Trading with Market Statistics. IV Standard Deviation

[Dogpile 10]

Soultrader,

 

I used to track POC but I find that particularly for the S&P's, the VWAP is the key level to think about. the concepts are similar though.

 

I have spent a lot of time trying to fit PVP into something useful for me but I just don't think it adds much to my set-ups so I am not using this. my advice would be to start with just watching VWAP and learn to see how price reacts to it. there is a ton of good information by watching how it responds to a test of VWAP or a break away from VWAP. I find it fascinating to watch the action the S&Ps have relative to VWAP.

 

the one set-up that is very useful is that when PVP = VWAP in the middle of the day, think of it state of near-perfect 'balance'.

 

other than that, I only look at PVP in context of overall profile shape.

 

here are some notes from todays action.

[jperl 11]

the one set-up that is very useful is that when PVP = VWAP in the middle of the day, think of it state of near-perfect 'balance'.

 

This unfortunately is a misleading statement.

Near perfect balance would be price = PVP = VWAP.

 

Very often when PVP=VWAP, price action can be far from the PVP, even as far as the 3rd Standard Deviation. That's not a balanced market.

[Soultrader 12]

Hi Jerry,

 

I am still a little confused on what VWAP, SD, and PVP you use. Is the PVP the previous day PVP? Or do you use the current day's PVP. Also is this also the case with the VWAP and SD?

 

If applying historical data in combination with todays VWAP, SD.... is this 2 days back? Or do you use a continous VWAP and SD for the entire contracts lifetime?

[BlowFish 10]

I think I can answer that and I am sure I will be corrected if wrong but for everything except position trading (the very last thread) the developing profile for today is used. So basically you have nothing until the first tick at 9.30.

 

In the series on scalping Jerry suggests a way for jumping right in if you are keen for action!

 

Cheers,

 

P.S. are you in China yet Jerry? Hope you are enjoying yourself where ever you are.

[Dogpile 10]

pretty clear that the vast majority of what jerry has written about has used current days pvp, vwap, sd.

 

so at the beginning of the day, you have an especially undeveloped data set. after that, the data set will gradually mature to the point where VWAP esentially gets to where its going - as incremental volume becomes less and less important to the VWAP calculation as the day goes on since you are building a larger and larger volume base on the past (ie, VWAP will change a fair bit from 10am to 1pm but will not change so much from 2pm on unless you are in a very, very strong trend). the idea is that it is profitable to make trades looking for statistical extensions/retracements based on the current data set -- while fully realizing that the data set is dynamic and will very often have different statistical characteristics as the day goes on.

[Soultrader 12]

I think I can answer that and I am sure I will be corrected if wrong but for everything except position trading (the very last thread) the developing profile for today is used. So basically you have nothing until the first tick at 9.30.

 

In the series on scalping Jerry suggests a way for jumping right in if you are keen for action!

 

Cheers,

 

P.S. are you in China yet Jerry? Hope you are enjoying yourself where ever you are.

 

Thanks Blowfish,

 

This will indicate that a trader using this methodology must wait until the VWAP, SD, and PVP becomes clear? The SD usually takes all morning before widening up for the Nikkei. This is why I was thinking of applying this technique for the afternoon only.

 

However, I am trying to figure out a way to play the open. For example, if price is below the previous day VWAP and PVP go short, etc.... Im curious to here any comments on such strategy. Perhaps add a few filters like candle patterns, etc...

[Dogpile 10]

<<For example, if price is below the previous day VWAP and PVP go short, etc....>>

 

no idea how the nikkei trades but if it is the first down day after a series of up days, then I like this thinking. if price is below the previous day vwap but the last few days have all seen lower and lower VWAPs -- then price might be expected to start low (morning low) and trade to an afternoon high in a reversal day.

 

but in general, VWAP > VWAP[1] or VWAP < VWAP[1] is an important thing to monitor, in my opinion. if 'building higher value' --- look to go long after a downswing completes and vice versa... this can really keep you from fighting the markets theme for that particular day.

[Soultrader 12]

Thanks Dogpile, Im actually going to look into this behavior and jot down some notes and ideas on it.

 

I have another question regarding the SD. How narrow is narrow? It appears that Jerry would take trades with risk:reward ratios of slightly below 1.0. I personally do not take these type of trades even if Im scalping. If scalping the minimum I aim for is a 1:1.5 risk reward ratio. I understand that these risk:reward thinking is not entirely correct as it is geared for newer traders. However, I just never found myself worth taking a trade with so little reward opportunities.

[Dogpile 10]

<<I have another question regarding the SD. How narrow is narrow?>>

 

I will let jerry answer that particular question since I don't use SD at all -- but here is a comment.

 

I use a set number of points from VWAP as kind of a ballpark number to consider -- and try to think more in terms of strength (momentum/volume) of that particular move more than anything purely statistical based on historical data. The market is dynamic and while statistics are crucial to understand -- I don't want to get TOO caught up in statistics as I think there are better ways to do it. but to each his own. jerry very likely has a ton of nuances to his approach such that when I see some of his trades --- I find that we are actually often making very similar trades -- but we are getting there in totally different ways. thus, jerry has figured out through experience how to get a ton of information looking purely at the statistical distribution -- stuff that I just can't see when looking only at a distribution of prices.

 

I know some traders where some combination of oscillators just speaks to them and I just don't get how they do it -- but they do. this is kind of how I think of jerrys approach. he is pulling more out of it then I can certainly see. he has likely been able to do this because he has learned all these little nuances that go along to his approach. kind of like in poker -- there are all those situations that you have seen many times if you have played a lot of hands but each particular situation is actually a very rare thing --- so you get good once you have seen enough hands to build up a library of all those rare but cumulatively important situations -- that is the difference between profit and loss.

[jperl 11]

Thanks Blowfish,

 

However, I am trying to figure out a way to play the open. For example, if price is below the previous day VWAP and PVP go short, etc.... Im curious to here any comments on such strategy. Perhaps add a few filters like candle patterns, etc...

 

Both Blowfish and Dogpile have correctly stated when to use today's distribution and when to use yesterdays.

Since today's distribution has not developed yet at the open, use yesterdays distribution and simply add on to it as the morning price/volume data develops. I do this for position trades as described in [thread=2423]part X[/thread]. You can then switch to today's distribution at your convenience.

[jperl 11]

I have another question regarding the SD. How narrow is narrow? It appears that Jerry would take trades with risk:reward ratios of slightly below 1.0. I personally do not take these type of trades even if Im scalping. If scalping the minimum I aim for is a 1:1.5 risk reward ratio. I understand that these risk:reward thinking is not entirely correct as it is geared for newer traders. However, I just never found myself worth taking a trade with so little reward opportunities.

 

To restate this question, how large does the SD have to be before you enter a trade?

If you are only using today's distribution, then at the open, the SD is virtually zero. As more price/volume data is added, the SD grows. What's nice about watching this is you can see how the volatility is changing as the day continues. First growing, possibly leveling off, then growing again, then reaching some kind of stasis.

So when should you first consider taking a trade? My rule of thumb is, don't trade until the range of the bars on your chart are less than 1 standard deviation. If the high of a bar touches 1 SD level and the low of the bar touches a second SD level, then the bar range is too large to consider entering a trade on that time frame. You either need to wait until the bar range gets smaller, or go to a faster time frame.

[smodato 10]

Can somebody please advise me on this code.

I am a newbie to Easylanguage.

I am using this code on mullticharts

Comments appreciated

 

Naveen

 

 

vars: vwap(0),

pv(0),

Totalvolume(0),

Barfromstart(0),

Squareddeviations(0),

Probabilityweighteddeviations(0),

deviationsum(0),

standarddeviation(0);

If date > date[1]

then

begin

Barfromstart=0;

pv=AvgPrice*volume;

Totalvolume=volume;

vwap=pv/totalvolume;

end

else

begin

Barfromstart=Barfromstart[1]+1;

pv=pv[1] + AvgPrice*Volume;

Totalvolume=Totalvolume[1] + Volume;

vwap=pv/Totalvolume;

end;

deviationsum=0;

for value1= 0 to Barfromstart

begin

Squareddeviations=Square(vwap-avgprice[value1]);

Probabilityweighteddeviations=volume[value1]*Squareddeviations/Totalvolume;

deviationsum=deviationsum+Probabilityweighteddeviations;

end;

 

standarddeviation=SquareRoot(deviationsum);

plot1(vwap);

plot2(vwap+standarddeviation);

plot3(vwap+2*standarddeviation);

plot4(vwap-standarddeviation);

plot5(vwap-2*standarddeviation);

 

 

Hi,

that code works properly for me, I see we are all worried about VWAP to be plotted in Tradestation; but my real concern is how to plot PVP, if I use AVGprice function I never have "round" prices to work on so how can I say what price showed the maximum volume in the day?

Bye

Smodato

[darthtrader 10]

hi, check out the thread in Trading Indicators. Blowfish looks like he should have everything pretty much nailed down at some point as far as matching Jerry's videos.

[smodato 10]

hi, check out the thread in Trading Indicators. Blowfish looks like he should have everything pretty much nailed down at some point as far as matching Jerry's videos.

Thanks for the suggestion, unfortunately I did not get the PVP code there, furthermore other codes I found are ELD format and using Prosuite 2000i I cannot read them, please see this attachment and maybe someone can read it and post it here in order for me to "transport" it into prosuite 2000i.

Thanks, bye

Smodato

MARKETPROFILE.ELD

[mmaker 10]

Howard Arrington just told me he is including SD as a built in study in ensign to be released today in the nov 8th beta.

 

Looking forward to seeing this.

 

In his words.....

 

"VWAP with standard dev band based on price-VWAP is now a built in study in the 11-08 beta to be released later today.

Enjoy. You can do away with the DYO for VWAP now."

[jperl 11]

Howard Arrington just told me he is including SD as a built in study in ensign to be released today in the nov 8th beta.

 

Looking forward to seeing this.

 

In his words.....

 

"VWAP with standard dev band based on price-VWAP is now a built in study in the 11-08 beta to be released later today.

Enjoy. You can do away with the DYO for VWAP now."

 

Glad to hear it. It was only a matter of time.

[LS_Chad 10]

Would it not make more sense to convert the VWAP bands into an oscillator. Here is essentially what it would look like:

 

http://www.charthub.com/images/2007/11/09/VWAP_Oscillator.png

 

This way, you have one histogram, instead of 5, 7, 9 lines overlaying your candles. The histogram tells you how many standard deviations price is above or below the VWAP. I'll add this oscillator option to our next release (I/RT 9.0).

[jperl 11]

Would it not make more sense to convert the VWAP bands into an oscillator. Here is essentially what it would look like:

 

http://www.charthub.com/images/2007/11/09/VWAP_Oscillator.png

 

This way, you have one histogram, instead of 5, 7, 9 lines overlaying your candles. The histogram tells you how many standard deviations price is above or below the VWAP. I'll add this oscillator option to our next release (I/RT 9.0).

 

That's fine for the forward candles, (the ones all the way to the right). However the oscillator gives the wrong impression about where price has been relative to the standard deviations in the past, due to the fact that the standard deviation lines are renormalizing with each added data point.

For example from 12:20 to 12:50, the lows of all the candles touched the 3rd standard deviation price which kept renormalizing to a lower price.

The oscillator on the other hand gives the impression that none of those candles touched the 3rd standard deviation until about 12:40

[MidKnight 12]

Thanks Blowfish,

 

This will indicate that a trader using this methodology must wait until the VWAP, SD, and PVP becomes clear? The SD usually takes all morning before widening up for the Nikkei. This is why I was thinking of applying this technique for the afternoon only.

 

However, I am trying to figure out a way to play the open. For example, if price is below the previous day VWAP and PVP go short, etc.... Im curious to here any comments on such strategy. Perhaps add a few filters like candle patterns, etc...

 

Hi Soultrader,

 

I used to use several current day volume based studies on the Nikkei but found that the opening print often ends up distorting the information for most of the morning as you have commented on above. I ended up changing the studies to tick based or time based. Maybe take a look at those for alternatives.

 

My best regards,

MK

[Kiwi 16]

Interesting you should say that MK. I have recently adjusted my Volume bars to self-scale for the last 20 bars but I exclude the opening bar and, for SPI, include all bars after the close of the cash market. This makes Wyckoff style volume use much more effective.

 

How are things going? (pm me )

[metalhead 10]

Hi.

 

Sorry to bump this old thread but I've been reading this entire series of threads and am trying to follow along.

 

I'm using SierraChart and have loaded the VWAP but I can't figure out how to get the SDs loaded. When I add the SD study and base it off of VWAP, I get new lines that are very close to the VWAP. I've attached a pic to show what I'm talking about.

 

My options for the SD study are:

Top Band Input Data

Bottom Band Input Data

Length

Multiplication Factor

Moving Average Type

 

Any ideas on how to correctly set this (or code my own SD formula is this one is wrong) are appreciated. Thanks!

[BlowFish 10]

I don't know sierra but my guess its something to do with the muliplication factor. have you tried adding 2 bands one with mult x1 and one with mult x-1?

[metalhead 10]

The default multiplication factor is 1.8, which is what was used in my screenshot above.

 

When I calculate the SD of the VWAP manually I get values like .05. Hardly useful when the YM moves in 1 point increments.

[Head2k 10]

The problem is that in fact you don't want to calculate SD of the VWAP itself. You want to calculate SD of VWP (Volume Wiighted Price, i.e. a price distribution where probability of each price is defined by volume traded at that price). VWAP (Volume Wieghted Average Price) is the mean of such a distribution.

I don't use Sierra so I am unable to help you. But search Wikipedia for Standard Deviation, Variance and Mean.

[metalhead 10]

I'm afraid I don't know how to get VMP on my charts