Dogpile

Blowfish, I don't know the mechanics of the european markets because they are strongly affected by the US market but here in US, a large opening gap changes the dynamics of the morning session. Gaps here in the S&P futures tend to fill at least partially. Given this tendency, the initial play is generally to fade the gap for a trade and then see how market responds and go back with a trade in the direction of the gap once the market has pushed into the gap. You can see this dynamic play out on the DAX at the open. Think about it, the market wants to screw those who panic with 'bad marks' to open it too low allowing nimble players to buy into the panic and take a ride back up before the institutional players enter the market (institutions generally trade in afternoon -- which often creates 'afternoon trendiness' versus morning '2-way action'). General rule is that the morning session will often see a flush to force people who haven't yet panicked to panic. This will often set a high or low for the day in first few hours of trading- thus the PVP/VWAP will not be so relevant for the opening 30 mins+... then gets more relevant as the distribution fills out. my point is just that the morning and afternoon sessions tend to be fundamentally different.

walter, no I wasn't commenting on correlations -- but I will seems to me like S&P futures is the contract to watch most closely as it seems to really interact with VWAP nicely. I have begun trading S&Ps more -- I used to trade YM and NQ almost exclusively but find myself trading YM and ES more right now. I was watching NQ but I didn't actually trade it even once today. I was trying to short a re-test of the morning high but it kind of spiked down hard and never really got my short signal so went back to the Dow and S&P charts.

Walter, the chart you just posted before was from July 25th. Look at the similarity to todays chart: Bands narrow, chops around a bit, breaks trendline lower, forms bear-flag technical pattern, then pushes down a few more times... deja vu. I labeled a few other entries I took today. Today I was watching S&P futures for that initial break but had my finger trigger on Dow futures as it came down through that trend-line. I then added on the S&P bear-flag, covered, and re-shorted the test back up to VWAP. Just an incredible day in an incredible market. I am not sure how long we can continue to have these types of days but I was trading in 1997-98 and that stayed volatile for quite a while.

btw, as rumor-filled as the market was today -- look how 'normal' the volume distribution ended up...

<<Ok Dog I see.... now this other, would that be diferent ? sorry for bothering you... thanks Walter>> yes that is different. that is the code I wrote to watch how the bands compress and widen -- not necessarily for levels. and you aren't ever bothering me, I am as addicted to chatting about this as I am about trading. here it is: {I use this on 1 and 2-minute charts with a 'custom session' start time to collect 45 2-minute bars -- thus it starts plotting this band using 60 minutes of pre-market trading and first 30-mins of regular trading} value1= square(c-vwap_h)+ square(c[1]-vwap_h)+ square(c[2]-vwap_h)+ square(c[3]-vwap_h)+ square(c[4]-vwap_h)+ square(c[5]-vwap_h)+ square(c[6]-vwap_h)+ square(c[7]-vwap_h)+ square(c[8]-vwap_h)+ square(c[9]-vwap_h)+ square(c[10]-vwap_h)+ square(c[11]-vwap_h)+ square(c[12]-vwap_h)+ square(c[13]-vwap_h)+ square(c[14]-vwap_h)+ square(c[15]-vwap_h)+ square(c[16]-vwap_h)+ square(c[17]-vwap_h)+ square(c[18]-vwap_h)+ square(c[19]-vwap_h)+ square(c[20]-vwap_h)+ square(c[21]-vwap_h)+ square(c[22]-vwap_h)+ square(c[23]-vwap_h)+ square(c[24]-vwap_h)+ square(c[25]-vwap_h)+ square(c[26]-vwap_h)+ square(c[27]-vwap_h)+ square(c[28]-vwap_h)+ square(c[29]-vwap_h)+ square(c[30]-vwap_h)+ square(c[31]-vwap_h)+ square(c[32]-vwap_h)+ square(c[33]-vwap_h)+ square(c[34]-vwap_h)+ square(c[35]-vwap_h)+ square(c[36]-vwap_h)+ square(c[37]-vwap_h)+ square(c[38]-vwap_h)+ square(c[39]-vwap_h)+ square(c[40]-vwap_h)+ square(c[41]-vwap_h)+ square(c[42]-vwap_h)+ square(c[43]-vwap_h)+ square(c[44]-vwap_h); value2=squareroot(value1/(45-1)); value3=vwap_h+value2; value4=vwap_h-value2; value5=vwap_h+(value2*2); value6=vwap_h-(value2*2); if time>659 then begin {note, I am in California timezone >659 = >959 in New York Time} Plot1(vwap_h, "UpperBand" ) ; {Plot2(value3, "UpperBand" ) ; Plot3(value4, "UpperBand" ) ;} Plot4(value5, "UpperBand" ) ; Plot5(value6, "UpperBand" ) ; end;

you need to forget about the results and focus on the set-ups. keep a trading plan with X # of set-ups written-down. if you come up with a new idea during the trading day -- it can go into the plan for the next day but should not be traded that trading day. make it a competition among your set-ups to see which is best. keep one 'set-up' listed in the trading plan entitled 'impulse trade'. any trade you do that doesn't fall into the other set-ups goes into this grouping. see how impulse trades do over time. it took me a good 9 months of taking impulse trades before I 'got it' -- that you cannot syphon off your dollars earned on good trades with all those impulse trades and expect to come out on top. The key to this business is simply having the patience to wait for the high-probability set-ups to occur. personally, I believe that high probability set-ups require 2 things; 1) a good pattern and 2) good trade location. If one or the other, it isn't high probability. You only need 1 good trade per day to make a ton of money. Sometimes this one trade will take 2 entries. Sometimes, the market will present you with 8 good trades. Take the good ones and avoid the others. Nearly all of this advice can be read on pages 20-21 of Mastering The Trade by John Carter (a decent but not great book). "whenever I focused on the set-ups and not the results, I did fine. But whenever I focues on the results and not the set-ups, I got killed"

walter, that is dbntinas code but I played with the # of Std Devs on there.. that one I think had 0.5 1.0 and 2.0 std devs... but I am playing around with those settings and was using something different today.

which std dev are you talking about walter. I use dbtina's code as proxy for Jerrys std dev... I use my own code to watch the expansion/contraction of volatility in intraday basis. btw, I have to thank Jerry. I have not had a losing day since I started filtering trades with VWAP (nearly 3 weeks now). part of this is of course these juicy markets. very forgiving market. bails you out of a bad trade with a monster swing at some other point.

as I mentioned in the video I did over the weekend... the best coil is when volatility (std dev bands) contract AND you can draw a triangle... this occured today around 11:38am EST... the breakout occurs when price moves enough to get the bands to expand. volume was weak on the move relative to previous day -- but you had a non-statistical long bias on days the fed is to announce a decision -- market tends to be safe until an hour or two before the fed announcement -- so the lack of volume was less concerning today.

<<So is volume the motive force causing all of this?>> not necessarily, IMO... but volume is often important. earlier this year we had these days that just grinded up on low volume and then the market would launch further up and only THEN would the volume come in. volume would come in at bad prices creating a subsequent hard flush the other way ~2 days later. but following volume only left you not believing in the move. <<And is the use of MP a means of price-volume discovery?>> MP is good for its concepts. MP concepts are something that helps you with your 'trade location' -- Dalton says "the most important skill you can master to become a successful trader is to distinguish 'price' from 'value'" (pg 100). I don't know if this is the MOST important skill, but its an important one. My results got much better when I began combining my set-ups with concepts of 'value' (trade location). examples of such might be using 'single prints' and buying/selling tails to help pinpoint support/resistance. but momentum is also important. thus something like finding that 'first pullback following strong short-term momentum' combines both concepts -- the first pullback will generally have pretty good location relative to recent 'value' (equilibrium) and you are entering with high reward potential as price has just begun to 'auction' with momentum away from the last equilibrium level -- as it seeks a new level.

curious jerry, in what type of enivornment does your method work best and in which type has it not done well historically? do you prefer trend days to make a lot of money (ie yesterday on NQ) or a choppy, 'normal' market (normal meaning avg ATR type of days with 2-way action)?

<<one thing though is don't you think std dev bands on vwap make more sense as far as market volatility than BBs? I've always been fascinated by BBs, I have Bollinger's book right in from of me. >> the problem with bollinger bands is that they make the assumption that the moving average is the point of 'value' -- which seems kind of flawed. <<Maybe its just philosphical but it would seem to me the dev bands make more sense when you add volume over just what Bollinger tried to do. >> I think the difference in volume-weighting the prices versus just using the closing prices is not such a significant difference. I have grown up on the key concept that 'momentum precedes price' -- such that just as a ball that is thrown up in the air deccelerates before it reverses its flight, a similar tendency occurs in the markets -- a strong directional move will often get a second push in the same direction (which may then be of lesser force). you can measure such with various oscillators. these oscillators are never volume-weighted -- volume is kind of just an adjacent concept. this is how I think of volatility bands -- yes, if the band widens on higher volume that is a more valid move if it doesn't. but a strong momentum push needs to still be respected to some degree. it gets tricky because what if the move is on less than average volume but that volume reading is higher than the immediately preceeding move -- is it valid or invalid then? Many situations have kind of a 'grey area' aspect to them -- I think you have to just develop a sense for the various factors going on and weigh the ongoing buying and selling 'pressures' and not get caught up too much in all of the technical issues.

nice. yes well today was quite a different set-up than July 25th (the day of the video). I could list all the ways it was different but I know you don't really care. I did watch the PVP/VWAP relationship at times today and did factor this in as a slight (long) bias to my thinking -- I did make about 10 pts on NQ today. I should have made more but got sidetracked with thinking that the market was going to have a tougher time than it did with all that previous congestion/resistance from last week.

yes I meant that you shouldn't think that 95% of observations should be within 2 std devs if the distribution is skewed -- I should have said that rather than saying 2 std devs is different in its own right. clearly, I am not up to speed on the properties of skewed distributions so this isn't intuitive to me. instead of saying: the premise of this strategy is that for any non-normal (skewed) distribution, standard deviation will understate the 'true' volatility. is it right to say, the premise of this strategy is that for any non-normal (skewed) distribution, you would expect far more observations to fall 2 std deviations away from the mean than you would if the distribution were normally distributed. ?? re mean and VWAP --- most people used to something like a moving average would expect regression to the mean. but we have stated that this is not necessarily the case with regard to VWAP. thus in this case, 'mean' doesn't mean the same thing as 'mean' -- as in 'regression to the mean'.... or at least, regression to the mean would not be expected until the skew of the distribution changed. on first read of your reply, it looked like I really didn't understand this at all. but now when I think about it -- what I said was not technically correct but the trading implications weren't far off -- assuming this post here is correct.

btw, until we figure out the PVP code -- I am using a screen like this -- call it poor man's PVP -- 2 windows side by side with font shrunk down to '5' (times new roman)

let me just make a point that I didn't initially get but explain it another way than the way Jerry did initially since it helps me to understand it if I try to explain it a different way anyway. (please correct anything that is wrong here). the premise of this strategy is that for any non-normal (skewed) distribution, standard deviation will understate the 'true' volatility. thus, 2 std devs is not as far away as you might first think by the std dev calculation (ie, 2 std devs means something different if the the distribution were instead 'normal' -- normally distributed). we have observed many cases where price will not return to VWAP -- despite VWAP serving as the 'mean' for the distribution in the std dev calculation. thus, for a skewed distribution -- you can kind of think as 1 SD as the 'new mean' (though that term 'mean' probably isn't right -- just think of it as a new potential 'pivot' since price might very well not return to the VWAP price) -- and price should be expected to rotate between the VWAP and 2 SDs (or more) -- the price pivots that are above and below 1 std dev. and if price doesn't do what is expected --- then many times you will be exiting since the PVP might have changed -- or price will trade down far enough away from VWAP just due to pure volatility to allow you to get out. so skewed distributions are kind of funky -- you are using VWAP in the calculation as you would the 'mean' -- but it really shouldn't be thought of as the mean.

darth, I got sidetracked and meant to clean up/clarify that question -- it was pretty murky. lol. My question was born out of seeing the example and not being at all comfortable shorting in the spot that this method (-1SD) shorted -- the initial short in the video. NQ will often make its high or low for the day before 11am EST then trend the opposite direction all day -- in fact it did that today. again, I am not saying jerry's method isn't profitable --- its just hard for me to relate to this particular example. I was thinking just that; VWAP is better 'location' than 1SD and 1SD is better than 2SD -- therefore 0.80 SD's is better than 1.0 SD. the only reason NOT to wait for VWAP is because you are looking for incremental opportunities as it won't always get back to VWAP. Thus, you are passing up 'positive expectation' by NOT trading at 1 SD. but there should be a point between 1SD and VWAP that is more optimal than exactly 1.0 SD. Was just curious if this was correct to think like this or is there some other factor that I am just not 'getting'.

its hard for me to relate to this 'scaling in' thread given the example in the video. the location of the initial short is just a location I wouldn't ever consider shorting NQ -- and I trade NQ every day. I am not saying this method isn't profitable, just that personally -- I place a premium on having good trade location and use a hard but reasonable stop against that -- then often re-enter if I believe my initial read was correct and my stop just wasn't wide enough. I can see the logic in your approach Jerry but I just don't think that is optimal trade location -- hence my question above.

a good clean coil did not develop today. nonetheless, following the 'rules/concept' of this idea -- you should clearly not have been shorting this afternoon. The play was to be long or sit out. The market appeared to have substantial resistance above this afternoon but it powered right through it. Had you been following the std dev bands, you would have seen that the bands narrowed and then re-expanded -- the market on this intraday chart was bullish. the issue was whether the market would find sell pressure as it pressed up into the congestion of the last few days. note I have also added an indicator at the bottom (labeled 'VWAP Std DevTrend') that attempts to show when momentum may be forming away from the VWAP level (expanding bands indicating the potential beginning of a trend) -- green for bullish, red for bearish. I am still tweaking this but you can see how it remained green or neutral all afternoon.

jerry, was curious if this is true or false: given your assumption that SD will be generaly understated for any skewed distribution and therefore trading at the +1/-1 SD level will generally be profitable since it will be likely to go 2 SD's (if skewed) enough times to offset your stop outs... then would it hold that every tick closer FROM +1.0/-1.0 StdDev TO the VWAP is superior location to the point of exactly +1.0/-1.0 Std Devs... seems intuitive that this would be the case and if so, it begs the question why trade necessarily at the +1.0/-1.0 std dev... if any entry superior to that level is also expected to be profitable then there is something to be said for improving location relative to that level through some technique/filter that adds a little value to that, ie X ATR's better than the +1/-1 Std Dev price where X can probably be calculated through back-testing to give you the most number of trades that are still profitable enough to offset the extra variance they create. I got the sense that you were just trying to increase the number of trades and picked +1/-1 std dev as a number that seemed to have some logic to it. but I didn't 'get it' if there was another reason why this price was important. you did say 'for any arbitrary distribution...' so I assumed you were saying that the expectation is for an artitrary distribution to develop and you have no expectation as to how it gets there -- such that VWAP price is superior to +1/-1 std dev and +1/-1 std dev is superior to +2/-2 std dev's and therefore; (-1 std dev + 1 ATR) would be superior location for say, a short, than; (-1 std dev), is that right? if I am not right about the above assumption, can you explain why that is?

if you get 1 good idea from a book, then it is easily worth a read. this book was not my favorite but there are some good nuggets in there and I did like the Bollinger Band Squeeze Play (Chapter 10) did stimulate some new ideas for me that has turned into a very successful set-up for me.

<<A slow bleed is the worst thing that a new trader can have. It's insidious, because it makes him think that the methods he is using are ok, but they just need some fine tuning. So what does he do? He adds another indicator to his chart, discovers he still is bleeding and so adds another and another. Soon he's wrapped up in so many indicators, patterns,other market internals and externals, he doesn't know whether he's coming or going AND he is still bleeding. >> you just described probably 95% of traders first 6-9+ months of trading, including mine. I think this was ok though because my initial futures account was small relative to my total liquid net worth. I bled off money but the absolute amounts were small -- had I used wide stop losses, I probably would have blown through my account over and over again -- this is what I mean by a slow bleed not being the worst thing. If you blow your account out with bad trades and wide stop-losses, that is the worst thing. I was overtrading (bad trades) with tight stop-losses -- bad, but not as bad. If you makes good trades -- well then wide stop-losses are likely optimal -- but most newbies simply aren't going to make good trades, so wide stop-losses will just make them lose fast rather than slow. personally, I followed my mentors advice -- which was to not trade a lot (err on undertrading) and to use reasonable stops. this has worked for me. jerry, kudos to you for these videos. these have been great. btw, I have preached us private traders need to work together to share ideas and take on the algorithmic machines of the world -- lately, I have been trading at very high % lately and then I read this: "one of the largest firms specializing in algorithmic "black box" auto systems (market making), had taken a rather large hit the prior few days, and had turned off all their auto-trading systems. Another large firm specializing in the same game, claimed "technical difficulties" and had also shut off their auto trading systems. " http://futurepathtrading.com/content/view/362/69/ interesting that my results (and many of the peers I chat with daily) just spiked up while black boxes have been getting abused lately.

For those who enjoyed 'When Genius Failed' -- the book about LTCM -- this book will be of great interest. The author, Richard Bookstaber, is actually the author that I had to read when I was going through the CFA (Chartered Financial Analyst) program -- he wrote chapters on 'risk management' that were required reading in order to pass the Level 3 exam and earn the Charter. He is very well qualified to speak on this subject and this topic is extremely pertinent to what is going on in the fixed-income market currently. The basic theme of the book is that financial market accidents need not be related to actual serious economic problems. The 'structure' of the market itself is set up to spiral out of control at times. His concluding paragraph is entitled "Built To Crash?" [due to innovation in the derivatives market] "when a market dislocation arises, it is difficult to know how the prices of these instruments will react. Innovation and mechanical efficiency have also increased complexity by pushing markets to become more interconnected... The combination of tight coupling and complexity is a formula for normal accidents.... In all of these cases disaster was triggered by simple and apparently innocent actions that initiated a chain of compounding problems because of the complex nature of the system..." "as we have seen time and time again, in the instances where it really matters the liquidity that is supposed to justify the [increased] leverage will disappear with a resulting spiral into crisis." end quote Look how this fixed-income market is acting. Look how the broker stocks are acting. Does this look eerily similar to you? http://bp3.blogger.com/_5h-SWVGx6Ms/RrXwMevXbEI/AAAAAAAAAXQ/g3Io4oRrnRM/s1600-h/LEH+1998+vs+BSC+2007.png

Jerry wrote: <<This is a good example of why hard stoplosses will slowly bleed you to death. In the next thread we will discuss an alternate paradigm called risk tolerance to replace hard stop losses>> I just wanted to make a point to newbie traders out there. Trust me when I tell you that you are fighting a long uphill battle. Jerry is clearly an experienced trader and has many nuances to this strategy that he has not yet presented. Newbie traders really shouldn't be using this method for actual trades yet. A 'slow bleed' is not such a bad thing relative to most 'new trader' results. In the example given (fridays mid-day YM VWAP touch with PVP > VWAP), isn't it possible that not initiating a trade at the VWAP level was perhaps a good choice -- rather than where your stop-loss was? For a newer trader, I would strongly argue that this was the best way to go. I would err on the side of 'too few' trades. In my view, there were serious cross-currents to deal with on Friday. Adv-Decl line was bearish all-day. We have been in a downtrend and VWAP was lower than previous day (showing distribution) after 2 days of the market closing higher than its open. On the other hand, the put-call ratio was extremely high at 1.90+ -- indicating investors were very worried. The market started down and petered-out (volume was weak on the initial push down -- it was just an initial flush). But because of the initial push down, the futures markets all faced a ton of congestion above -- at the previous days equilibrium level of 1473-1474 on the S&P's. The market tested up away from this level late on thursday and then returned BELOW this equilibrium level and now 73-74 was going to be tough to get through to the upside -- though clearly a possibility. But essentially, we were stuck back just under Thursdays VWAP after an attempted break higher (bull trap) and an attempted morning break lower (bear trap). I am just trying to help newer traders here by pointing out there is a lot more going on than just the PVP, the VWAP and the Std Dev of the days distribution. In my view, the cross-currents above called for a choppy range to fill-out with a break later in the afternoon. The dow (YM) did break up before down (another bull trap) -- but the S&P's did not and the failed spike up on YM was actually the best shorting opportunity of the day. Until Jerry presents more, if you are thinking of trading this concept -- I would wait for only the cleanest set-ups and err on the side of undertrading. Believe me, I say this with complete respect for the methods Jerry is presenting here.

thought this was interesting rumor/fact on something that came out end of this week regarding 'program trading': "one of the largest firms specializing in algorithmic "black box" auto systems (market making), had taken a rather large hit the prior few days, and had turned off all their auto-trading systems." http://futurepathtrading.com/content/view/362/69/ (good blog by the way)