Trading with Market Statistics VII. Breakout Trades at the PVP

[nickm001 10]

if you are not using tick charts, then the volume withing the bar is a composite volume and one does not know at what price it happened, so one way to deal with it is to average the volume over the price range of the bar.

[BlowFish 10]

if you are not using tick charts, then the volume withing the bar is a composite volume and one does not know at what price it happened, so one way to deal with it is to average the volume over the price range of the bar.

 

Actually that's not strictly true OK OK forgive me I'm being pedantic now By running the indicator real time and updating on every tick you can get precise values, even on a 2 min chart. This is the approach that all the market delta (volume@bid vs volume @ask) type indicators use. I did not suggest this approach because they are limited in application (won't run on historical data, only real time).

 

Ensign is subject to no such limitation. It seems Howard has chosen to implement things this way in the accuracy vs speed trade off.

 

Actually I think it was you that raised the original question Nick, when dbtina started on the new indicator. Maybe I misunderstood the sentiment behind the original question, but I got the impression it was "is an approximation good enough?" As Ensign uses an approximation too (and Jerry uses this to base his approach on) the answer to that would have to be "Yes" .

 

Forgive me if this was not the sentiment behind the question.

 

Perhaps what we should be asking is "could precise calculation make the method more profitable?" Maybe we shouldn't (ask this)! It seems to illustrate that really the accuracy of the tool (i'd go further and say even the tool you use) is not the crucial factor in trading success.

 

I have been watching approximated charts against precise charts and they have a slightly different feel to them but I'd hesitate to say either was better. Actually I quite like using a 'bell' type distribution over the range of the bar. I use a sin wave as I don't know how to generate a normal distribution.

 

In summary accuracy dosen't bother me too much as long as it is within 'acceptable' limits. maybe this is not so for others.

 

Cheers,

[nickm001 10]

The sentiment on accuracy was different, related to how to treat volume of the 2 min bar vs subtotal of the volume@price... but I commented then, that it is close enough as approximation and it doesn't matter. I tend to favour simplicity and speed over accuracy, especially if you wan to run multiple copies of MP on all indeces and few time frames...

I totally agree with second part of your post... will the added accuracy change the net profit or not is the real question...

[bh_trade 10]

Jerry:

 

I would like to thank you for this entire series of very enlightening threads.

 

I am a Tradestation user and have been trying to look at the markets intraday using the VWAP/PVP concepts discussed in earlier threads. It is difficult to visually keep up with the TS matrix as a substitute for a price/volume histogram indicator right on the chart. The other thing I have noticed is that indeed PVP jumps all over the place many times throughout the day and seemingly would lead to difficulty in consistent trading. Perhaps that is due to my untrained eye.

[jperl 11]

The other thing I have noticed is that indeed PVP jumps all over the place many times throughout the day and seemingly would lead to difficulty in consistent trading. Perhaps that is due to my untrained eye.

You are correct bh_trade. PVP does jump around especially at the beginning of the day when the volume histogram is first developing. It's important to know the relation between PVP and VWAP in order to understand the price action. Hopefully these threads will help you understand how price action is connected to this relation.

[jperl 11]

Jerry,

 

Here is yesterdays NQ chart.

 

The blue dotted line is the tick by tick pvp.

 

The red dotted line is the averaging bar volume over the price levels PVP.

 

You can see the 2 minute is way off.

 

You can see the 1 minute is a little closer.

 

It can be way off at times when you have peaks that are close at two different levels.

 

 

dbntina

 

There is something I don't understand dbntina.

On your 2 minute chart, it looks like the tick by tick PVP is constant for the entire day at around the 1907 value, whereas on the 1 minute chart it jumps up for a short time and then back down again.

Why the difference?

[dbntina 10]

Jerry,

 

The blue line is the tick by tick PVP. It is constantly updating and moving all over the chart if you look at it.

 

The red lines are the distributed volume...they hardly move at all.

 

At least the 1 minute moves a little more and is closer to the tick by tick movement.

 

dbntina

[jperl 11]

Jerry,

 

The blue line is the tick by tick PVP. It is constantly updating and moving all over the chart if you look at it.

 

The red lines are the distributed volume...they hardly move at all.

 

At least the 1 minute moves a little more and is closer to the tick by tick movement.

 

dbntina

 

OK, sorry db, I had it backwards. In any case here is my data for the PVP values of NQ for August 15 on a 2 minute chart (times are east coast). You can compare these with your computations:

TIME, PVP

9::30 to 10:18 ,1907.25

10:18 to 11:00 ,1915.50

11:00 to 11:16 ,1914.50

11:16 to 11:32 ,1912.00

11:32 to 11:34 ,1915.50

11:34 to 12:30 ,1912.00

12:30 to 14:18 ,1907.25

14:18 to 14:40 ,1912.00

14:40 to EOD , 1907.25

 

A lot of jumping around

[dbntina 10]

Jerry,

 

Here is what I have for Aug 15:

 

Yours Tick by Tick

 

9:30 to 10:18 1907.25 9:30-9:33 1906.75

 

9:34-9:35 1907.25

 

9:36-10:11 1906.75

 

10:12-10:15 1914

 

10:18 to 11:00 1915.50 10:16-11:25 1915

11:00 to 11:16 1914.50

 

11:16 to 11:32 1912.00 11:26-11:31 1914

 

11:32 to 11:34 1915.50 11:32-11:33 1915

 

11:34 to 12:30 1912.00 11:34-12:52 1914

12:30 to 14:18 1907.25 12:53-14:25 1907.50

14:18 to 14:40 1912.00 14:26-14:41 1910

 

14:40 to EOD 1907.25 14:42-EOD 1907.50

 

 

So they are pretty close for the most part...not too bad.

 

dbntina

[walterw 10]

Ok... I am following this thread from the very begining.... I will interact now...

 

First of all thanks Jerry for such great job and for introducing this excellent concepts you have developed over time...

 

My question here I believe has some sense (hope) and it really got me thinking after watching the august 10th video and also looking a chart posted here by dbntina...

 

IF we where to be strict on the trend definition given by the skew... then so far it has been presented the entry ( example for shorts) on vwap area as on the sd`s below the vwap... now I wonder, if we have a down skew and we are like the first example on the video on the 1rts SD above vwap, wouldnt this be an actual competitive place to take a short ? thought we still have a down skew and we are testing a sd level... I attach two charts posted by dbntina where we have the same scenario.... expect your feedback...

 

PD: I am about to test ensign, any hint how I can program the sd`s for vwap ?... thanks in advance Walter.

[jperl 11]

 

IF we where to be strict on the trend definition given by the skew... then so far it has been presented the entry ( example for shorts) on vwap area as on the sd`s below the vwap... now I wonder, if we have a down skew and we are like the first example on the video on the 1rts SD above vwap, wouldnt this be an actual competitive place to take a short ? thought we still have a down skew and we are testing a sd level... I attach two charts posted by dbntina where we have the same scenario.... expect your feedback...

 

The simple answer to your question walter is yes. What complicates the anwser however, is that the price action is in a region (low volume region) where a break out against the skew is very likely. Also, price action is on the wrong side of the VWAP, so the trend is up. In addition, price action is above the PVP which acts as a HUP (Hold UP Price) for the short. So be cautious here. Use the Shapiro effect to enter the short, but bail out immediately if the SD is violated to the upside. Similarly for longs.

 

I am about to test ensign, any hint how I can program the sd`s for vwap ?... thanks in advance Walter.

 

VWAP itself is available as a Design Your Own (DYO) study in ensign.

For the SD's I'm sure if you send a note to Howard, he would be happy to write a DYO to compute the SD.

[BlowFish 10]

Jerry I am still trying to get my head around the observation I made in the last thread. Here is probably a better venue!

 

From Thread II:

 

"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."

 

This is the crux of the method to me, the skew (or bias as I think of it). Perhaps this is the error in my thinking. I can't help drawing the conclusion that the VWAP 'leads' the PvP. Maybe this is not a good way of thinking about it.

 

This thread deals with when price and the PvP find themselves in the same place. One way (the one that I have some trouble with) is a) when the PvP jumps to price.

 

Another quote - "When price action is near the PVP, price is sandwiched between the VWAP and an SD or betwen 2 SD's. You might notice that price will tend to oscillate back and forth for a while between the VWAP and the SD, across the PVP line or oscillate between the 2 SD's. The market is thinking."

 

It seems to me ths behaviour is more common in senario b) price moves to pvp. In type a) senarios PvP moves to price, price often continues in the same direction with great vigour. The market is not thinking in this senario it has clear intent! The interesting thing here is the skew is reversed and can remain reversed for some time as the PvP stair steps along with the price action. This seems like a second variation of type a) behaviour that you have not talked about.

 

I know I haven't really asked a question here Jerry. I am simply having trouble with this behaviour -i breakout after breakout after breakout in the same direction. It often occurs when a strong base (PvP) has not had a chance to form and then price takes off on increasing volume dragging the PvP with it in 'stair steps'.

 

Anything you might have to say on this would be welcomed. I have re-posted a couple of charts that illustrate the behaviour 4&5 lead on 7 is seperate.

 

Cheers,

Nick

[walterw 10]

Thanks Jerry for response, its clear that it would be an agressive entry and I agree as presented also on video that tight stops or BE stops should be implemented on this case diferent to the more generous tolerance used for the regular vwap trades...

 

One more question... being at the extreme of the 2nd SD, have you experimented doing counter "refresh" trades to the VWAP... wich would be nice on a cylce day ? just curious if you trade that type of strategy... thanks Walter.

[jperl 11]

One more question... being at the extreme of the 2nd SD, have you experimented doing counter "refresh" trades to the VWAP... wich would be nice on a cylce day ? just curious if you trade that type of strategy... thanks Walter.

Glad you asked Walter. That's coming up in the next thread on trading symmetric distributions.

[darthtrader 10]

Jerry, I just rewatched a few of the videos and I'm unsure of why you would manage a winning trade as such.

Say you take a trade at vwap with 1 contract, price goes to 1 std dev, you get filled on the exit, winner...

 

If your trading multiple contracts though, same thing happens.3 for instance. Does it really make sense to scale out and leave a runner? Wouldn't it make more sense to take it all off the table, wait for the Shapiro effect at 1st std dev, then put on 2 contracts, and keep one in reserve incase price moves back to wvap?

 

If that is not totally wrong then I'm also wondering if you have some measure based on probability that would dictate putting on 2 contracts at 1 std dev and keeping 1 in reserve vs putting on 1 contract and keeping 2 in reserve?

[jperl 11]

This is the crux of the method to me, the skew (or bias as I think of it). Perhaps this is the error in my thinking. I can't help drawing the conclusion that the VWAP 'leads' the PvP. Maybe this is not a good way of thinking about it.

Not sure Nick what you mean by VWAP leading the PVP. If you mean for example that when the VWAP is less than the PVP and stays that way, then yes you would only look for short trades, until there is either a change in the sign of the skew or price action moves back to the PVP. At that point you are going to have to rethink any new trade entry.

 

This thread deals with when price and the PvP find themselves in the same place. One way (the one that I have some trouble with) is a) when the PvP jumps to price.

 

Another quote - "When price action is near the PVP, price is sandwiched between the VWAP and an SD or betwen 2 SD's. You might notice that price will tend to oscillate back and forth for a while between the VWAP and the SD, across the PVP line or oscillate between the 2 SD's. The market is thinking."

 

It seems to me ths behaviour is more common in senario b) price moves to pvp. In type a) senarios PvP moves to price, price often continues in the same direction with great vigour. The market is not thinking in this senario it has clear intent! The interesting thing here is the skew is reversed and can remain reversed for some time as the PvP stair steps along with the price action. This seems like a second variation of type a) behaviour that you have not talked about.

 

Ok, I think I understand what you may be asking. Let me phrase it as a question:

Is there a distinction to be made between a)PVP moving to the price action and b) price action moving to the PVP.

 

My initial thinking about this was similar to yours. That if the PVP suddenly jumped to the price action, it was still trying to establish itself and hence the price action would continue in the same direction. But after seeing a lot of this type of behavior (that is, PVP jumping to the price action) and noting that sometimes it continued in the same direction and other times it would reverse, I've concluded that the best you can do if you want to trade in this region is wait for the break through an SD or VWAP before taking a trade. In some cases this means taking a trade in the same direction as the trend, in other cases it means taking a trade against the trend. Is it dangerous? Yes. That's why I've waited seven threads to talk about it.

As far as the stair stepping of the PVP goes, I think each stair step down say has to be considered on it's own merits. When the PVP drops from one point to a new point, you have to re-ask yourself the same question, is a reversal iminent. Will the price action take the market up and break out the nearest SD above the present price.

 

You can also do the following thought experiment. Suppose you walked into a room for the first time and you saw a monitor displaying a real time chart with the price action at the PVP. Is there anyway for you to tell without going back in time, whether the PVP jumped to that price action or the price action moved to the PVP? The answer is no. Until the price action breaks through the nearest SD, you really can't say much about which direction you would look for a trade.

Now compare that to walking into the same room and seeing the VWAP below the PVP and the price action below the VWAP. In this case you would know immediately which way to look for a trade.

[BlowFish 10]

Thanks for your reply. I have been thinking more about this (maybe too much). I think part of the issue is to do with starting indicators at session start. It takes time (well it takes volume but that volume needs time to build) for a 'solid' PvP to build. If you trend from the open you will get quite a flat distribution. In that case the PvP will not have an awful lot more volume than other levels due to the flat distribution. I think I have probably over thought this.

 

Perhaps a better question is how long (into the session) do you wait before trades? Do you have different criteria if the market just takes off or opens in 'balance'?

[jperl 11]

Jerry, I just rewatched a few of the videos and I'm unsure of why you would manage a winning trade as such.

Say you take a trade at vwap with 1 contract, price goes to 1 std dev, you get filled on the exit, winner...

 

If your trading multiple contracts though, same thing happens.3 for instance. Does it really make sense to scale out and leave a runner?

Well condsider the profit in each case.

Trade 3 contracts at VWAP, exit all at 1st SD. Profit 3SD

Trade 3 contracts, remove 2 at 1st SD, remove 1 at 2nd SD. Profit 2SD for the first 2 contracts and 2SD for the last contract. Total profit 4SD.

 

Wouldn't it make more sense to take it all off the table, wait for the Shapiro effect at 1st std dev, then put on 2 contracts, and keep one in reserve incase price moves back to wvap?

This one is not a good idea. If you trade 2 at the 1st SD and price moves against you back to the VWAP, you are going to want to put 2 more contracts on, so that break even is a 50% retrace. If you put only 1 on, break even is a 67% retace, leaving you hardly any profit potential back to the 1st SD.

Which brings me to another point. If you are using risk tolerance as a trading philosophy, and you are comfortable trading only 4 contracts. Your initial entry better be 2 contracts or less. Do you understand why?

 

I'm also wondering if you have some measure based on probability that would dictate putting on 2 contracts at 1 std dev and keeping 1 in reserve vs putting on 1 contract and keeping 2 in reserve?

Again if I am trading using risk tolerance, and 3 contracts is my limit, your only choice is 1 contract on, keep two in reserve. In this mode, if you enter 1 contract at 1st SD and market moves back to VWAP, you can put 2 more on and have break even at 33% retrace. That's usually a pretty good bet.

[jperl 11]

how long (into the session) do you wait before trades? Do you have different criteria if the market just takes off or opens in 'balance'?

 

At the open, you don't have any data for today. If I am not using any HUP from previous days (yet to be discussed), then I wait until the range of the bars is smaller than 1 SD, before considering any trades. This of course means I miss all that great action at the beginning when the market takes off in one direction or oscillates rapidly. So be it. We will talk about trading at the HUP on the open in an up coming thread.

[dbntina 10]

Jerry,

 

I am really enjoying the threads...just taking it all in.

 

1) Using something that actually is based on valid

conceptual information (not on a bunch of worthless

indicators)

 

2) Not using the standard small stops and constant

bleeding of account (love the risk tolerance concept)

 

Keep it coming...the breakout method is definitely

not my cup of tea (too much like the other ways

I have traded in the past constant stop taking

and breakeven stops)

 

Good stuff...Thanks,

 

dbntina

[jperl 11]

the breakout method is definitely

not my cup of tea (too much like the other ways

I have traded in the past constant stop taking

and breakeven stops)

 

I realize that breakouts can be touchy trades, but try using the Shapiro effect to trade the breakouts (see post 16541 ). Sometimes there will be a retrace and you will be able to catch this trade for a big move.

[darthtrader 10]

Do you understand why?

 

hmm...I feel like the kid that skipped their math homework. I'm going to go back and review the risk tolerance thread, I'm a bit shakey to give an exact answer to that without mostly guessing.

[Dogpile 10]

<<In the second video, we again see price action in the PVP area, but this time price breaks through the VWAP. We show how to apply the Shapiro Effect discussed in post 16541 to enter the trade.>>

 

By my way of looking at it -- the 'Shapiro Effect' is effectively using a pattern to enter a trade (a break of a 2-min high/low to confirm entry at a level with a statistical edge). It is the combination of statistics and price patterns where I think this gets powerful.... Patterns are not so great by themselves and neither are statistics -- but put the two together is where the secret sauce is... just my opinion.

 

I am not so impressed with the 'Shapiro Effect' but I do view this direction as awesome Jerry -- great job in this stuff. Through reading your threads, I have added some statistical concepts to my own pattern-recognition trading that has really made a difference. Thanks to all.

[jperl 11]

 

I am not so impressed with the 'Shapiro Effect' but I do view this direction as awesome Jerry -- great job in this stuff. Through reading your threads, I have added some statistical concepts to my own pattern-recognition trading that has really made a difference. Thanks to all.

 

Glad you find the statistics useful Dogpile. As far as the Shapiro Effect is concerned, it's not a pattern in the usual sense of patterns as defined by Bulkowski, but rather a simple statement of implied market direction. The breaking of a high/low is just my interpretation. You can use any other wait period of your own choosing.

[Dogpile 10]

is it fair to say that PVP is really a proxy for peak volume area? I mean, if you have a cluster of huge volume in one area -- but the PVP happens to be slightly higher in another area, it would seem to me that the cluster of huge volume is more important than the particular PVP... is that right?