jperl

Yes, for sure. However stay away from anything that does not have high liquidity. Less than 100K contracts/day, and you are hurting for good statistical data.

NEWBIE has come a long way since his early days of using technical analysis. He no longer trades by the seat of his pants. He has a good quantitative feel for market statistics and he simply follows the statistics wherever it wants to take him. He knows that the volume distribution function contains all the information that he will ever need to institute a trade. He knows about the peak volume price, PVP, and can pinpoint that with good precision on his charts. He knows about the distributions average value, the VWAP, and he can follow it as it slowly evolves during the day. He knows about market volatility and he can quantitatively measure it using the standard deviation, SD, of the VWAP. He knows how to determine the market's skew from the difference between the VWAP and the PVP (skew is proportional to VWAP - PVP). He has a simple entry technique, entering at the VWAP in the direction of the skew, a good profit point measured by the SD and a good stoploss point at the PVP. (As an aside, a discussion of distribution skew, also called kurtosis, can be found at this Wikipedia site. http://en.wikipedia.org/wiki/Skewness We use the Karl Pearson definition of skew which is (VWAP-PVP)/SD ) But he wants more. He's discovered that trade entries at the VWAP don't occur all that often throughout the day. He knows the market can give more if he just knew where else he could enter a trade beside the VWAP. NEWBIE is about to have an epiphany. Suppose he enters a short trade at the VWAP, exits the trade at the 1st SD. Then what does the market do? If it rarely returns to the VWAP, then the only other thing it can do is drop below the 1st SD. Now here is the epiphany. Another entry point is at the 1st SD itself. NEWBIE knows this has to be a good entry because the volume distribution function being skewed to the downside, (VWAP-PVP<<0) will remain skewed to the downside only if the price action stays below the VWAP. Only two conditions will change this, a)The market stalls near the 1st SD such that the PVP abruptly changes to near the 1st SD or b)the price action takes the market back up to the VWAP and higher. We will discuss these two conditions in later threads, but first things first. Watch the 31 minute video and see how NEWBIE takes a trade at the 1st SD. Where is his profit target? The volatility is still in force. His profit target can only be one place, the 2nd SD. YMshortJuly26 NEWBIE is about to have a second epiphany. He's about to learn how he might change losing trades into winners by changing his ideas on stoploss placement. Check out [thread=2189]part VI[/thread] to find out how. YMshortJuly26.swf

GCB...here is how IntereactiveBrokers summarizes my trading day. In the attached summary it shows the contract traded, the number of buys ,number of sells,the average buy price, average sell price. So today I took 5 round trips for a net/contract of 790.14-789.50 = 0.64pts/contract traded

Glad your learning something about market statistics Jay. Be careful however. Do not confuse Market Profile with what is being discussed here. They are not the same.

That's correct Darth. NEWBIE would have not taken any trades today based on his present knowledge. But NEWBIE is about to graduate from trading 101 in the next thread. Based on the knowledge he is going to receive there, he would have made a killing today.

The skew would reset, only if the market stalled with a build up of volume to move the PVP. It takes a large volume to do this. NEWBIE, being the alert trader that he his would notice this immediately. So if he was in a short trade (negative skew) and the skew reset and turned positive, he would bail out of his short position as shown in the video. What he is hoping for of course is that price action will take the market to the first SD before the skew resets. In either case, he takes money off the table.

Actually just the opposite Dogpile. If NEWBIE is trading long (skew > 0) for instance he wants the skew to increase further, not decrease. If he takes a trade at the VWAP, he doesn't want price action to just sit there which would decrease the skew. He wants price action to move away from the VWAP in the direction of larger skew.

I don't use Market Profile terminology to describe the Volume Distribution function. Throughout these threads, I have not offered an explanation of why the PVP is where it is or why it moves from point to point. I don't use terms such as "value", or "value area". The fact is, it doesn't matter. I just accept the statistic for what it shows. The PVP serves two purposes: 1)It acts as a Hold Up Price or HUP for short. A point where the market pauses before continuing on or reversing 2)Along with the VWAP it defines the skew of the market. How much the market deviates from a symmetric distribution. For a NEWBIE trader, the skew of the market is his lifeblood. He needs to know how skewed the market is before he will enter a trade. And he will only enter a trade in the direction of the skew. The extent of the skew is defined by the difference between VWAP and PVP skew = VWAP - PVP so if the skew is positive NEWBIE takes long trades only if the skew is negative NEWBIE takes short trades only and if there is no skew (skew close to 0) no trade It doesn't get any simpler than this. Eventually NEWBIE will learn how to take trades against the skew. But for now he needs to understand the basics This is a Market Profile interpretation, that somehow markets if they are "out of balance" (that is skewed) will somehow move back into balance (market skew = 0). There is no evidence to support this assertion. And as far as intraday trading is concerned it isn't necessary. A NEWBIE trader simply needs to trade in the direction of the skew and avoid trading when there is no skew. An Advanced trader can do many other things (Trade against the skew, trade when the skew is 0) but NEWBIE is not ready for that yet.

NEWBIE now has an arsenal of tools to trade with, all generated from the volume distribution function. He knows how the distribution is skewed by comparing the VWAP to the PVP, and he knows how volatile the market is by including SD bands above and below the VWAP. The SD now determines is exit strategy. If he enters at the VWAP, his exit will be 1 standard deviation above the VWAP (for long trades ) or 1 standard deviation below the VWAP (for short trades). Here is an example from today's ER2 price action of a trade that NEWBIE takes with a VERY LARGE SD. Watch it to see how NEWBIE trades it. In this video NEWBIE has the opportunity to make 4 or 5 points because of the large SD. But he doesn't. He properly exits early. Watch it and understand why he exits where he does. ER2shortJuyly25 ER2shortJuly25.swf

Dogpile--glad to see you are using VWAP in your own way and that you find it useful. I hope it works for you. I have a problem using rolling 90-minute periods or for that matter any N-period method for computing the SD or N-period technical analysis in general. (This is includes all moving averages, CCI's, stochastics, MACD's, RSI's and any other method that requires a period length, and yes, sad to say Market Profile Analysis which uses 30 minute periods and an arbitrarily defined value area). The period length is arbitrary and would have to be readjusted when market properties change as they do daily. This is why I am presenting this general statistical method of viewing the markets. It's independent of period length of your chart and only depends on your starting time. As we delve deeper into this you will see the utility of using this generalized statistic.

Ok let's give an example of computing variance: Consider the 5 numbers, 1 2 3 4 5 all of equal weight for simplicity what is their average: (1+2 + 3 +4 +5)/5 = 3.0 what's the variance: [(1-3.0)^2 + (2-3.0)^2 + (3-3.0)^2 + (4-3.0) ^2 + (5-3.0)^2]/5 = [4.0 +1.0 + 0 + 1.0 + 4.0]/5 = 2.0 Do you notice what value I use for the average in each of the squared terms? It's 3.0. If I added another number to the series, say 6, then the new average would be (1 + 2 + 3 +4 +5 +6)/6 =3.5 I would then compute the next variance using this average in the squares. Hope this clears up the computation method

If you are going to use unweighted prices to compute SD, then use an unweighted average to compare it too. Be consistent. Don't compare apples to Oranges.

You can if you wish use a frequency distribution function in place of a volume distribution function. The distributions look similar but will differ in the fine details.

Nickm, see the reply above to Dogpile. To compute the variance of a group of numbers, find the average of the numbers and then subtract each number from that average, square each difference and sum them up.

Good observation Nick. There is a solution to this which we will eventually get to in later threads having to do with how you incorporate previous days, weeks, months VWAPs and their SD into todays price action. At this point in time, our NEWBIE trader waits for the distribution to develop and also waits for the price action to touch the VWAP. But, coming up in the next thread, we will introduce a paradigm shift in NEWBIE's thinking. Stay tuned. Perhaps you might want to expand on this, to give us an idea of what you are thinking about here.

Yes, that's correct. Think of the following: Suppose you had just one VWAP value say at 12:30 and you wanted to know its variance. You would compute the difference between that value and all the old prices. Take the square of each difference and sum them up to get the unnormalized variance.

Not each price, but each square term in the variance computation Glad to see you find the VWAP useful. We have a lot more ideas about this coming up.

Dogpile, you left out an important term in your variance computation. Remember that the VWAP is volume weighted. so you need to weight each one of your square terms by the normalized volume: value1= Pi*square(c-vwap_h) +..... where Pi= vi/V, vi=volume traded at price c, V=total volume for the distribution. Also each of the terms in the sum should be the same VWAP : value1= P1*square(C-VWAP) + P2*square(c[2]-VWAP) + .....

I've started a thread on the use of the Standard Deviation of the VWAP in [thread=2101]Part IV[/thread] of Trading with Market Statistics.

When I was first learning how to trade futures, I would visit Woodie's online site to learn some techniques. What I liked about it is they had live real time charts with commentary. It's a good place to get started. That being said, CCI is no better or worse than any other TA indicator contrary to Woodie and his followers. It is not a leading indicator as Woodie would like to believe. Woodie basically has some CCI pattern recognition entries, that win as often as they lose. So be careful. If you use them, try it in simulation mode for a while and see how you do.

Sorry losfer, not familiar with Sierra. I would recommend that any charting program that is supplying VWAP should be requested to add the standard deviation as a choice. Otherwise you will be in the dark about market volatility.

Good observation Unleashed, you are getting the feel for this. You indeed could take a trade at the PVP, but our NEWBIE is not ready for that yet. Trades at the PVP are possible but dangerous. We will discuss this in a later thread when we get to reverse trades and break outs.

Yes, 2 minute chart, but there is nothing special about using 2 minute chart, you could use any time or type chart you wanted. The volume distribution function would be the same. That's the beauty of market statistics. The VWAP only depends on when you start the computation. Not sure what you are asking, but let me state how the SD is computed by example. Suppose it is 12:30. Compute the VWAP from the open until 12:30. The value you get is the 12:30 VWAP value. It is that one value that is used to compute the SD at 12:30 using all prices in the subtraction from the open until 12:30. As far as what prices to use, in principle it should be the prices for every trade. In practice this is too CPU intensive. Most computations use either the close of each bar or the average (O+H+L+C)/4 of each bar. It is not too critical.

Throughout the previous threads ([thread=1962]Part I[/thread],[thread=1990]Part II[/thread] and [thread=2008]Part III[/thread]), I have described the use of a probability distribution in the form of the volume distribution function as a trading tool. The shape of the probability distribution is dynamic, changing with time throughout the trading day. Nevertheless all information relating to price and price action is contained within this distribution function. Anything you want to know about price and price action can be obtained by analysis of the distribution function itself. No extraneous information from other sources is required. We have so far analyzed the distribution in terms of two properties, a)the peak volume price ( PVP ) and b) the volume weighted average price ( VWAP ), which is the mean for the distribution. Both of these are dynamically updated throughout the trading day as the volume distribution function dyanmically changes. In [thread=2008]Part III[/thread], we showed how the relationship between the VWAP and the PVP could be used for an entry technique in a simple newbie VWAP trading strategy. But there is much more that is needed to advance beyond the newbie strategy. In this thread and succeeding threads, we will address the following issues: 1)Given an entry point, where should the profit target be set? 2)What other entry points are there beside the VWAP? 3)How can you tell when a reversal may be imminent? 4)When is a breakout imminent? 5)How do you trade the opening? 6)When should you be looking for scalps.? 7)How do you set stoplosses ? and related to this a)Should you set stoplosses? b)when do you scale in? c)when do you scale out? d)When do you reverse a trade.? . While we won't address all these questions in one thread their answers can be obtained by analysis of the volume distribution function. To do so requires that we introduce a third property of the volume distribution function called the Standard Deviation of the VWAP, SD for short. SD is computed from the following equations: where the summation subscript i, runs over all prices in the volume distribution pi = ith price in the volume distribution Pi = vi/V is the probability of occurrence of price pi vi = the volume traded at price pi from the volume distribution V = total volume for the entire distribution That's a mouthful. If you would like more details about the variance and the standard deviation, see the wikipedia reference http://en.wikipedia.org/wiki/Variance and references therein. So what does the Standard Deviation tell you? Well for starters, SD tells you how far you can expect price to move away from the VWAP. It can be shown (but we won't prove it here ) that computing the SD with respect to the VWAP gives the smallest expectation of price movement. Put another way, if our newbie trader were to initiate a trade at the VWAP (which he/she already knows how to do from [thread=2008]Part III[/thread]), then the obvious place to put his profit target is 1 standard deviation away from his entry price. This is the least he should expect the price action to move price. SD is thus a measure of market volatility for the time period over which the VWAP is computed. This gives NEWBIE a very powerful handle for his trading. If the SD is too small, he should stand aside. If it is too large, requiring a large stoploss, he might stand aside as well, if this frightens him. Too small and too large are of course qualitative terms which NEWBIE will have to decide for himself, but at least now he has a quantitative measure of market volatility and what he can expect when he enters a trade. Watch the attached video ESlongJuly23.swf and see how adding the SD helps NEWBIE set his profit target. After using the SD for profit targets, a light bulb goes off in NEWBIE's head. He realizes something about entry points that he didn't know about before. If he believes what he is thinking, it will totally change his way of trading now and forever. Can you tell what it is? Check out [thread=2130]part V[/thread] to see what it is. ESlongJuly23.swf

The computation of the standard deviation is with respect to the VWAP. We will discuss the implications of this in the next thread, coming soon.