jperl

Unleashed---good question. If you looked at the first video in this thread, you saw exactly that situation. If you are a newbie, you stand aside. Do nothing. In that video, NEWBIE took a long trade based on perceived market trend and was stopped out. Trading in the low volume region is dangerous and requires more advanced analysis. We'll get to that in future threads. In your chart, from what you describe, it sounds like VWAP ~= PVP. Again do nothing. It's imperative that you understand the logic of the basic VWAP trade. It forms the foundation of everything that is to follow. JERRY

Yes....still a major problem here in New York State. Here is a possible work around that I have tried that seems to function most of the time.... a)Open your browser to some other site. b)click on a link in this other site. c)Then try opening traderslaboratory.com This usually works for me. But its a pain. There clearly is a problem with getting into the server. JERRY

NEWBIE is now ready to take trading a little more seriously. After a minor disaster trading with the trend and getting stopped out, he's decided to look at the "Trading with Market Statistics" Threads and has read [thread=1962]Part I[/thread] and [thread=1990]Part II[/thread] at least a half a dozen times. He doesn't know much about statistics but he is willing to learn if it will help him with his trading. What he has learned so far or at least should have learned is that market direction is reflected in the relation of price to the VWAP AND the relation of the VWAP to the PVP. Market data is skewed to the upside when the VWAP is above the PVP, skewed to the downside when VWAP is less than the PVP and symmetric when VWAP ~= PVP. NEWBIE should be trading only in the high volume region of the price action so for NEWBIE to enter a trade, the following conditions should prevail: Long Entry: VWAP > PVP and price action above the VWAP Short Entry: VWAP< PVP and price action below VWAP No Trade: VWAP~= PVP NEWBIE is going to embed this in his brain so that it becomes second nature. Download the following video and see how NEWBIE fairs by following market statistics. (attached) In the next thread, [thread=2101]part IV,[/thread] our newbie will learn about other points where he can trade ER2VWAPTrade.swf

I'm being as candid as I can possibly be about this Dogpile. You have fallen into the reverse logic trap. Because scaling-in and averaging-down have one thing in common, doesn't make them identical. You have already mentioned one point where they are different. Scaling-in is planned, Averaging down is not. Before you scale in you know exactly where you will do it and whether the new entry is in your favor. Averaging down overloads the boat because the boat was full on the first entry. Scaling-in adds to a mostly empty boat. You are absolutely right about that. It is not symmetric, which is why I said one needs to rethink the whole concept of loss on a trade. There is paradigm shift here where one has to substitute risk tolerance for stop loss in ones thinking. If you always require the reward/risk ratio for your trades be some fixed number like 2/1 or 3/1, then you will be forever stuck in the old paradigm. Once you get out of that mold, you won't look back. JERRY

We've had this discussion before in a previous thread about the difference between scaling-in vs. averaging down. They are not the same so I won't repeat that whole discussion here. The important point I want to make is that, if you are using hard stops AND you are not profitable (which is the vast majority of daytraders), then you might want to rethink your trade management to include scale-in and/or reversal strategies with position sizeing. You might well discover that your trade profitability will improve substantially. JERRY

The problem with hard stops is just that. They are static. They don't allow for any change in the market dynamics while you are in a trade. How many times has your stop been hit, and then the price action reverses back to your entry? Probably more times than you are willing to admit. Or how many times has the market blown through your stop, only to reverse and come back to your entry? The point is, when you are in a trade, you have to manage it. That doesn't mean just sitting on your hands like a newbie waiting for either your stop to be hit or your profit target to be hit. It means being proactive in the trade like most pros are.JERRY

Well Dogpile, since you raised the issue of stops, let me suggest you learn not to use them. If you were a newbie, I would of course tell you to use them, but you're not a newbie, so you need to learn some advanced techniques of trade management that allows you to turn a losing trade into a winner. I used to use stops all the time and was slowly bleading to death. Eventually, I learned how to do scale ins and reversals. That got rid of the slow blead. To do this requires that you change your mental set with regard to loss. You need to develop the idea of risk tolerance. How much of your capital are you willing to risk on any one trade. Once you do that, you can better manage your trades. Stops if you use them at all should be relegated to safty stops, far from your entry in case your whole system crashes due to power failure. JERRY

4.00 Eur round trip JERRY

Both these contracts also available on IB DAX symbol is DAX STOXX50 symbol is STX JERRY

Here is a swf version of the video for those of you who do not wish to download an exe file. Thanks to cooter for the filefront.com recommendation. http://www.traderslaboratory.com/Trading%20Videos/Newbies_First_Trade.swf JERRY

In this thread, we will present several videos to demonstrate how to use the volume distribution function and its associated Peak Volume Price (PVP) and its Volume Weighted Average Price (VWAP) as a trading tool. This thread will concentrate on entries and stops only for new traders. Our trader for this is named NEWBIE. We will show how NEWBIE should use the relationship between the PVP discussed in [thread=1962]Part I[/thread] and the VWAP discussed in [thread=1990]Part II[/thread] to determine a) the region of the price action where he could be trading, b)the direction of his trade (long or short) and c)a possible entry point for the trade. So lets get started. Below is the first video. We have a very raw newbie, who knows nothing about market statistics. He's trading the Emini Russell 2000 index futures by the seat of his pants. He thinks he knows the market direction from the premarket open and the first half hour of trading. He's heard something about trend lines and "The Trend is your Friend" , so he enters a long trade, sets a profit target and a stop loss. Watch the video and see what happens. If you are a newbie yourself, see if you recognize any of NEWBIE's traits in yourself. The video ends with a short discussion of what NEWBIE could have done if he had used market statistics instead of the seat of his pants. Enjoy, JERRY Newbies First Trade.swf

Dogpile---I suggest you wait to see the videos that I will be posting in the coming weeks. You will then understand what I mean by the discontinuous change that occurs in the PVP compared to the VWAP. JERRY

Ok Dogpile, I will accept your distinction. This is why I will use the term PVP rather than POC in describing the peak in the volume distribution function. This peak does change abruptly with time. JERRY

That's good Future.....glad to see you are using VWAP in your trading. Keep in mind that the dynamics of the VWAP is very different from the PVP (What you call the POC). The VWAP changes gradually over time, whereas the PVP changes abruptly. If you follow both the VWAP and PVP at the same time, you will see this dyanmic. I will show some videos of this so you can get the feel for how the market reacts to changes in the relative relation between the two. JERRY

Good observation Nick. Todays VWAP and PVP can be used for tomorrow's trade setups. We will cover that topic down the road when we get to more advanced types of trades. However, you will see in the videos that you can use todays developing VWAP to make trades today. This will be the basic VWAP trade that must be understood before we move on. Newbies will be able to get their feet wet here. A sort of crawling before we start walking. Market Profile Analysis is actually a subset of this more general way of looking at market statistics. There are important differences, however. a)Market Profile uses half hour increments for setting up the distribtuion. Generalized market statistics has no special time scale. b)I introduce the concept of the distribution average (the VWAP) which Market Profile does not use. c)There is no concept of value area as used in Market Profile. Value area is a purely heuristic invention. Rather we use the terms, high volume zone or high probability zone and low volume or low probability zone. In addition we will see later on that there is a generalized standard deviation of the VWAP which can be used as a measure of market volatility. But I am getting ahead of myself....so stay tuned.

Torero- the line shown is the VWAP value for the end of the day (blue line). Similarly for the Peak Volume Price (red line). I purposely drew these as horizontal lines so that you could see the relationship between the two. When we start looking at the dynamics of the lines in the upcoming videos, you will see how the lines change with time. JERRY.

That's coming next waveslider. I will start with some simple video examples on how to use the distribution function for trading. JERRY

In a previous thread, [thread=1962]Part I[/thread] I introduced the Volume Distribution Function in the form of a volume histogram plotted along the price axis (see figure 1 of that thread). The length of the bars extending out to the right represent the amount of volume traded at that price during the day. The distribution has a peak which I call the peak volume price or PVP ( also known as the Point of Control in Market Profile Analysis, but I won't use that term here in order to avoid any confusion). . The volume distribution is a probability function, thus trading occurs less often in the low volume regions of the distribution compared to the high volume regions. However I also stated that the distribution function is dynamic and that the shape of the distribution changes during the day such that the PVP may change abruptly as the trading day progresses. As such, if price action is in the low volume region, it does not mean that there will be a reversal back to the high volume region. The distribution function could simply expand itself and continue moving in the same direction with an eventual abrupt change in the PVP. This was shown by the price action in figures 2 and 3 of the previous thread. In order to shed more light on this, I want to introduce the concept of the volume weighted average price or VWAP. The VWAP is a well known quantity used by institutional traders to gauge there trading performance. It's use as a day trading tool however has not been fully explored. The VWAP is simply the average of the Volume Distribution Function. The figures below show examples. The red line is the PVP of the distribution and the light blue line is the VWAP for the distribution. To compute it, take the volume Vi for each bar i in the distribution, multiply it by the bars price, Pi, compute the sum, SUM(PiVi) and divide by the total volume, Vtotal, for the whole distribution: VWAP = [sUM (PiVi)]/Vtotal The VWAP has the following characteristics: 1) Being the average for the entire distribution, Volume traded above the VWAP is identical to volume traded below the VWAP. In terms of the distribution function as a probability function, it means that when price action is at the VWAP, there is equal probability for price to move up as there is for price to move down. As corollaries then we have: 2) if the VWAP is above the PVP, then more volume has traded above the PVP than below it. The distribution function is thus skewed to the upside and the expectation is that at the PVP, price action should move up. Take a look at the figure below, the ER2 for June 28,2007. At the end of the day, the VWAP (light blue line) is at 847.98 and the PVP at 846.60. The VWAP > PVP hence more volume was traded above the PVP than below. 3) Conversely, if the VWAP is below the PVP, then more volume has traded below the PVP than above it; the distribution function is skewed to the downside and the expectation is that when price is at the PVP, price action should move down. You see this in the following figure for ES on June 11, 2007. The VWAP is at 1525.32 and the PVP is at 1528.75. VWAP < PVP. Clearly the amount of the skew will be a function of the difference between the VWAP and the PVP. 4) If the VWAP approximately equals the PVP, then the distribution function is symmetric. In this case when price touches the PVP, there is no expectation of price movement in either direction. Instead, expect to see small oscillations about the VWAP. The next image shows this for ER2 on June 22, 2007. VWAP = 840.44 and PVP = 840.20. Oscillations about the VWAP occured for most of the afternoon starting at 13:30. 5)The VWAP and its relation to price also determines the trend of the market as follows: a)If Price >> VWAP, the trend is up b)If Price << VWAP, the trend is down. . 6) Finally it doesn't matter on what time scale you plot the distribution functions and its associated VWAP. The chart could be a 1, 2 ,3 minute etc time chart, or a tick chart, or a range bar chart or a volume bar chart. The distibution and hence the PVP and VWAP are all the same. You need only take a quick glance at the VWAP and its relation to price, to decide the trend of the market. In future threads I will present some examples of how to use this information for entering a trade. In [thread=2008]part III[/thread] we will start with the newbies, since they need the most help. After that we will look at more complex situations using only the distribution function and the VWAP. There is a lot here to digest, so I will stop for now Comments are welcome. JERRY

no Yes Yes these questions will all be answered in later threads when I discuss the significance of the VWAP. Stay tuned. JERRY

Nick---yes I will get into that when I start talking about the volume weighted average price and its standard deviations. Stay tuned. JERRY

Waveslider- Here is my chart of YM for June 26, 2007- The peak volume price is at 13492, far from the close in the 13390 area. The volume distribution is skewed about 20 pts to the downside. JERRY

Want to explain about action on higher time frames waveslider?

I think there is some confusion here about the difference between scaling in vs. averaging down. They are not the same thing. In averaging down, you load up the boat on your first entry. Let say you are comfortable trading a max of 8 contracts with a loss of 5 pts/contract or 40 pts. If the market moves against you, you then overload the boat above your 5 pt stop increasing your load to 16 contracts. If the market continues to move against you, you are now in deep doodoo. You are trading beyond your comfort range. You can't stand the possibility of taking a loss so you add more contracts and you are really sweating it. But of course the market continues its relentless pursuit against you. Eventually you lose a bundle. This is what averaging down is all about. Now consider scaling in. Let say you are normally comfortable trading no more than 8 contracts with a stop loss of 5 points, 40 pts total . At entry however, you only trade 4. Reason- you think you may have to scale in. The market moves against you 5 pts. Your down 20 pts., so you are not uncomfortable (remember your risk tolerance is 40 pts). You reconsider the trade. If it still has possibilities on the long side, you load the boat. Loading the boat means adding 4 more contracts. The market could drop another 2.5 pts. before you would be out 40 pts total (4x7.5 +4x 2.5=40). But interestingly enough, the market only has to revert 2.5 pts to the upside, for you to break even. So in reconsidering the trade at the 5 pt down entry, you have to decide whether the probability for the market going up 2.5 pts is greater than the probability for it going down 2.5 pts. If it is not, don't scale in. If it is, pull the trigger. The difference then between scaling in vs. averaging downs has to do with planning and an understanding of your risk tolerance. Scaling in is not a helter skelter event which averaging down is. You should always be undertrading, in the event that scaling in or reversing becomes a necessity. As an aside, every day trader should have scaling in as one of his or her strategies. And in addition, every day trader needs to learn how to reverse a trade when the situation warrants. JERRY

This thread and succeeding threads will discribe my use of market statistics as an intraday trading tool. I wanted to write this down some where for my own edification and perhaps introduce some new ideas that have not been expressed before. Perhaps some of these thoughts may be of use to those of you who are mainly interested in price action, and what market statistics implies about it. We are all aware that price action is all about probabilities. One can ask the question, what is the probablility that at any moment in time, prices will move higher rather than lower. To answer this question requires a knowledge of the probability distribution of prices or volume. The shape of the distribution, and where present price is in the distribution function, suggests in which direction to trade. If price is in a low probablility region, enter a trade in the direction of higher probability. If price is presently in a high probability region, don't trade. Sounds simple, but it's fraught with difficulties. Look at figure 1. This is a 2 minute candlestick chart for the E-mini Russell 2000 index futures for June 22, 2007. The volume distribution function is drawn on the left along the price axis with bars extending out to the right. The length of the bar is determined by how much volume was traded at that price. The longer the bar, the more volume traded at that price. Looks a lot like a Market Profile. In fact Market Profile is a subset of this more general probability distribution function. Several things to note about it as follows: 1)The distribution of volume is roughly symmetric about the peak volume price occurring at 840.20 (indicated by the red line in the center) with some smaller peaks occurring both above the peak(at 842.30 and 843.60) and below the peak (at 837.20 and 836.60) 2)The distribution shows very low trading volume, in the high price area and low price area. Figure 1 I point out this symmetry in the distribution mainly because it is unusual. It doesn't occur very often. More often than not, the peak volume price does not occur in the center of the distribution. I've also shaded in light blue, the region outside what is called the value area for you Market Profile fans. The green region is the value area, the area where 70% of the volume has traded. I suspect that 70% was chosen as the value area because it is close to 1 standard deviation of a normal distribution ( 68.3%). The normal distribution is symmetric about the peak volume price. There have been lots of prognostications about how to trade when price moves back and forth across the value area, especially value areas generated the previous day. For a more or less complete list of these trade setups see the following [thread=175]sticky thread[/thread] or this site Simply entering a long where the volume distribution is low (below 836.60) and exiting the trade when price moves back into the high volume area (near the peak volume price) doesn't hack it, the reason being, that what looks like a low volume area now, could become a high volume area later on in the day. In actual practice, one never knows what the distribution will look like later on in the day. Take a look at figure 2, which shows the same 2 minute chart of the Russell at 12:16 EST, 106 minutes after the open. The peak volume is at 842.30, and the last bar has closed in a low volume area at 839.90. The distribution looks pretty much symmetric. What do you do? You pull the trigger and go long. Would this have been a good entry? Apparently not. Price action drops the market like a stone as shown in figure 3. By 12:34, price has dropped to 835.80. You exit for a loss of 4.1 pts ($410). Figure 2 Figure 3 So what happened? What happened was, the distribution function decided to expand. It would evenutally expand so much, that the peak volume price would eventualy move down to 840.20 (figure 1). In fact, you should NOT have taken the trade described above, for reasons which will be mentioned in a future thread, when we introduce the concept of the volume weighted average price, the VWAP in [thread=1990]part II.[/thread] JERRY

Ditto Same Problem