VSA and Per-bar Delta

[BlowFish 10]

Blowfish, can you share the source of these studies? I would love to read them and learn more.

 

A search for Lee & Ready algorithm will get you going in the right direction. For some reason they are credited with the original algorithm despite it being proposed a couple of years before their paper. There is a large (and ever growing) amount of research on these sort of metrics, there really is no reason to rely on anecdotal evidence.

[BlowFish 10]

Hi John, it sounds like you have come up with a pretty well defined process to arrive at some quite specific goals. It is difficult to work purposefully towards something if that something is not well defined or, as is frequently the case for newer traders, does not really move you towards your ultimate trading goals. (Some never get beyond looking for the indicator that is going to make them successful)

 

There is nothing wrong with relying upon simple observation to come up with 'variables that help stabalise things'. This can be done in completely formal ways (the scientific method if you like) or in much more informal 'instinctive' ways. I think there are perhaps more potential pitfalls with the latter. For example simply getting distracted (particularly if one doesn't have as well defined specific goals as you appear to). Another biggy (which can creep in with formal approaches too but is more likely with informal approaches) is anyone of the numerous cognitive biases that can easily sucker punch traders.

[johnw 10]

Hi John, it sounds like you have come up with a pretty well defined process to arrive at some quite specific goals. It is difficult to work purposefully towards something if that something is not well defined or, as is frequently the case for newer traders, does not really move you towards your ultimate trading goals. (Some never get beyond looking for the indicator that is going to make them successful)

 

There is nothing wrong with relying upon simple observation to come up with 'variables that help stabalise things'. This can be done in completely formal ways (the scientific method if you like) or in much more informal 'instinctive' ways. I think there are perhaps more potential pitfalls with the latter. For example simply getting distracted (particularly if one doesn't have as well defined specific goals as you appear to). Another biggy (which can creep in with formal approaches too but is more likely with informal approaches) is anyone of the numerous cognitive biases that can easily sucker punch traders.

 

hello Blow,

 

Much is made of having a Trading Plan, but what happens when an imperfect Plan is perfectly traded.

 

Structure ..... that is what this game requires.

I agree with everything in your last post, but I think that instincts need to be contained within the structure,

otherwise they can run around like a free range chicken.

 

I am a firm believer in graphically drawing my structures rather than writing them.

It helps me with the big picture and I find it easier to tune up.

I used to find that I would need to redraw the whole thing every few days to clean up the mess.

Gradually, the changes slowed down and now it is more about fine tuning.

 

This approach has made a mockery of many of the things that I have read in books, in forums, videos, posted charts etc.

 

Incidentally, I believe that good Instincts are structured thoughts, arising from deeper thought then is normally associated with observation.

That is why we can sense that price will turn just before it does ... the little wheels are spinning at a far deeper level

than normal observation affords, as information previously stored in the recesses of our brain is pieced together.

 

Until recently, I imagined this process was too complex for me to code, but now it is gradually coming together

and I can smell success in the air.

Edited April 27, 2011 by johnw

[TheNegotiator 13]

So going back to the original topic of the thread, is there anything specific that anyone uses with delta or cumulative delta to make their decisions less subjective? I know I don't so much other than contextual awareness of the market and the price areas I highlight for closer monitoring.

[johnw 10]

So going back to the original topic of the thread, is there anything specific that anyone uses with delta or cumulative delta to make their decisions less subjective? I know I don't so much other than contextual awareness of the market and the price areas I highlight for closer monitoring.

 

The time is 14.27 EST and I am on the ES

 

Right now we have VAH, minor and major resistance, yesterday's high, RTH open, all crowded into 1346.25 - 47.00.

The short cum delta is positive.... so what value would you assign to this.

The breakout will come via MOs.

[TheNegotiator 13]

I wouldn't try to assign anything yet. I don't trade the Fed when people are taking more notice of the outcome/statement as you just don't know who is going to jump in/out. I let it do it's thing and then I look at what it's doing after it's had time to digest.

[johnw 10]

I wouldn't try to assign anything yet. I don't trade the Fed when people are taking more notice of the outcome/statement as you just don't know who is going to jump in/out. I let it do it's thing and then I look at what it's doing after it's had time to digest.

 

I couldn't agree more.

I am just highlighting the point that the ES has been parked in a congested zone rather than out in the open for the FED statement and by the time cum delta tells it's story, the price will be long gone.

 

Of course I could be wrong, but either way I can't see delta helping me

[BlowFish 10]

So going back to the original topic of the thread, is there anything specific that anyone uses with delta or cumulative delta to make their decisions less subjective? I know I don't so much other than contextual awareness of the market and the price areas I highlight for closer monitoring.

 

If you buy into the idea that delta is a decent proxy for order flow then it is not much of a stretch to use cumulative delta as a measure of inventory. (Have to credit Fulcrum trader for promoting that idea). If you accept that, then it is pretty easy to come up with strategies based on discrepancies when price revisits a supply or demand level (obvious from price alone) depending on what the cumulative delta (inventory) looks like when it revisits that level. (are people still holding short inventory from the area). Simply put you look for divergences between price and cumulative delta (inventory) at key levels.

[TheNegotiator 13]

BlowFish I agree. Like I mentioned earlier in the thread though, I also watch the quality and flow of the CD to monitor for algo/otf activity. I find it is a good tell and a useful visual tool in addition to specific value or value comparison techniques.

[heretodaygone... 10]

So going back to the original topic of the thread, is there anything specific that anyone uses with delta or cumulative delta to make their decisions less subjective? I know I don't so much other than contextual awareness of the market and the price areas I highlight for closer monitoring.

 

 

This should make you think about the possibilities...

[joshdance 10]

If you buy into the idea that delta is a decent proxy for order flow then it is not much of a stretch to use cumulative delta as a measure of inventory. (Have to credit Fulcrum trader for promoting that idea). If you accept that, then it is pretty easy to come up with strategies based on discrepancies when price revisits a supply or demand level (obvious from price alone) depending on what the cumulative delta (inventory) looks like when it revisits that level. (are people still holding short inventory from the area). Simply put you look for divergences between price and cumulative delta (inventory) at key levels.

 

Thanks blowfish--as you know, if it were this easy, of course, then it would cease to work very quickly once a few people found out :-) Of course we can look at our charts and find many cases where these divergences work, and others where they don't. And as with anything, context is king and anyone looking for a "buy when this divergence happens" will be disappointed--particularly in realtime. Divergences can lead to more divergences, and to more, and more... how many is enough to take the trade? Thus are the pitfalls with divergences... two things can diverge further than one thinks.

[joshdance 10]

This should make you think about the possibilities...

 

Thanks so much heretoday--just the kind of visual this thread needs! Below are my thoughts.

 

On pretty much the entire data series, the two are very closely correlated, almost perfectly. The only difference is the scale (in other words, the oscillations for the order book delta are much more often than the CD), but if you changed the scale on the CD it would overlay almost exactly with the other. So to say that CD is rising when order book delta is rising, and vice versa is, well, pretty much all the time. This is only logical, as when CD goes positive, there must be the the matching offers in the books to provide the liquidity for these market orders reflected in the CD. Basically, the graph looks like it's showing the same thing twice, again the only difference of consequence being the absolute values only.

 

Further, using only price, the area where you mark as "met by buyers" is a second lower high in what appears to be, if this were the right edge, as a trend reversal. In other words, price is pretty much showing that it's met by buyers by the fact that it's rising. Further, adding volume gives some clues as to the validity of what price is doing--exhaustion volume at the peak, followed by lower volume on moves down.

 

The one place I find the bottom pane of the chart interesting is around 14:25 -- CD appears to have an upward slope and the order book shows more bids than offers, the only real divergence in the two I can find. Perhaps this divergence indicates that aggressive buyers and passive buyers are strong in number, and that a move up is more likely than ever.

 

These are my thoughts on your chart. If you would care to explain how you might use the information presented on the chart to some advantage I would love to hear your thoughts. Thanks again for taking the time to post this!

[TheNegotiator 13]

Order book delta? Are you using the difference between bid and ask limit orders here? If so, how far are you going depth-wise? Delta as it's known in the traditional sense is the difference in actual trade at the bid and ask. If you have an interesting idea on this, please share it.

[joshdance 10]

Order book delta? Are you using the difference between bid and ask limit orders here? If so, how far are you going depth-wise? Delta as it's known in the traditional sense is the difference in actual trade at the bid and ask. If you have an interesting idea on this, please share it.

 

Well, "delta" just means "difference" or "change" in math terms, so really the bid/ask volume difference guys just commandeered exclusive use of the term ;-) Seems like I've heard that word before somewhere else... an airline, or a letter, or... ah nevermind. :rofl:

[TheNegotiator 13]

Yes, I understand it's used in various different ways. Option delta is the obvious one. However, generally in trading it is used it terms of difference in market executions at bid and ask. Order book delta is an interesting thought though, but I am sure there are many of different considerations using this method. Like for example whether it is open to manipulation. If you don't have to even place a trade, manipulating become much more viable if it works...

[johnw 10]

Well, "delta" just means "difference" or "change" in math terms, so really the bid/ask volume difference guys just commandeered exclusive use of the term ;-) Seems like I've heard that word before somewhere else... an airline, or a letter, or... ah nevermind. :rofl:

 

Try to remember the golden rule ... IF YOU CANNOT SEE IT IN PRICE AND IT ADDS TO YOUR DECISION MAKING, THEN INCLUDE IT ON YOUR SCREEN.

 

If it is in the price but you decide to add it anyway THEN LEARN TO READ PRICE

 

Trust me, this is the best path.

There are not many many ways to trade.

There is the best way and then there are other ways ...and so this is yet another leap of faith.

 

You will not know this until it happens to you within the circle of understanding.

 

LESS IS MORE

Edited April 29, 2011 by johnw

[BlowFish 10]

BlowFish I agree. Like I mentioned earlier in the thread though, I also watch the quality and flow of the CD to monitor for algo/otf activity. I find it is a good tell and a useful visual tool in addition to specific value or value comparison techniques.

 

The trouble is (and this is through casual observation, albeit a lot of it) at interesting points is where things can be difficult to quantify. For example price can be halted an turned in a mix of two ways buyers can withdraw or sellers can hold firm or be prepared top offer lower. Of course in practice it needs a mixture of the two. Delta is not so good for revealing magnitude though plotting volume alongside helps. Plotting positive delta and negative delta separately might also reveal what's going on better. Another interesting metric is measuring 'delta shift', so you essentially reset delta when price makes a high or low measure delta from that point.

[BlowFish 10]

Try to remember the golden rule ... IF YOU CANNOT SEE IT IN PRICE AND IT ADDS TO YOUR DECISION MAKING, THEN INCLUDE IT ON YOUR SCREEN.

 

If it is in the price but you decide to add it anyway THEN LEARN TO READ PRICE

 

Trust me, this is the best path.

There are not many many ways to trade.

There is the best way and then there are other ways ...and so this is yet another leap of faith.

 

You will not know this until it happens to you within the circle of understanding.

 

LESS IS MORE

 

Absolutely!

................

[TheNegotiator 13]

I definitely agree with you guys here. The fact is any indicator is always subjective if only just because the one thing you generally can't see on a chart is the guys who are waiting on the sidelines preparing to make their move. Everything has to be viewed in context and assessed as a continuum of probabilities. Trading is about thinking. Methods may help traders think more incisively but most just want them to tell them what to do and when. To me, this is the holy grail that doesn't exist.

[thc 10]

I don't think johnw ever expounded on the concept of seeing selling initiative at the ask and buying initiative at the bid, rather than vice versa, via observation of the 1 tick chart.

 

Did I miss that?