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[FulcrumTrader 10]

Fulcrum, I welcome your views, but I will post this which I wrote at another forum which explains why your using delta as a proxy for open interest is flawed in principle. I am not saying that you cannot be effective with it, I'm not saying you don't make money with it. I am simply saying that you are making assumptions about delta which, given its formula for calculation, are not correct, and thus invalidate it in the way you say you are using it. Here is my explanation below. Further, readers should note that Fulcrum is a vendor and thus should have a "C" by his name on this forum. While I do welcome your views, I do not want this thread to become an advertisement for the services and products you sell. You do very well at marketing yourself, but please don't do it in this thread.

 

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For every transaction there are two parties. When the two parties are both opening a new position or adding to an existing position (such as when both are flat, or where one is long and buys and the other is short and sells), open interest will increase. The calculation does not take into account whether the orders are at the market, or limits.

 

When the two parties are decreasing their positions, such as when a trader is long and sells and the other is short and buys, the open interest will decrease. Again, the calculation does not care about the type of order.

 

However, when someone who holds an existing long position (A) sells to someone who's flat (B), for example, the open interest does not change. Delta would change, and volume would change. However, it's simply a case where one trader who was "interested" is now flat, and one trader who was "not interested" is now "interested" -- so, while volume will increase as there was activity, the amount of positions taken in the market have not changed--B is now long, whereas A used to be long. It's simply a transfer of ownership of the contract.

 

Compare delta to open interest when A sells to B, and then B sells back to A. Volume will be 2, delta will either be 0 or 2, depending on the types of order used, but open interest will be 0.

 

As open interest declines, the number of open positions in the market are decreasing. When it increases, the number of open positions, or open interest, goes up. At the end of the day, if open interest has increased, then the number of traders who have a position in the market has gone up. If it has declined, then the number of traders with a "horse in the race" has gone down. However, volume will always be positive. And delta will again depend on the type of order used.

 

This is why delta is good IMO for a short term indication of who's trying to move the market, and then a comparison can be made if the price is reflecting that effort to move the market. However, delta will not say whether the number of outstanding contracts is up or down.

 

Thus, I don't think we can say either is "better" as they measure different things. However, we can say for a certainty that delta is calculated in such a way that it is impossible to determine how many positions are being held long or short; and open interest tells us exactly how many traders (contracts actually) are holding positions.

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Actually, I am not a vendor...I do not own or run FulcrumTrader site as of the transfer to THD months ago (TradersHelpDesk has full control now).

 

Also, you are off in your example of open interest tracking and we don't need to see what exactly every order was (opened new position or closed held position). It is a known absolute that price will not leave one price level and rally to levels 5 points above on a bunch of selling bias. Understanding the mechanism that takes price 5 points higher is the critical component - which is built upon SHORTS buying to cover and newly Initiated directional LONGS. This is all I need to know, so when price makes obvious to see directional changes, I know there was newly initiated directional trades as a component of the order flow bias - which at a specific pricing level changed the direction of price (newly initiated directional open interest - and the pricing level where the newly initiated activity started). You have to also understand how commercials carry their directional held inventory bias from one contract to the next (leading up to and through the rollover period).

 

I can see every price level where there was an obvious component of newly initiated directional trade to change the direction of price (MICRO Open Interest tracking). I can see the upper most and lower most levels of a price range, where at some point order flow bias (with newly initiated directional trade as a component) changed the direction of price back into the range (MACRO Open Interest tracking). With Delta tracking, I see the outer edges of the volume distribution - from the first day a contract trades to the last - the highest and lowest levels of price, where indexed Delta levels, at the shift in order flow bias drove price back into the previous range (where obviously newly initiated trade was a component of the order flow bias shift). Again, this is MACRO Open Interest tracking or seeing when futures instruments are at the edges of their volume distribution and extreme out of balance.

 

Large liquidity participants track order flow and open interest, not to see exactly what each and every single lot order was for (BUY, SELL, BUY to cover, SELL to cover). No...they know the exact components of the order flow bias that creates price movements (the constantly repeating order flow patterns that drive price). They also know from tracking the order flow bias, off each and every turn of price day to day, when a market has too many participants SHORT in relation to not many participants LONG (out of balance open interest in a down trending market or just the opposite in an uptrending market). If you get a chance to spend time with those in large liquidity futures trading firms, you will be able to get some insight how they use BID/ASK differential analysis.

Edited November 27, 2011 by FulcrumTrader

[FulcrumTrader 10]

excellent post FT.

Can you expand this out into what you are looking at and how you are tracking it to help bring us all into the loop.

You are one guy we can rely on to deliver the goods and not just wimp off with the excuse of "secrets or proprietary systems"

You can track Delta as a standard feature within the following charting programs with the one well proven feed of DTN.IQ;

 

Inv RT Pro

 

Marketdelta

 

Sierra Charts

[joshdance 10]

Anyone who read my above explanation of the delta calculation versus the open interest calculation should find it clear that logically, they cannot be so easily interchanged over long periods of time. You may think you're seeing "inventory," but the very calculation of delta precludes it from being used as such. You can go buy a compass and call it a "santa claus finder" too, but it will only do its job, which is to point north. Likewise, delta will do only one thing: measure contracts traded at the offer less contracts traded at the bid. There is nothing in the calculation which has a notion of inventory. There is no "memory" from one trader to the next. That is what open interest is for, and it's calculated as such.

 

For long term inventory tracking, use the tool that's designed for that: the commitment of traders report. That will tell you who's long and who's short. I use delta quite a bit, but I use it on short term time frames, from a second or two to an hour or two. But for long term tracking, why would you use something that does not calculate it correctly, when you have a perfectly accurate COT report?

[FulcrumTrader 10]

The COT report is frequently inaccurate at providing hints towards structural moves in an instrument - and that actually does not surprise me.

 

Newly initiated trade open interest (positions not yet closed) is absolutely a component of price movements. When price leaves one level and trades to another, there was definitely newly initiated inventory (open interest) as a component of the price directional change and continuation (to the next level). The predominance of directional trade by large liquidity participants is through market order driven order flow - the tracking of this order flow and the price levels where order flow changes took place (to change the direction of price) are created with newly initiated inventory (open interest). If you are tracking the Cumulative Delta your are tracking ongoing organic open interest (always changing - the ratio of those holding SHORT positions in relation to those holding LONG positions). Of course Cumulative Delta will never tell you exactly how many contracts are held "open" at any moment of time, but that is not needed. All I need to see with Delta, is where order flow bias created changes in the direction of price - to see where (the price levels) the change in the ratio of the held open interest was affected by newly initiated trade.

 

I am not tracking the expansion or contraction of the overall open interest, but the ratio of those holding open SHORT inventory to those holding open LONG inventory - this ratio does change as the market trades up and down day to day and that is the key. In my over 8 years of tracking Delta and working through this order flow tracking process, with my friends who trade within firms in Chicago, it is the ratio of the open interest that I want to follow. Also, the price/delta levels where obvious newly initiated directional trade caused the directional movement of price (price changing directions or the pivot points of price activity throughout the day) are the other critical items to track (what I call Delta threshold levels - turns in Delta that align with pricing levels). There is a reason why commercial participants track the levels of price tied to turns in the BID/ASK differential (Cumulative Delta) - so they can see areas of price and what possible supply may be held there as open inventory. When a large liquidity participant is working new directional trade order flow into the market, they already want to know where there are possible exits (price areas where held open inventory was initiated - these are seen as areas of supply that may be used to cover into for their trade - or what could be called potential profit taking supply zones, where a winner can cover into a loser without a lot of slippage).

 

I could go on for another hour about how Commercials track order flow / open interest and why, but in the end everyone has to form their own opinion. All I can say is, try to establish contacts within the large liquidity firms and you will be fascinated by how well they play the order flow game.

[TheNegotiator 13]

Delta can be used in a simple or in a complicated way. I prefer the simple. Using cumulative delta helps me track the level and continuation of imbalance and acts as an additional piece to the picture I use in my decision making arsenal.

 

If something you use which been well thought through works, use it. If it stops working, change it. Everything we understand in life is best guess only. Don't ever let anyone tell you something is wrong if it really does work for you. No matter who they are.

[PJK2 10]

Within the last couple of weeks, I've missed pops on stocks I was waiting for creek entries on. Most notably was today (GMCR). I was waiting for a break of that .84 level on my chart, but low and behold it popped much earlier than that on what appears to be a symmetrical triangle.

 

Again, this has routinely happened to me while patiently waiting. Then I just stay away from the trade all together because the stock is already up too much on the day and I don't want to chase .... especially in a situation like GMCR's where there's an immediate "demand test" in the creek area.

 

 

E: How are you defining or identifying "the creek area" in your planning/analysis?

[Enigmatics 10]

E: How are you defining or identifying "the creek area" in your planning/analysis?

 

Typically after the first bounce of a sustained drop & selling climax. Once that bounce peaks, that is the level or "creek" I'm looking to break after some accumulation.

[PJK2 10]

Thanks E - I've seen the term a few times but never understood what it referred to...

[Enigmatics 10]

Thanks E - I've seen the term a few times but never understood what it referred to...

 

Welcome. Ya whenever you get a big drop, the first legit bounce is considered an "automatic reversal" .... that's typically an area where shorts start cover. It's also one of the most volatile times to trade IMO so that's why I like to wait for the accumulation to develop under the creek.

[Guest Muir]

Wyckoff preferred the climax, of course.

And so do I.

 

However, your questions speaks of risk, rather than technique.

You want confirmation but then find that in order to have the comfort of that confirmation, you are unwilling to pay the price: (a higher price.)

In the end, you end up paying anyways: a low cost / low risk opportunity passes by you.

 

The answer lies in understanding the nature of risk and fortunately there is a book with that very same title: The Nature of Risk.

 

 

p.s. I hate to pass judgement on a chart without having more background, but that long tail seems to have been a golden opportunity, so yes, you may also be weak technically, which would explain your hesitation.

[YertleTurtle 10]

David Weis has a much better DVD out which is somewhat basic but shows how to trade upthrusts and springs. Its a good foundation for anyone looking to start trading the Wyckoff method as this one setup can make you a lot of money.

[hektorr 10]

Not Thorough videos. Little gold info in those videos so my advise is not to buy, He is keeping a lot of gold for himself not sharing it to the public. It is understandable but when you paying high price you want the best.

[forrestang 10]

There is absolutely no point in withholding anything with regards to a discretionary method (a'la Wyckoff). Discretionary methods do not have a problem with being market effecting, nor will his customers find the same trades he does. So it's not like him sharing things would have him fighting for liquidity with his customers. I doubt he is keeping anything secret related to the info on his DVDs.

[Gary Fullett 10]

ES daily, 60 minute, and P&F. I'd love to hear any thoughts or comments.

 

 

 

 

 

 

There is a substantial risk of loss in trading commodity futures, options and off exchange foreign currency products. Past performance is not indicative of future results.

[YertleTurtle 10]

Look at the stickies on this forum and the original wyckoff course:

 

http://www.traderslaboratory.com/forums/attachments/131/17907d1263785828-wyckoff-resources-wyckoff-method-tape-reading.pdf

 

Master the Markets is about VSA. Although VSA is good for entry signals I personally feel that studying Wyckoff's material is much better for understanding accumulation and distribution and the background.

[quark 10]

Look at the stickies on this forum and the original wyckoff course:

 

http://www.traderslaboratory.com/forums/attachments/131/17907d1263785828-wyckoff-resources-wyckoff-method-tape-reading.pdf

 

Master the Markets is about VSA. Although VSA is good for entry signals I personally feel that studying Wyckoff's material is much better for understanding accumulation and distribution and the background.

 

Thanks Turtle. I will start the Wyckoff course study!

[YertleTurtle 10]

No problem - just to reiterate - Master the Markets is worth reading too. It is derived from Wyckoff so there isn't any disagreement between them.

[YertleTurtle 10]

Gary,

 

I wonder if you could comment on my chart of the EUR/USD daily. Its similar to yours but I drew the bottom of my trading range across the double-bottoms. This would have allowed us to trade the spring on 2/16 and perhaps 3/15. Do you not consider this line as the actual bottom of trading range as the reaction to the high on 1/30 wasn't significant enough?

 

Thanks in advance.

[Gary Fullett 10]

Gary,

 

I wonder if you could comment on my chart of the EUR/USD daily. Its similar to yours but I drew the bottom of my trading range across the double-bottoms. This would have allowed us to trade the spring on 2/16 and perhaps 3/15. Do you not consider this line as the actual bottom of trading range as the reaction to the high on 1/30 wasn't significant enough?

 

Thanks in advance.

 

I drew my horizontal support line from two important areas. One, it was the reaction high before we moved lower in early 2012. Also, in mid January, it corresponds to a markup bar and then the low in mid February made a reaction high in late February so that's why I drew the line where I did. Those two areas show me greater reactions to where you drew it. Your lines aren't bad, but I think mine tell a better story.

 

Gary

[YertleTurtle 10]

Thanks Gary,

 

I appreciate you taking the time to comment.

[gozila 10]

is this a accumulated phase?

 

anybody can tell me how does identify phases ( accumulation- distribution - re-accumulation - re-distribution)

[MightyMouse 12]

No, this isn't re-accumulation. I think we've had a couple of signs of weakness in the markets. I think the market is in distribution phase.

 

 

 

Gary

 

No one, not even the ghost of Wyckoff, can look at an area and say that it is accumulation of distribution before the fact. "Smart Money" or "Composite Man", if you will, adjusts quickly to his mistaken direction, if he is mistaken, but that is only after the fact.

 

I certainly understand your need to sell; hopefully, you can understand my need to sift out the BS.

Edited May 23, 2012 by DbPhoenix

[Gary Fullett 10]

No one, not even the ghost of Wyckoff, can look at an area and say that it is accumulation of distribution before the fact.

 

Wyckoff never used the terms accumulation and distribution in his work [This is incorrect. Simply open up the original course -- http://www.traderslaboratory.com/forums/wyckoff-forum/6192-wyckoff-original-course.html -- and use Ctrl+F to find dozens of references to Accumulation and Distribution, the concepts of which are fundamental to Wyckoff's approach]. When a market goes through a sequence of a buying climax, it is quite true that it is seen in hindsight. However, if supply is present and forms a lower trading range, we can deduce that this lower trading range is more likely preparing itself for the markdown phase. Wyckoff looked at markets in a wave structure. When there are stronger waves to the downside than to the upside, we can get an idea that the market is weak.

 

The most important piece of information that one can have in trading is knowing the trend for the time frame they are trading. When we have a series of higher highs and higher lows, the higher trading ranges that form are more likely to lead to markup versus markdown. All we can do is read the price, action, and volume to determine strengths and weaknesses and go with the reading of the tape. In the chart presented, it appeared to me that there were supply bars evident, which lead me to deduce that the market may go lower.

 

Gary

 

 

 

There is a substantial risk of loss in trading commodity futures, options and off exchange foreign currency products. Past performance is not indicative of future results.

Edited January 2, 2013 by DbPhoenix
Incorrect and misleading statement

[onesmith 10]

MightyMouse, I like Gary's posts and encourage him to keep posting. He's clearly mastered the area he specializes in. As to sifting out bs I support and appreciate your efforts. I also appreciate your trading skills and enjoy your posts immensely.

 

Regarding before or after the fact. Specify your desired criteria a priori and any timing constraint within the models found is guaranteed to match the equation you formulated.

Edited April 11, 2012 by onesmith

[MightyMouse 12]

Wyckoff never used the terms accumulation and distribution in his work [This is incorrect. Simply open up the original course -- http://www.traderslaboratory.com/for...al-course.html -- and use Ctrl+F to find dozens of references to Accumulation and Distribution, the concepts of which are fundamental to Wyckoff's approach]. When a market goes through a sequence of a buying climax, it is quite true that it is seen in hindsight. However, if supply is present and forms a lower trading range, we can deduce that this lower trading range is more likely preparing itself for the markdown phase. Wyckoff looked at markets in a wave structure. When there are stronger waves to the downside than to the upside, we can get an idea that the market is weak.

 

The most important piece of information that one can have in trading is knowing the trend for the time frame they are trading. When we have a series of higher highs and higher lows, the higher trading ranges that form are more likely to lead to markup versus markdown. All we can do is read the price, action, and volume to determine strengths and weaknesses and go with the reading of the tape. In the chart presented, it appeared to me that there were supply bars evident, which lead me to deduce that the market may go lower.

 

Gary

 

 

 

There is a substantial risk of loss in trading commodity futures, options and off exchange foreign currency products. Past performance is not indicative of future results.

 

Hmm. Not sure how you can tell if there is supply or not without a decent measure of volume which is not available in currencies. As far as the original question, there is accumulation here and will be accumulation down to 1.3 which is widely seen as support.

 

Because of the lack of a decent volume measure, it is difficult to tell if the accumulation is weak buying or strong buying. If there are weak buyers, they will sell against themselves and will provide a great deal of the supply needed to scare away the buyers, pushing the market through the 1.3 level. If they are not weak, then those who attempt to probe the market lower will not find sellers to buy from and will be forced to buy from sellers at higher prices.

 

I don't think the shape of the bars will help out too much and could lead to faulty conclusions.

 

I do hope your analysis is correct since I am short biased the euro.

Edited May 23, 2012 by DbPhoenix