What is DEMAND/SUPPLY volume?

[jperl 11]

This thread is started as a result of a short discussion by Tasuki in the Volume Spread Analysis posts 982 and 991 to quantify the concepts of DEMAND and SUPPLY volume. The problem arises on how to define DEMAND volume and SUPPLY volume. Some traders define trades made at the ask as DEMAND volume, trades made at the bid as SUPPLY volume. Other traders would say volume should be considered DEMAND only if there is an uptick in price and SUPPLY only if there is a down tick in price. If price does not change, then that trade is taken to be DEMAND volume if the last time price changed was an up tick and SUPPLY volume if the last time price changed was a down tick.

 

The former definition is used by Mister Ed in the following quote from the VSA thread

  mister ed said:

Let’s say there is a sequence thus:

1. Bid = 25

2. Ask = 50

3. Trade at 50 for 75 lots. (This is an aggressive buy – reported as a buy)

4. Bid is now 50

5. Ask = 75

6. Trade at 50 for 30 lots. (This is an aggressive sell – reported as a sell).

 

In that series of trades, trade 3 would be DEMAND volume of 75 lots because it occurred at the ask and trade 6 would be SUPPLY volume of 30 lots because it occurred at the bid.

 

For the alternative definition of DEMAND/SUPPLY (which I prefer) consider the following series of trades

1.Bid =25,Ask=50, trade at 25 for 25 lots

2 Bid=25,Ask=50, trade at 50 for 75 lots

3.Bid changes to 50, Ask changes to 75, trade at 50 for 30 lots

 

In this scenario, trade 2 would be DEMAND volume of 75 lots because there was an uptick from trade 1 from 25 to 50.

Trade 3 would also be DEMAND volume of 30 lots (even though it occurred at the bid at the same price as trade 2) because the last price change was an up tick(trade 2 after trade 1).

This is not a small difference in definition and is crucial for quantifying many of the ideas in VSA.

This thread is now open for discussion.

[mister ed 10]

  jperl said:

This thread is started as a result of a short discussion by Tasuki in the Volume Spread Analysis posts 982 and 991 to quantify the concepts of DEMAND and SUPPLY volume. The problem arises on how to define DEMAND volume and SUPPLY volume. Some traders define trades made at the ask as DEMAND volume, trades made at the bid as SUPPLY volume. Other traders would say volume should be considered DEMAND only if there is an uptick in price and SUPPLY only if there is a down tick in price. If price does not change, then that trade is taken to be DEMAND volume if the last time price changed was an up tick and SUPPLY volume if the last time price changed was a down tick.

 

The former definition is used by Mister Ed in the following quote from the VSA thread

 

 

In that series of trades, trade 3 would be DEMAND volume of 75 lots because it occurred at the ask and trade 6 would be SUPPLY volume of 30 lots because it occurred at the bid.

 

For the alternative definition of DEMAND/SUPPLY (which I prefer) consider the following series of trades

1.Bid =25,Ask=50, trade at 25 for 25 lots

2 Bid=25,Ask=50, trade at 50 for 75 lots

3.Bid changes to 50, Ask changes to 75, trade at 50 for 30 lots

 

In this scenario, trade 2 would be DEMAND volume of 75 lots because there was an uptick from trade 1 from 25 to 50.

Trade 3 would also be DEMAND volume of 30 lots (even though it occurred at the bid at the same price as trade 2) because the last price change was an up tick(trade 2 after trade 1).

This is not a small difference in definition and is crucial for quantifying many of the ideas in VSA.

This thread is now open for discussion.

 

New thread! OK.

 

Just to reiterate Jerry - yes we are in complete disagreement about our definitions :haha:

[mister ed 10]

By the way Jerry, and all, this thread should not be limited to just discussing the definition of bid / ask or Demand / Supply volume - I hope we can find more to discuss than just the definition.

 

But while we are on that subject I think it would be worthwhile finding out what definition is used in TradeStation, it is a popular package and be good to know.

[BlowFish 10]

  mister ed said:

 

3. I have an issue with smart = big. Observation of the big-lot trades that go through suggests to me that the big lot traders are not necessarily “smartâ€Â. It is logical that smart = big, but in my experience, not all big = smart. This may be an issue with how the data is presented, and I would love input on this. I am only speaking of the ES, my current understanding is that a 100 lot buy (i.e. a buyer who hits the ask for 100) is reported as a 100 lot buy even if he buys from a split of sellers, say a 5, 10, 15, 10, 30, 20, 10). Another point is the software exists to allow trade size to be split, so instead of executing one lot of 200 near-simultaneous execution of 4 lots of 50 (for arguments sake) can be done instead. My broker even offers a humble trader like me an “iceberg†facility to split up my limit orders.

 

 

Glad you agreed with most of my post . This was a bit sloppy on my part. VSA tends to use 'smart money' as a type of catch all for the guys that are privy to stuff we dont know, it is kind of implied that they also have the guys that take massive positions. Really there is just a right side and a wrong side in the timeframe you trade!! As I mention now and then the commitment of traders report would indicate The % winners and losers don't really vary that much amongst the various market participants. In a nutshell I agree the big guys loose too. The way I see it (which maybe a bit different to the pure VSA view) is that there is 'smart money' that knows stuff we don't or simply has there own agenda. They are probably 'large'. Where I agree with you and perhaps stray from the pure VSA view is there are also a whole bunch of 'dumb' participants trading size too. Anyway I digress.

 

The thing you introduce is the other piece of information that we can use as traders. That is the order book. Basically its inventory the participants choose to advertise. Incidentally I think this is another area where people tend to use intuition and get it wrong. If you watch the order book price tends to move towards size not away from it. In fact the old timers say 'size trades to size'.

 

I think probably one of the key thing is how the advertised inventory (order book) reacts to the aggressive sellers. I have noticed a few things but I find it quite tricky sometimes. As yet I have never discovered a tape reader that can really explain it!

 

Anyway I hope we can get some practical application out of this stuff as it is unique market generated data.

 

Cheers

[jperl 11]

For those of you who use Investor R/T software, you have a choice on how you break down volume, the Mister Ed version (bid/ask) or my version (uptick/downtick). Here is a quote from their site:

 

http://www.linnsoft.com/new/index86.html

The Volume Breakdown Indicator (VB) has been enhanced with an option to divide up volume by "Up Tick vs Down Tick Volume". In the past, volume was always broken down between Ask Traded and Bid Traded volume. Now, the user has a choice of dividing up Buy and Sell volume as either "Ask Traded vs Bid Traded Volume" or "Up Tick vs Down Tick Volume. When "Up Tick vs Down Tick Volume" is specified, each trade that occurs on or after an uptick is placed in the buy volume category, while any trade that occurs on or after a downtick is considered in the sell volume category.

[monad 10]

  jperl said:

For those of you who use Investor R/T software, you have a choice on how you break down volume, the Mister Ed version (bid/ask) or my version (uptick/downtick). Here is a quote from their site:

 

http://www.linnsoft.com/new/index86.html

The Volume Breakdown Indicator (VB) has been enhanced with an option to divide up volume by "Up Tick vs Down Tick Volume". In the past, volume was always broken down between Ask Traded and Bid Traded volume. Now, the user has a choice of dividing up Buy and Sell volume as either "Ask Traded vs Bid Traded Volume" or "Up Tick vs Down Tick Volume. When "Up Tick vs Down Tick Volume" is specified, each trade that occurs on or after an uptick is placed in the buy volume category, while any trade that occurs on or after a downtick is considered in the sell volume category.

 

 

As I have mentioned on the VSA thread, the most productive way forward is to illustrate these issues via observations on a chart with some realtime trades and get them posted so that all can benefit, who knows Sebastian and Co may decide to incorporate in their analysis and in any charting software they may be developing.

[mister ed 10]

Well, new thread and already I am learning! Jerry - thanks for the tip re option in IR/T - I will compare our two definitions and see the pros & cons for each.

 

BF and Monad - past bedtime here, will go through posts more thoroughly when fully awake...

[BlowFish 10]

  jperl said:

For those of you who use Investor R/T software, you have a choice on how you break down volume, the Mister Ed version (bid/ask) or my version (uptick/downtick). Here is a quote from their site:

 

http://www.linnsoft.com/new/index86.html

The Volume Breakdown Indicator (VB) has been enhanced with an option to divide up volume by "Up Tick vs Down Tick Volume". In the past, volume was always broken down between Ask Traded and Bid Traded volume. Now, the user has a choice of dividing up Buy and Sell volume as either "Ask Traded vs Bid Traded Volume" or "Up Tick vs Down Tick Volume. When "Up Tick vs Down Tick Volume" is specified, each trade that occurs on or after an uptick is placed in the buy volume category, while any trade that occurs on or after a downtick is considered in the sell volume category.

 

Hi Jerry,

 

I have looked at both and uptick/downtick looks like a good 'proxy' for volume at bid/ask. While not identical they look very similar.

 

If you think about it price is likely to tick up to the ask and down to the bid. Of course you do get cases where this is not the case but on the whole the two look very similar. Tradestation offers this uptick downtick natively though there are indicators available to do @bid @ask.

 

Cheers.

 

P.S. I cant post charts right now as they only accumulate the volume corectly in real time.

[jperl 11]

And for those of you who use TradeStation, according to epiktetos at post 12637 the following is the info about upticks vs down ticks:

 

"TS uses the following rules when assigning a tick to the reserved word UpTicks:An uptick is a tick whose price is higher than that of the previous tick of a different price. Thus, if tick 1 occurs at a given price, tick 2 occurs at a higher price, and tick 3 occurs at the same price as tick 2, both tick 2 and tick 3 are counted as upticks."

[mister ed 10]

BF – interesting points about the “smart money†you make “that knows stuff we don't or simply has there own agenda†– yes agree with you on both. I also think there is less of it than perhaps we assume. I have heard figures bandied around that 85% of activity is related to smart money, the figures and definitions are vague (at least to my understanding) but I can’t think that number is anywhere near accurate.

 

It is important to differentiate between size and smart – there is plenty of big lots traders bumping up against big lot traders activity, and one, at least, has to be on the wrong side. The point you make about sometimes they just have their own agenda is true, in MP you would refer to it as the other timeframe trader I believe, and a lot of the time their activity in the smaller timeframe is not at all “smart†– “just get me set†would seem to be a better description of their activity sometimes.

 

Now the order book – trade towards size is very accurate. I have heard two good, plausible explanations. One is that if the price is moving up towards large offers it is because there is no point sticking in a limit bid and waiting to get set, the price is moving up so may as well pay the offer and get in, the reason there are large offers sitting there is because in an up move the sellers can afford to sit on the offer and wait, hence the market moves towards size. Sounds plausible. The other explanation I have heard is “herding the sheepâ€Â. Stick in big offers just above market to spoof it while getting filled on the bid with iceberg limit buys. Must be one of the few instances in the business world where stuff is advertised for sale with no intention of actually selling it. This second explanation is my preferred model.

 

It is very interesting when this herding is occurring. I am not much of a watcher of DOM beyond when I am executing my own orders, most of the time I am watching my charts instead. But there are times when the nature of the trade changes, it is hard to explain but the range/volatility contracts while volumes remain reasonably strong. Sure enough I will flick over to DOM and there they are, offers in the thousands just above the market offer. As the market ticks higher so do these large offers, close but tantalizingly out of reach! Call me a cynic, but worth a look.

 

-------

 

I am still pondering on the 2 definitions slugging it out at present. Each definition will give a unique view of the market activity – the two are going to be very similar overall but at times will be distinctly different, and I think these differences will be at key points. I think its all in the way the price reacts to what is going on, as always. I am yet to go through some playback charts and look at these differences but on the brief look I have had I have a sneaking suspicion that my conclusion is going to be that both definitions offer valuable insights and maybe there is a role for using both. Anyone else doing the same thing, be good to hear other input.

[monad 10]

Blowfish has made some very pertinent points at elite trader on this matter:

http://www.elitetrader.com/vb/showthread.php?s=&threadid=92158&perpage=6&highlight=volume%20delta&pagenumber=3

[Skog 10]

Here is an interesting document on this subject.

 

Written by Richard Malato of MarketDelta.

 

It was posted on their website a couple of years ago. Don't know if it's still there, but you can at least read it here.

 

It gives you a thorough introduction to the microstructure of the auction process in the electronic markets and clearly describes the relationship between aggressive and passive traders.

 

Enjoy.

 

-Skog

MarketDelta_White_Paper.docFetching info...

[darthtrader 10]

  mister ed said:

both definitions offer valuable insights and maybe there is a role for using both.

 

I think it would be interesting to see what it would look like if you only plotted volume that was hit at the ask AND the previous tick was an uptick and vice versa. Or take it even further, 3 upticks then then an ask getting hit. That to me would be a much better way to define an aggressive buyer or seller and then just view everything else as noise. I think the problem though for this is you would need a true tick feed and the way tradestation handles this it wouldn't even make sense.

[BlowFish 10]

  monad said:

Blowfish has made some very pertinent points at elite trader on this matter:

http://www.elitetrader.com/vb/showthread.php?s=&threadid=92158&perpage=6&highlight=volume%20delta&pagenumber=3

 

I had forgotten about that thanks for pointing it out.

[BlowFish 10]

Mr Ed,

 

Why market moves to size I don't really bother myself too much about any more. Observation shows it does. (Though there are many interesting reasons put forward and I certainly like to hear them).

 

There is a particular type of order that doesn't show on the book but sits there all stealthy like. The good old stop. Guess what, every one who has been trading for a while knows exactly where those are likely to be situated....one obvious place is above/below previous swing highs and lows. This is why we see 'tests' and backing and filling it's the basis of why price moves how it does. It is simply seeking out orders.

 

Actually that bought about a paradigm shift in me (though I forget it often in day to day trading so it is not ingrained yet). Essentially rather than price 'bouncing off support' these areas where orders are bunched or likely to be bunched are actually magnets for price. Put another way on the whole price moves too support or resistance. This is subtle difference but is interesting and I think exploitable.

 

Just some more food for though though I guess we need to start looking for specifics that might help us see what is going on.

 

Cheers.

[BlowFish 10]

Heres a couple of ES charts from this morning - the thing that cries out to me is that the price often drifts on a couple of ticks after the volume comes in. Oh and sometimes it comes in late. Any other observations welcome as this is quite experimental really. Edit: I added the arrows so you could see the bars the peaks occurred on.

 

Cheers,

[monad 10]

  BlowFish said:

Heres a couple of ES charts from this morning - the thing that cries out to me is that the price often drifts on a couple of ticks after the volume comes in. Oh and sometimes it comes in late. Any other observations welcome as this is quite experimental really. Edit: I added the arrows so you could see the bars the peaks occurred on.

 

Cheers,

 

What charting software you using Blowfish.

 

Is this upvolume/downvolume analysis similar to Market Delta. and if so have you found it useful in your trading, in conjunction with VSA

[brownsfan019 17]

  monad said:

What charting software you using Blowfish.

 

 

 

Just have to take a look.

 

[BlowFish 10]

It is volume@bid vs volume@ask on multicharts. Because each range bar is 1 tick wide it gives a visualisation of what volume was done at each level and what side. This chart is just a timing chart, currently I am looking at it after a turn to see if it shows something a 5 min and 2 min chart doesn't.

 

I am not using 'pure' VSA, though use price bars volume and channels for trade decisions. I have been observing this particular format of V@bis V@askfor a couple of weeks though have observed various delta configurations for a couple of years on and off.

 

My objective here is to see if this sort of resolution can nail turns a bit better. I think that delta lends itself better to fine resolution. The peaks on the charts would seem to confirm that. Its still quite experimental for me though I did scalp off footprint charts about 18 months (or maybe more) ago fairly successfully.

[BlowFish 10]

One of my motivations is to see if there is a way to read the tape without looking at the tape!

 

Another chart seem clear that someone decided support the market at the arrow. Is this useful to know? Maybe guess if there was potential support on my 5 min chart it might be. Of course this could still easily break later on.

[mister ed 10]

Well, this is another thread I cannot keep up with!

 

Been some great points and ideas brought up, I think one of the reasons I cant keep up is there is so much to mull over. Thanks for the charts BlowFish. I too am experimenting with this stuff, there are many combinations and permutations to play with.

 

Can I return back to the opening discussion Jerry and I were having? I have had a few thoughts. In a nutshell. the definition I have been exclusively using (I wont define it again, its in the earlier posts) up until now is, to my mind, just a “pure†bid/ask volume. I don’t mean that in a value-judgement way, what I mean is it is just data without any interpretation placed on it. The bid was hit? That’s an aggressive sell. The ask was hit? That’s an aggressive buy. (Yeah, OK, "aggressive" is an interpretation, just call it a "buy" or "sell" if you prefer).

 

The uptick/downtick definition, on the other hand, places an interpretation on the data before it is presented. The bid was hit? Well, before we classify it, what was the most previous price movement, an up- or down-tick? A downtick? OK, well that bid getting hit is “supply†then. On the other hand, if the tick prior was an uptick and that bid getting hit does not represent a downtick then that bid getting hit is “demandâ€Â.

 

See the difference? I would suggest using the uptick/downtick to classify the buys and sells is one step removed from the data. Is there anything wrong with that? Well, actually, I think no, there isn’t; and in fact I think classifying the hits in this way can be extremely useful. DarthTrader has suggested another alternative way of presenting the data, this too looks interesting.

 

I have attached a chart showing yesterday’s ES (3-minute chart), with the panes below plotting, in order: total volume, straight bid/ask volume, uptick/downtick bid/ask volume. Close examination will show how the two definitions of bid/ask volume show the data differently.

[BlowFish 10]

I meant to post a couple of 'failures' or 'anomalies' I closed my workspace before I did a screen capture <doh>. I'm going to slow up and mull over a few things. I cant remember what I have said already!

 

Did I mention price seems to often pass the level that sees the influx of 'paper' by a few ticks before it actually makes the turn? That's interesting. I wonder if its like some kind of test.

 

Cheers.

 

Edit: absolutely agree with what you said above btw. I think Aggressive is fine to use if we agree to define this as "is prepared to hit the bid/ask" or "is prepared to trade at the market". Doesn't mean she wants to punch the counter party :D

[mister ed 10]

  BlowFish said:

Did I mention price seems to often pass the level that sees the influx of 'paper' by a few ticks before it actually makes the turn? That's interesting. I wonder if its like some kind of test.

 

Happens a lot - more to investigate.

 

  BlowFish said:

Doesn't mean she wants to punch the counter party :D

 

Well, maybe sometimes....

[zdo 20]

In TS, for the last week or so have been watching KlingerGoslin() and TickMoneyFlow() indicators plotted in the same subgraph using a TickBar data stream.

Scaling for both indicators is on NoAxis, Date range on screen.

KGI parameters are set fast (c,3,10,16,34,55, 13, 1, Darkgreen, Darkred).

(If you need I can post pictures or the version of the KGI I'm using)

 

Their movement is usually highly correlated but they also show some pretty neat divergences / disagreements, etc.

Is this a ‘squigly lines’ representation of what this topic is exploring?? Thx

[BlowFish 10]

  zdo said:

In TS, for the last week or so have been watching KlingerGoslin() and TickMoneyFlow() indicators plotted in the same subgraph using a TickBar data stream.

Scaling for both indicators is on NoAxis, Date range on screen.

KGI parameters are set fast (c,3,10,16,34,55, 13, 1, Darkgreen, Darkred).

(If you need I can post pictures or the version of the KGI I'm using)

 

Their movement is usually highly correlated but they also show some pretty neat divergences / disagreements, etc.

Is this a ‘squigly lines’ representation of what this topic is exploring?? Thx

 

Most likely though it did not get me where I wanted to go. Maybe cause I just don't like squiggly lines! If you have a search over at ET for posts by 5pillars on delta you will get up to speed pretty quickly on delta divergence. I got the impression he's 'for real' though you never know for sure.

 

Cheers,