the challenges that are associated with that.

 

It seems to me that price in relationship to the VWAP is not much of a factor. The location of price within the type of distribution should be the driving force in my mind.

 

The short question to all of this is why is the price in location to the VWAP so important and why is this the "trend"? Are there some statistics concepts that validate this?

 

I am thinking in terms of statistics in that...if I know the distribution function of grades on a test for example and the symmetric distribution says a C is the mean (VWAP) and the mode is also a C (PVP)....and the last few papers we graded were D's & F's (current location of Price) ...price is below the VWAP...I am going to bet all day that the next paper or papers are going to be above F's. I am expecting price to really start moving back to at least a C and probably A's and B's especially if there was a positive skew....

 

I am trying to reconcile all my math statistics classes I have taken with what I am reading.

 

Very interesting...THANKS SO MUCH Jerry for taking the time to explain this and answer my questions...

 

dbntina

[jperl 11]

One more question....

 

The VWAP/PVP relationship determines the type of distribution (skewed/symmetric). Ignoring for the moment that as price moves around and volume trades that the VWAP and PVP change and the distribution will probably change. Let's just say we were pretty sure that the type of distribution was not going to change for the next hour.

 

The point I am trying to clear up is that price in relationship to VWAP determines trend. I don't think it does. I think the distribution function itself tells you the trend bias and strength based on the strength of the skew. Who cares where prices are in relationship to the VWAP. I am thinking in terms of statistics and occurences in relationship to the disribution function.

 

You are quite correct for static distribution functions. Note the emphasis on the word static. If you knew the distribution function in advance, you would know exactly how to trade it.

As you correctly point out, if the distribution had positive skew, you would go long every time the price action dropped below the PVP and vice versa for negative skew. Similarly for no skew distribution, always trade toward the VWAP. This is the classical reversion to the mean theory.

The problem as you realize, is that in a real market, the distribution function is dynamic. Note the emphasis on the word dynamic. Reversion to the mean, does not necessarily occur. Price action itself renormalizes the distribution as more prices are added to the time series. As a consequence, the relation of the price action to the VWAP and PVP becomes critical in choosing trade direction. Trading AWAY from the VWAP then becomes the more likely scenario. Trading TOWARD the VWAP is then relegated to symmetric distributions, which is the classical case.

Trading away from the VWAP then defines the trend (if in fact you want or need a definition)as UP when the price action is above the VWAP and DOWN when the price action is below the VWAP. This definition breaks down of course when the distribution passes through the symmetric state. At that point there is no trend.

[dbntina 10]

Jerry,

 

Thanks a bunch...makes sense that the fact that it is dynamic it changes how you have to approach the distribution.

 

Very interesting and it is starting to come together.

 

Thanks for sharing,

 

dbntina

[emmster 10]

Thanks to jperl for his generous insights, and dbntna and BlowFish for their work on theTradeStation code to see what is being discussed on the chart (received a copy from a trader on this board).

 

Sorry for being dense on this, but I am a bit confused on the trade direction when viewing the Price vis-a-vis the VWAP and the PVP.

 

My understanding is that the skew is in the direction of the VWAP (so VWAP > PVP means skew is up).

 

When VWAP > PVP but current price < VWAP, is there a directional bias?

 

Thanks for the threads and any clarification.

[jperl 11]

My understanding is that the skew is in the direction of the VWAP (so VWAP > PVP means skew is up).

 

When VWAP > PVP but current price < VWAP, is there a directional bias?

 

The answer to your question emmster is a definite maybe.

If the price action stays below the VWAP and breaks out below the 1st SD, then the bias would be down. But until that happens, all you will get are oscillations between the VWAP and the 1st SD below it. See the breakout thread [thread=2232]Part VII[/thread] for further clarification.

[BlowFish 10]

Emmster despite following carefully at home I discovered something that I had missed. Skew and Trend can be quite different. I am not sure Jerry introduced the term 'bias' I think he has always talked about skew until others (like me ) mentioned it. Early on I chose to think of skew as a 'bias'. On reflection maybe that was not such a good idea.

 

Might be easier to just think of skew (more volume above or below the PvP) i.e the distribution is skewed. And trend i.e. price is trading above or below the VWAP.

 

In the basic trades skew and trend match things become trickier when they don't.

 

Caveat - I'm still learning this stuff too so I hope I haven't given duff info. I am sure Jerry will correct me if I am mistaken.

[emmster 10]

Thank you for the responses Jerry and BlowFish. I can see that I must be careful in the terminology I use because I may be introducing my own mental "bias" by using the wrong wording in my head when reviewing the posts.

 

In ES Thurs, I see where skew and trend match, producing very nice outcomes.

 

The idea of a breakout against the skew is also clearer on review and Jerry's comment above to dbntina - "the distribution function is dynamic. Note the emphasis on the word dynamic. Reversion to the mean, does not necessarily occur."

 

(Lightbulb starting to flicker on....)

[steve46 12]

1.) Why not look to a longer time frame when trying to determine how long a distribution will remain symetric. I am thinking that following the skew on a daily and/or weekly basis might add value to the process.

 

2.) I have started to look for, and catalog "HUP's". Based on Jerry's characterization of them as places where price is held up while the market decides direction, I am keeping a list not only of the price but of the time (time and duration) to see if there is some utility to be had from that.

[jperl 11]

1.) Why not look to a longer time frame when trying to determine how long a distribution will remain symetric. I am thinking that following the skew on a daily and/or weekly basis might add value to the process.

 

2.) I have started to look for, and catalog "HUP's". Based on Jerry's characterization of them as places where price is held up while the market decides direction, I am keeping a list not only of the price but of the time (time and duration) to see if there is some utility to be had from that.

 

Good points Steve. These two issues are related. I was going to do a thread on HUP but discovered that the presentation was too complicated. I'm still searching for a simple way to start it.

[Dogpile 10]

jerry,

 

was curious your thoughts on yesterdays volume distribution? it looked like a near perfect symmetrical distribution for much of the day then ended up building a fat lower tail. In situation like this, where you would expect to go long low in a symmetrical distribution (as it looked with an hour or two to go) -- but the distribution did not END UP symmetrical. curious your take?

 

thx

[jperl 11]

jerry,

 

was curious your thoughts on yesterdays volume distribution? it looked like a near perfect symmetrical distribution for much of the day then ended up building a fat lower tail. In situation like this, where you would expect to go long low in a symmetrical distribution (as it looked with an hour or two to go) -- but the distribution did not END UP symmetrical. curious your take?

 

thx

 

Sorry for the delay in getting back to you Dogpile. Just got back from China.

 

I took a look at the Sept 20 data for ES. Here is my take on it:

 

In the first chart you can see that the skew is positive until 14:20 PM. So I would have been biased for breakout trades to the upside. There were quite a number of these that would have been good trades to the 1st and 2nd SD. Breakout trades to the downside would have all failed until 12:28 PM when the market broke out to the downside.

It was only at 14:20 that the market became symmetric (PVP=VWAP at the last bar shown in the the first chart).

As a trader you then had to decide whether to take an upside move back to the VWAP. Here is where the Shapiro Effect comes in handy.

In the second chart which shows the whole day, there was no Shapiro effect to the upside after 14:20. In fact all the Shapiro effects occurred to the downside with good trade entries at 14:44, 14:58, 15:30 and 15:56. By 14:44 the skew went negative, so I would have only looked for short entries anyway.

Too bad I had already left for China. It would have been a great trading day.

JERRY

[Dogpile 10]

thx jerry, welcome back. yes, 9/20 was a great trading day.

[BlowFish 10]

Jerry do you pay much attention to the symmetry of the distribution? In particular I am thinking of taking a trade when the market is actually balanced but the distribution is still asymetric. Here is an example from today. To me long side seemed right even though the market was in balance. Interestingly the 2 minute chart showed +ve scue. The pvp seems quite sensitive to how the data is sampled. Funnily enough the slight smoothing you get by using say a 2 minute bar often seems to be helpful.

[jperl 11]

Jerry do you pay much attention to the symmetry of the distribution? In particular I am thinking of taking a trade when the market is actually balanced but the distribution is still asymetric. Here is an example from today. To me long side seemed right even though the market was in balance. Interestingly the 2 minute chart showed +ve scue. The pvp seems quite sensitive to how the data is sampled. Funnily enough the slight smoothing you get by using say a 2 minute bar often seems to be helpful.

 

Symmetric distributions (PVP ~= VWAP) are tough to trade especially when you have multiple peaks as in the example you show. My initital reaction would be to let it pass.

[BlowFish 10]

Good point. Your probably more disciplined than me Jerry! As the old adage goes 'no position is a position'. I do find that sometimes I try and 'force' a trade particularly after missing a legitimate one (maybe just because I was doing something else) or for a variety of other reasons. When in doubt maybe it's wise to say 'what would newbie do' hehe.

[againstodds 10]

Hi Jerry,

 

Thank you for sharing your trading ideas and concepts with us. Your work has defiantly improved my technique and eliminated bunch of crap from my charts

 

I've been following these treads with great interest and have been experimenting with different setups and I keep wondering a lot about one thing (among few others), which up to this point nobody has explained or inquired about. I was wondering if you or anyone else could elaborate on on my question.

 

Why do you choose a "regular session" to start plotting your Volume Histogram and start calculations of PVP, vwap and SDs? I understand that majority of trades occur during regular session, and all institutions are then active, but statistically wouldn't it make more sense to include 24h of data?

 

I've tried that and seems that it produces some interesting results:

 

Positive:

 

1) It provides PVP and wider range between vwap and SDs right at the beginning of the regular trading session, which you could be trading immediately

2) Price seems to interact with PVP, vWAP and SDs according to expectations even outside of regular session. (not much advantage here unless you are an owl)

3) Statistical data includes more samples - all trades that occurred. In theory that should give us more complete picture of the market and its more accurate interpretation.

 

Negative:

 

1) The PVP is less "active" during start of regular session, since large volume could be already build up during morning and night hours. (I'm not sure if that's really negative or positive, just different from your data)

2) VWAP and SDs are usually different from these generated at the beginning of the session, but not as dramatically as one would think. Interestingly, depending on the volatility the market prefers to use one set of VWAP and SDs over the other.

3) You will often have PVP and VWAP in a different relationship to each other, especially at the beginning of the session, and therefore you could read skew etc. differently.

 

So wouldn't it seem logical to include all data available to us not just a partial sample, or how do we know that it is more beneficial to use to just use regular session data?

 

I can't help it but put a little quote to sum it up:

 

"Statistics: The only science that enables different experts using the same figures to draw different conclusions."

Evan Esar,

 

Thank you all again for running this thread.