Trading with Market Statistics VI. Scaling In and Risk Tolerance

[jperl 11]

comeon guys, save this stuff for last....so over the head of who is following this so far.

HUPS and market rotation theory next??

 

What stuff are you referring to darth?

 

Next thread will be on counter trend trades at the PVP. We won't get to details about HUP until thread IX or X.

[Guest cooter]

Well Dogpile, I wish I had traded NQ today instead of ER. There were at least four good long entry points including 1 scale-in point. In all trades, the VWAP was above the PVP, so distribution was skewed to the upside as you can see in each of the charts below.

 

 

Pretty good I'd say using just simple statistics.

Jerry,

In your assessment of VWAP and its SD, does price ever reach the 3rd SD level? If not, why not?

[jperl 11]

Jerry,

In your assessment of VWAP and its SD, does price ever reach the 3rd SD level? If not, why not?

 

good question cooter. yes price will reach the 3rd SD at times. This usually occurs on a fast momentum break out. In the last week there has been a lot of this. Extremely difficult to trade, if you didn't catch the move at the start. You don't want to enter a trade when price hits the 3rd SD. A rebound could catch you off guard.

[Guest cooter]

good question cooter. yes price will reach the 3rd SD at times. This usually occurs on a fast momentum break out. In the last week there has been a lot of this. Extremely difficult to trade, if you didn't catch the move at the start.

 

Perhaps you could point out an instance of this in a future video, as I've yet to see it myself (based on your calculations of the VWAP and its SD).

 

You don't want to enter a trade when price hits the 3rd SD. A rebound could catch you off guard.

 

Why not? Wouldn't you want to fade it and buy the pullback as price regresses towards the mean?

[dbntina 10]

Jerry,

 

Clarifying question, when calculating your:

 

VWAP

PVP

SD bands

 

Are you only going down to a 2minute chart for accuracy? I mean are you computing the variance, SD and VWAP and PVP using 2min data knowing that it is off a bit. Or are you using 2m of VWAP and SD and then using 1 tick data for volume at every price for the PVP only....Or all of them using tick data but displaying on a 2m chart?

 

This is important as I would like to code exactly what you are doing so that TS users can follow along exactly with what you are doing.

 

Also, nice job dogpile, that is an excellent setup until we get this thing programmed.

 

Thanks Jerry,

 

dbntina

[BlowFish 10]

comeon guys, save this stuff for last....so over the head of who is following this so far.

HUPS and market rotation theory next??

 

I would focus on what jerry has to say and pretty much ignore everything else unless it 'resonates' with a question that you have. I am not sure it is neccasary to fully understand the maths to me it is of secondary importance over whether the tools work through empirical research. If they prove to (they certainly look as if they do) I will probably try to understand the maths better.

 

It seems simple to me (if I understand it correctly) The relationship of the modal point (PVP) and the mean point (VWAP) gives you a bias for the market. This alone is pretty interesting to me and worthy of study. I have a hunch this may be turned on its head (a little) in the end when a market is statistically 'over extended' and we might expect a return to the mean. Maybe it'll be coupled with a switch in PvP....guess we'll see soon.

 

The other 'simple' thing is that an arbitrary tool (though it is statistically derived) is offered for when volatility expands and we anticipate we might not get a revision to the mean. The think I like is that these provide straight forward lines (though I am always suspect of squiggly lines:eek:) to manage your trades from. So far it seems like all bases are being covered.

 

Cheers.

[BlowFish 10]

I was going to answer your original question but I am feeling particularly lazy today .

 

It does raise an interesting point. Assuming that you only risk ever risk 2% (i.e. it is fixed rather than variable). Then the only variable in the frame work that you have control of is your position size. Knowing where the PVP VWAP & 1SD are you can calculate the size for a single entry at the VWAP or a scaled in entry at SD1 & VWAP so that no more than 2% is put at risk correct?

 

This seems a good point to raise a delicate question.

 

I would quite like to know roughly what percentage of trade type a)VWAP and trade type b) SD1 get stopped out. (I am guessing fairly low as we are often putting quite a large amount at risk compared to the reward). That would give a better idea of whether 2% is a reasonable amount to risk, (and to calculate your risk of ruin, a more interesting statistic I think!).

 

I appreciate it may not be valuable using this R:R value for arbitrary stops and targets however it is valuable looking at it historically to understand the performance of your system/method, the overall expectancy of your trading month to month, and finally what % to put at risk on any particular trade.

 

Another splendid thread Jerry thanks.

[jperl 11]

Why not? Wouldn't you want to fade it and buy the pullback as price regresses towards the mean?

 

in reply to my statement:

 

yes price will reach the 3rd SD at times. This usually occurs on a fast momentum break out. In the last week there has been a lot of this. Extremely difficult to trade, if you didn't catch the move at the start. You don't want to enter a trade when price hits the 3rd SD. A rebound could catch you off guard.

 

By entering a trade at the 3rd SD, I meant entering in the same direction as the breakout.

By fading it, you are doing a countertrend trade. This is also dangerous because you are trading against the skew. The breakout could just continue.

We will discuss countertrend trades in the next thread.

 

And yes you should wait for a pull back to the 2nd or better the 1st SD and enter in the direction of the breakout.

[jperl 11]

Clarifying question, when calculating your:

 

VWAP

PVP

SD bands

 

Are you only going down to a 2minute chart for accuracy? I mean are you computing the variance, SD and VWAP and PVP using 2min data knowing that it is off a bit. Or are you using 2m of VWAP and SD and then using 1 tick data for volume at every price for the PVP only....Or all of them using tick data but displaying on a 2m chart?

 

This is important as I would like to code exactly what you are doing so that TS users can follow along exactly with what you are doing.

 

 

Thanks Jerry,

 

dbntina

 

The VWAP and SD are both computed using the volume of each bar and the average price of that bar (O+H+L+C)/4 as input to the computation as stated in post 14559. So depending on the time scale of the chart, the VWAP and SD will be slightly different. The differences get small as more bars are added to the charts (less than 1 tick).

For example at 11:54 EST today for NQ, VWAP computations gave the following numbers:

 

2 minute chart VWAP = 1959.88

4 minute chart VWAP = 1959.82

10 minute chart VWAP=1959.67

 

These are all within 1 tick of one another. so yo don't need to use tick data for the computation which is very CPU intensive.

[jperl 11]

The biggest thing I have to ask though is should i start out with a really small account, play only 1 car at vwap over 4 markets or wait until i have more capital to be able to scale over a single instrument? or even wait to scale over 4 instruments?

Basically, if you were to start over trading, what would you do??

 

If you are going to use risk tolerance procedures to trade, you need a sufficiently large account so that 2% of it represents enough dollars to scale-in or reverse trades when necessary. Once you have computed your risk tolerance, you can then decide what instruments to trades based on their current SD. Personally, I wish I had known about risk tolerance years ago when I first started trading.

[Dogpile 10]

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)?

[jperl 11]

 

This seems a good point to raise a delicate question.

 

I would quite like to know roughly what percentage of trade type a)VWAP and trade type b) SD1 get stopped out. (I am guessing fairly low as we are often putting quite a large amount at risk compared to the reward). That would give a better idea of whether 2% is a reasonable amount to risk, (and to calculate your risk of ruin, a more interesting statistic I think!).

 

I appreciate it may not be valuable using this R:R value for arbitrary stops and targets however it is valuable looking at it historically to understand the performance of your system/method, the overall expectancy of your trading month to month, and finally what % to put at risk on any particular trade.

 

Another splendid thread Jerry thanks.

 

Well it's tough to answer your question Blowfish, because I haven't kept any data on every possible trade that could have been taken.

As far as getting stopped out, that is, my risk tolerance hit, it doesn't happen that often, maybe once every couple of months (turns out it happened yesterday). Usually when it does happen, it's because I did something stupid, like scaling in too early, or not having my system stop in the right place, or not seeing something that I recognized after the fact.

Generally markets rotate daily many times, so there is ample opportunity to exit a trade after scale in. On trend days, you wouldn't scale in, but I think it would be pretty obvious. Trend days usually just creep up an SD with little or no rotation.

[jperl 11]

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)?

 

Well first, I haven't defined a method as such. I've given you a tool from which you could develop your own method. Every trader using the volume distribution function will use it differently. So far I've shown you some basic entry and exit points, which you could incorporate into a style of trading.

 

Secondly, if you call yesterday a trend day for NQ, it worked pretty well, don't you think? I wouldn't have called yesterday a trend day for NQ, because there was considerable rotation from one SD to another. A trend day from my perspective is one with little rotation, ie, market just creeps up one of the SD curves all day long.

 

There is no preference for environment type as far as using statisitical analyis like this to make a profit. What is more important is how you adjust your trading style to conform to the statistics for the day. You can make money (or lose it) on any type of day.

[dbntina 10]

Jerry,

 

Thanks for the info Jerry, right now the SD bands and VWAP are calculating correctly then based on how you do it so that's good.

 

However, I am assuming for the PVP you get that calculated on a Tick by Tick basis is that correct? Or do you also just do it on a 2 minute bar chart for example and take the price as o+h+l+c/4 and volume of that bar? It seems that it would be more of a problem estimating as far as the PVP is concerned.

 

I wrote the code for PVP on a 1 Tick chart and I am not even using arrays, just simple code keeping track of the highest volume at price traded and it is taking forever....

 

Thanks,

 

dbntina

[jperl 11]

However, I am assuming for the PVP you get that calculated on a Tick by Tick basis is that correct? Or do you also just do it on a 2 minute bar chart for example and take the price as o+h+l+c/4 and volume of that bar?

dbntina

 

the PVP is computed by ensignsoftware. I believe it's computed on a bar by bar basis by dividing the volume for the bar equally between the fixed tick size interval for each bar. However you can ask Howard Arrington at ensign about that

[BlowFish 10]

Jerry,

 

I wrote the code for PVP on a 1 Tick chart and I am not even using arrays, just simple code keeping track of the highest volume at price traded and it is taking forever....

 

Thanks,

 

dbntina

 

Don't you need to store the volume at every price level somwhere? I can't see how you can do that effectively without an array (but I can be pretty dumb sometimes). I guess you could have a variable for each price level or something?

 

I'm being dense again here do you mean its taking forever to calculate or ages to code ?

[BlowFish 10]

Aha - I guess you are running through all the bars for the day and re accumulating each whenever a new bar comes in?

[BlowFish 10]

I've been messing around this morning (probably as an excuse not to trade). having said that the results are starting to look promising. Image attached.

[BlowFish 10]

A sequence from today. One think I am asking myself is whether to wait for a close through the vwap and then a final kiss goodbye or whether to take the trade as price pulls through.

 

Here is a sequence of DAX trades using the latter am I on the right track Jerry? a couple of inetresting areas the 'flip' (pvp and vwap) around 8.00 and then about an hours consolidation. Also 11 until curent time further consolidation with a nasty spike to our stop at PoC!

 

Despite some unpleasantness I think it looks profitable on the morning. (thats assuming I have got things correct.) I am thinking you might not take the trade right after a flip or the one after when PvP and VWAP are pretty close (not much skew).

 

Comments welcome.

Cheers.

[jperl 11]

A sequence from today. One think I am asking myself is whether to wait for a close through the vwap and then a final kiss goodbye or whether to take the trade as price pulls through.

 

Nice charts BlowFish.

 

On the first chart, the first blue up arrow at the VWAP is a good entry. You pull the trigger on the retrace when price is at 1 tick above the VWAP.

If you are an aggressive trader, you would have pulled the trigger 5 bars back when price crossed the VWAP, maybe exited the trade part way up and then pulled the trigger a second time on the retrace. Again this is all a matter of style.

 

3 bars after the retrace, you notice price touched the 1st SD. If you were in a trade with more than 1 contract, exit half there and hold on for the ride up to the 2nd SD with stop at break even. You would have been stopped out of course, on the second contract, but that's ok, you made your profit on the trade.

 

a couple of inetresting areas the 'flip' (pvp and vwap) around 8.00 and then about an hours consolidation.

We'll discuss what to do when the PVP abruptly changes in the next thread on counter trend trading.

 

Despite some unpleasantness I think it looks profitable on the morning. I am thinking you might not take the trade right after a flip or the one after when PvP and VWAP are pretty close (not much skew).

Again that's coming up in the next thread. When the PVP changes so the skew flips sign (in your chart from positive to negative), life gets very interesting and dangerous. The next thread and beyond will be the start of the advanced trader's threads.

 

 

Comments welcome.

Cheers.

[dbntina 10]

Blowfish,

 

Nice job...I am guessing that is not tradestation? I am wishing upon a star...he he.

 

Blowfish...correct I was iterating each bar but I realize that is going to take up more resources then just doing an array and adding the volume one time on each successive tick...oh well.

 

I can do it through an array...in fact doing it right now.

 

The problem I am going to have is getting the data from the tick to a 2minute chart using ADE. Great tool but not a lot of documentation. The syntax is not hard but understanding the logic and transferring the code to a higher timeframe is not as common apparently as people using it from a higher timeframe to plot on smaller timeframe.

 

Once I get the logic on the tick timeframe...I might need help from others on using ADE to get it to the higher tf and then altering the code on the higher tf.

 

Thanks,

 

dbntina

[O66 10]

Thanks for sharing Jperl!

 

Your timing is perfect after 4.5 years trying i'm more then ready to say goodbye to the classic indicators like CCI , MA, etc.

 

Im looking forward to the next threads and videos

 

Im using MultiCharts whice uses ELD's like tradestation.

I found someone who can create the pvp.

 

Is plotting on a (2 min) intraday chart enough or does the ELD for pvp needs more functionality for the upcomming lessons ? (plotting weekly ? etc.)

 

thanks!

[walterw 10]

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)

 

 

Hi Dog, can you share your eld of vwap and sd`s.. ? thanks Walter.

[BlowFish 10]

Blowfish,

 

 

Once I get the logic on the tick timeframe...I might need help from others on using ADE to get it to the higher tf and then altering the code on the higher tf.

 

Thanks,

 

dbntina

 

Yeah Id be inclined just to use single time frame to start out and worry about ADE later (if at all). AS Gerry points out the approximation using 2 minute bars is adequate for him (having said that Ensign probably accumulates volume in real time).

[houghton 10]

Blowfish,

 

The profile in your chart above looks a lot like the one I found in this TS Forum thread: https://www.tradestation.com/Discussions/Topic.aspx?Topic_ID=50398&SearchTerm=Market%20Profile&txtExactMatch=

 

Sorry, I couldn't get the hyperlink to work properly. Anyway, if so, I downloaded the ELD for 8.1 but can't get it to display on a chart. Any tips?

 

Thanks,

Karl