jperl

Agekay, you always want to be trading the contract with the most volume. This gives you the best liquidity for your trades. So for example, I am presently trading the mini Russell 2000 contract which expires in September and will switch to the December contract 8 days before expiration (the so called rollover day). At that time, the December contract should have higher volume than the September contract. (I say should because in September the Russell is moving from Globex to ICE. So it should be interesting to see what happens to the volume).

Agekay, I trade mostly the mini Russell2000 index futures which are 3 month contracts. So for instance if you want a 1 year VWAP, you have to have a continuation chart which shows 1 years worth of contracts on 1 chart. I use Ensign software which does this automatically.

No you are not wrong Head. In fact you have some good ideas, especially about the skew. I think you should start a new thread on trading with the skew. I have some ideas about this that might be useful

You are correct moon. The +sd1 price is not a good place to enter a short. If I were not already in a trade, I would not short at that point. However, given the circumstances you outlined, with a trade in progress, you have three choices: a) exit the trade at +sd1 and accept the loss b)scale in and try to exit the trade at break even or c)reverse the trade at +sd1 with possible increase in position size. A good trader should be willing to consider any of these options at any time. A new trader would only consider option a) all the time. My point is, that new traders are limiting their capabilities for trade management by only considering option a). When you allow yourself the option to consider options b) and c) as well, you will find that a whole new vista of trading is open to you.

The answer moon depends on several factors: a)what my position size was at the initial entry, b) what my profits look like up to that point, c)how fast the market is moving. So there is no unique answer. So let's assume this is my first trade of the day, and I enter light (well below my contract limit) and the market is moving slowly. I would have most likely doubled up on my contracts at the 1st SD away from the entry and tried to exit the trade close to break even. If the market is moving fast (fast and slow are of course about individual perception), I might have reversed the trade at the 1SD away from entry and doubled up on the number of contracts. If instead I was close to my profit target for the day from previous trades, I might have simply exited the trade at the PVP.

Moon, your calculation is correct for YM. This does not mean that you simply enter a trade without managing it. If, as you point out the price action is such that the trade no longer makes sense to you, then you simply exit it or reverse it. The point about using risk tolerance, is that you are not locked in to a course of action which takes you out of the market too early because a stop was hit. Rather, it gives you the opportunity to adjust the trade by either adding size to it or reversing it without the fear that a pre-set stoploss creates.

The volume histogram is available in Ensign. When I started these threads, VWAP and SD were not available, so I wrote them myself. Now both are available in Ensign.

Ron, before you get too deep into TS, you might want to check the new thread by Frank in the [thread=4230] coding forum [/thread]concerning TS and market profile problems.

The difference you are seeing in the PVP is most likely due to two peaks with almost the same volume. This will cause the PVP values to jump around from one time frame to another. This is an example where a visual of the total histogram would help you out.

I use ensign software for my charts. The volume histogram with the PVP is one of the studies provided. As you point out, for an exact value of the PVP you would need to compute the volume distribution for every tick. Ensign doesn't do this but uses the volume for each bar distributed equally among the tick increments for the range of the bar. This of course is an approximation.

Nice job Ondrej. It looks as if using the exact definition of the skew can provide some useful trading information not available in the approximate Pearson evaluation.

Very good Ondrej. You have the skew computation properly weighted. What makes this computation cpu intensive is in real time you have to update the value of PROBi as you add more volume data. Should be okay for a fast machine. Perhaps you can show us some charts with your skew computation drawn in along with the VWAP and PVP.

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.

You are correct. From this chart alone there is nothing that would tip you off about a short failure. Which is why I introduced the concept of HUP. If there were a HUP just below the short entry, you might have passed up the short trade. Here is where trade management becomes important. If you were a NEWBIE, you most likely would set a stop at the VWAP and be stopped out. If you were a more advanced trader, you might pull the trigger at the VWAP and enter a second contract short PROVIDED doing so was still within your risk tolerance. The other scenario and one that I have never discussed but probably should have is as follows: You enter the short trade based on the Shapiro effect. But then the trade starts to fail. If price moves above the high of your entry bar, reverse the trade and go long. A very aggressive trader would not only do this but also increase size. Keep in mind all of this is possible PROVIDED you are within your risk tolerance. You can see how using risk tolerance rather than stoplosses gives the trader considerably more flexibility. Yes, the psychological aspect of the trade is one that is difficult to control. Everything seems to be in your favor for the short, and your emotions tell you that this trade can't be wrong. In fact you must think differently. When you enter the short, the first thing that you must do is decide exactly what you will do if the trade moves against you. Will you wait for the price action to move to the VWAP? Will you reverse the trade? Will you increase size? The easiest thing to do is set a stoploss and forget about it. In my opinion this will never lead to profits. Active management is the key to a successful outcome of every trade.

ER2 hasn't changed to ICE yet but will do so at the expiry of the September contract. I prefer larger volatility. Gives me large profits/trade. Of course more risk too, but still within my risk tolerance. Risk is determined by what percentage of your capital you can afford to lose on each trade. This is typically 1 or 2 %. You can use the width of the SD bands to determine how far you can expect the market to move against you. If the bands are wider than your risk tolerance then you might not want to trade. The more data of course the better the statistics. But this does not determine the width of the SD bands. It's the price action that does If by behaving better, you mean not jumping around a lot, I have no idea what determines that, but I really don't care. I just follow the statistics. It's the only thing that really matters. I've quoted this before from Nihabaashi: "To fear volatility is to fear profits"

VAH and VAL have no statistical significance. They are purely heuristic values based on a percentage of the volume data above and below the peak. The choice of that percentage was based on the incorrect assumption that the volume distribution is normal. It rarely is. The statistically valid values are the standard deviation of the data from the VWAP. For finite data, this is always definable regardless of the shape of the distribution.

Ammo, you present an intriguing scenario which needs to be investigated further. The question is: Can the shape of the volume histogram be used to determine price action? You've presented one example, but there are many more. For instance, in your terminology, what happens if there are 3 boobs? How about 1.5 boobs, where 1 boob is larger than the other? How about a p or b shaped histogram, where the boob is split in two? There are clearly many examples. Perhaps you should start a new thread on this subject?

You're quite correct blowfish. Any kind of confirmation scheme, reduces reward and increases risk. As to whether I use it or not, it depends on what kind of trading I'm doing. For position trading, I do use it. For scalp trading I don't. For everything in between, I will use it on a fast time scale chart (such as a 15 or 20 sec) to gauge entry.

Alban, the video demonstrates how to trade at other points beside the VWAP. If you are having problems opening it, download the swiff player at the following link and use that to open the video. http://www.globfx.com/downloads/swfplayer

You are perfectly correct, that the exact definition of the skew requires a computation of the 3rd moment. The problem with it is the computation is very cpu intensive. I therefore settled for the approximate value due to Pearson as discussed in the skew tag. The advantage of this is you can visualize the skew just by looking at the volume histogram with the vwap superimposed. The problem is as you point out, when you have two large volume peaks, you don't quite know what the skew is. Nevertheless since you can visualize the volume peaks in relation to the VWAP you can approach the market with caution when this occurs. As far as HUPs go, you are correct again that peaks in the volume distribution are HUPS. Which HUPS you wish to use in your trading is of course a function of your trading style. Keep in mind that HUPS are just that, hold up prices. They are places for you to be cautious as to what to expect.

Here are the screen shots of the ensign price histogram property windows. The first one plots the combined volume histogram and the second one plots the daily volume histogram. You run both at the same time.

Is this what you are looking for MC? Chart is ES from May 22 to June 12 with daily volume histogram superimposed on combined histogram for the entire period.

That's correct. I've always used the volume histogram. There are situations where you have to use the price histogram instead. For instance if the contract you are trading has no volume data.

You can use either one. But be consistent. If you use the volume histogram, be sure to use a volume weighted average price to compute the histogram average. If you use a price histogram, you don't need to use a volume weighting to compute the average. You might want to ask Howard Arrington at ensign if he would include this on the properties window for the histogram.

You don't need a trend day for market statistics to "work". What ever the day is, market statistics will reveal it by the the shape of the volume distribution function. How you use this information will be different for different traders. I've just given a few examples of how you might employ it.