Trading The Extremes

[UrmaBlume 10]

The ability to recognize the formation of local and session extremes in time to take advantage of the information is key to intra-session success.

 

Maybe this thread could become a discussion and demonstration on how we colletively recognize local and session extremes.

 

Day to Day so many of these local/tradeable extremes form the same way with regards to commercial activity and order flow that the ability to recognize them in real-time might offer value to astute traders.

 

While it was not a huge trade Today's price and trade flow action in ES at 0732 -0742 PST provided a text book shot of the face of many local and session extremes.

 

The first shot below is of an 8k chart showing between the vertical blue lines 0732 -0742 the formation of a top or maybe a continuation.

 

The second chart below is of a 1k chart that shows the same period of trade. In this chart you can see strong commercial topping activity at 0372 as 0741 the chart reflects a double top with strong divergence between where price is and the power that put it there/negative divergence.

 

This top was only good for a few points and may not be a session high (good for over 2 hours at this writing) but it is a pattern that repeats itself through these indicators multiple times every week.

 

These charts demonstrate 2 components of many local highs and lows - Strong opposing commercial activity and a divergence in the comparison between price and the relative strength of the order flow that put it there.

 

 

8k Topping

 

 

1k confirming top w/strong opposing commercial activity and price order flow divergence

 

 

 

Cheers

 

UB

[steve46 12]

In a nutshell I only trade extremes based on standard deviation and supply/demand analysis (related to order flow)...I can use any chart system that allows me to go back in time far enough to locate areas of previous balance and imbalance just prior to a significant move up or down. It takes a while to get used to but basically you can see where participants have decided to put money to work. Once you have that in place you look at where price went after that move...I want to see a significant excursion away from that origin, followed by a basing action and then a retrace to that point...the first test is what I look for. They are high probability entry points, AND they usually deliver significant profits in either direction (although I will prefer the trend side). It works on any time frame, but the longer the time frame the bigger the profit target (since risk and reward are always proportional). Most of the hardware and software required to to do this is located between your ears.

 

Good luck

Steve

[UrmaBlume 10]

Steve,

 

To all those words, I present this simple explanation and this graphic.

 

Today's High in ES was formed at 1206 PST. Like the previously demonstrated high it was formed on a divergence between price action and both the order flow and net commercial trade.

 

In the graph below the middle sub-graph reflects order flow and the bottom sub-graph shows net commercial trade.

 

The divergence between price and the power that moves price is plainly demonstrated.

 

It is not about price action, it is not about volume - It is about the degree to which that trade volume is imbalanced.

 

 

 

Please Click to enlarge image

 

 

Cheers

 

 

UrmaBlume

Edited June 14, 2011 by UrmaBlume

[steve46 12]

Well thats nice, and it all looks very impressive indeed...except that it is only part of the picture...you see if one or more institutional participants decides to put money to work...they WILL move the market, no matter what your software says about the degree of imbalance....look what happened on Friday...as the market came down to test the yearly open......participants were trying to mark it down bigtime, and they were winning, until somebody decided (at around 1263.50) "thats enough"...thats when size came in to move it back up..At this point in time, no one has written a program that anticipates when a institutional player is going to make the decision to move capital...and I am pretty sure no one is going to be able to do that in the foreseeable future.

Edited June 15, 2011 by steve46

[gianno 10]

At this point in time, no one has written a program that anticipates when a institutional player is going to make the decision to move capital...and I am pretty sure no one is going to be able to do that in the foreseeable future.

 

How you you be so sure? I believe such programs exist. They are not advertized and they are not for sale. They anticipate large moves of capital in the next minutes to an hour with very high success rate. I've seen one at work but it was developed in-house. They work based on some math model.

[jurotraderslab 10]

Steve, you are right, no one can tell exactly when institutional players decide to step in, the question for UB is whether or not he can take ALL these set ups as shown and trade them automatically based on a fixed set of rules. One trivial example: when both trade velocity and net new trade diverge on a local swing high/low, take a trade with predetermined stop/target. Does this setup (or a "sufficiently smart" modification thereof) produce net positive alpha if it's executed automatically? If yes, then he's in business, but I guess it may not since if it did, he would be already trading it instead of writing about it on TL. I am just writing this because

a) I think there is some value to what UB says

b) it's not as easy as UB seems to make it (local extremes are only a subset of all situations in which these divergence setups occur, the profitability then depends on how you can separate these setups from the ones which are followed by a continuation as opposed to a reversal).

[UrmaBlume 10]

Of course some indicators CAN sport and classify the most important kind and magnitude of commercial trade (the kind of trade that forms local or session extremes). This indicator does it several times a day.

 

The high of today's trade in ES happened 37 minutes after the open at 0707 PST and the highest reading today in commercial topping activity happened at.......oh yea, the high of the day.

 

This formation of above threshold of significance spike in commercial activity and/or divergence between price and the balance of trade happened again today as it did yesterday and it does on most days.

 

The screenshot shows the High, so far, in today's trade in ES. This kind of trade can be seen by indicators smart enough to register trade that can only be machine executed and only commercial auto execute with such intensity.

 

 

 

This formation is not on every extreme but it is on many and the traders I know that use this indicator find it useful.

 

cheers

 

UrmaBlume

[UrmaBlume 10]

How you you be so sure? I believe such programs exist. They are not advertized and they are not for sale. They anticipate large moves of capital in the next minutes to an hour with very high success rate. I've seen one at work but it was developed in-house. They work based on some math model.

 

You couldn't be more correct. And in some cases they look like these:

 

 

 

 

 

 

Some say it can't be done and some said the earth is flat.

 

cheers

 

UrmaBlume

[jurotraderslab 10]

UB, I wasn't arguing that it doesn't work, however, what I was saying, the trade intensity peaks also happen at times when market continues its directional move. It would be fair if you also showed an example of when the indicator peaked but the market didn't turn.One cannot be sure that the current peak is the highest of the day and therefore any peak beyond a certain (albeit potentially dynamically adjusted...) threshold would have to be treated as a trading signal.

[UrmaBlume 10]

UB, I wasn't arguing that it doesn't work, however, what I was saying, the trade intensity peaks also happen at times when market continues its directional move. It would be fair if you also showed an example of when the indicator peaked but the market didn't turn.One cannot be sure that the current peak is the highest of the day and therefore any peak beyond a certain (albeit potentially dynamically adjusted...) threshold would have to be treated as a trading signal.

 

Fair enough, but we also use Net New Trade, order flow and indications of exhaustion to confirm or deny the spikes.

 

cheers

 

UB

[UrmaBlume 10]

Less than a half hour ago there was a signal of local topping that was good for 5 pts.

 

See the same spike in comercial topping AND the order flow imbalance that was present in previous posts.

 

 

And then just 15 minutes later we got a commercial buying and Positive Divergence in order flow for a 5 point long - below

 

 

It is about buying and selling and more to the point, it is about commercial buying and selling.

 

UrmaBlume

[UrmaBlume 10]

Note the spikes note either the exhaustion or the divergence for 4 trades each woth about 5 pts in an hour:

 

Here are 2 more:

 

[jurotraderslab 10]

That is great, could you show a picture for an entire day, preferably for a trending day? I would expect a trending day would have many false spikes. This is not to undermine your efforts but I would like to see it that is the case.

Also, based on your posts from the past, you normalize the spike indicator to time of day typical activity (time of day normalization, of course, this includes instrument normalization too I expect as every instrument has different typical volume figures). Do you also normalize it dynamically, based on how the day is progressing with respect to longer term volume statistics?

Edited June 16, 2011 by jurotraderslab
error

[UrmaBlume 10]

That is great, could you show a picture for an entire day, preferably for a trending day? I would expect a trending day would have many false spikes. This is not to undermine your efforts but I would like to see it that is the case.

Also, based on your posts from the past, you normalize the spike indicator to time of day typical activity (time of day normalization, of course, this includes instrument normalization too I expect as every instrument has different typical volume figures). Do you also normalize it dynamically, based on how the day is progressing with respect to longer term volume statistics?

 

No. We do serial normalizations to the point of time of day. We find that beyond that you get into local curve fitting.

 

cheers

 

UrmaBlume

[jurotraderslab 10]

Note the spikes note either the exhaustion or the divergence for 4 trades each woth about 5 pts in an hour:

 

Here are 2 more:

 

 

What do you mean exactly by "exhaustion" (how does it show in your picture)?

[UrmaBlume 10]

What do you mean exactly by "exhaustion" (how does it show in your picture)?

 

The exhaustion in either buying or selling in the V94 indicator is explained in the manual which you can see/download here.

 

cheers

 

UB

[jurotraderslab 10]

Could you show some pictures of other markets, say currency futures like 6E, 6B, or rates (ZN, ZB), or soft commodities? Does it work as well as on SP500? I suspect (speculate...) that in equities big institutions buy/sell futures (in an automated fashion...) before they turn on their cash buying/selling activities so it makes sense that these spikes could capture reversals (as the index really only follows the underlying stocks). However, in a currency like 6E the futures market is just a tiny fraction of transacted volume in EURUSD (let's consider futures and cash the same for now...) so one would think it shouldn't work as well. Do you have observations (or better yet hard statistics) that confirm it's universally valid across markets?

[rt-trader 10]

UB,

 

I find most of your posts interesting and thought provoking - thank you for continuing to present your different views here.

 

One aspect of what your various posted charts show remains a puzzle for me - perhaps you can shed some light on the following.....

 

For the many examples where you show spikes in Trade Intensity, they are normally on 1000 Share Bars and the spike builds/peaks/declines over 4 to 6 bars or so.

 

Even if the active commercial was responsible for almost all activity within those bars, they would still only accumulate perhaps 4000 or so contracts during the spike.

 

Even allowing for pre-spike accumulation I would have thought in order to expend the capital necessary to subsequently move the market in their favor, the commercial would require a much larger inventory than your indicator suggests they grab at these key times.

 

Since you also point out supporting divergence on your Net New indicator, the implication is less rather then more is being accumulated at these times.

 

Are you able to provide some additional comments on this?

 

Thanks

[steve46 12]

Just thought I would offer this comment

 

I am doing the same thing every day, I use supply & demand analysis of the chart (the chart shows you everything you need), and I incorporate time based pivots to show me where the high probability entry points are...When price hits these points, we read the tape....

This morning we had 15 ES points right off the open...(the only software required for this is located between my eyes and ears)

At the end of the day, you can see the reversal down at 1252.25. If you took the trade, you got another 10

So, I realize that what most folks want is to be told when to buy or sell...no problem, God Bless and go right ahead with that...I think I will continue to do it this way...

 

Cheers

[UrmaBlume 10]

UB,I find most of your posts interesting and thought provoking - thank you for continuing to present your different views here. One aspect of what your various posted charts show remains a puzzle for me - perhaps you can shed some light on the following.....For the many examples where you show spikes in Trade Intensity, they are normally on 1000 Share Bars and the spike builds/peaks/declines over 4 to 6 bars or so.Even if the active commercial was responsible for almost all activity within those bars, they would still only accumulate perhaps 4000 or so contracts during the spike.Even allowing for pre-spike accumulation I would have thought in order to expend the capital necessary to subsequently move the market in their favor, the commercial would require a much larger inventory than your indicator suggests they grab at these key times.Since you also point out supporting divergence on your Net New indicator, the implication is less rather then more is being accumulated at these times.Are you able to provide some additional comments on this?Thanks

 

rt-trader,

 

First, thanks for the kind words. TL is a great resource and I am happy to be part of the community.

 

As an aside we tell new users of these indicators who want to trade other markets to put the velocity indicators first on a chart with volume bars of .0005 * average daily volume as a starting place.

 

A very astute question - It is not about how much they do relative to total volume is is that during that very brief time period they were bigger than the market - "fill em up and shut em up."

 

You will notice that spikes on the bottom are made on red/selling volume. What is little known is that the dynamic here is that such spikes, at the lows, happen because the downward momentum that brought price to the lows is met by a bid that is not at any moment bigger than the market but that is being constantly replaced by machine executed orders so that it is the sudden rate/velocity/intensity/one sidedness that turns price.

 

That is how you can have a divergence in the BALANCE of trade and still have the power to turn the market.

 

While day time frame traders do 80%+ on the volume in instruments like ES and the longer termr/value trader does less than the remaining 20%, the value trader/investor is the ultimate arbiter of price because when he come in, for however briefly, he is bigger than the market at that price.

 

cheers

 

UB

[UrmaBlume 10]

Here is the formation of today's session low in ES.

 

One interesting point is that sometimes these spikes can give you upt to a 7 minute warning of the session/local extreme.

 

In this case the low, once again, came after the spike and coincidental with a positive price/balance of trade divergence.

 

Users of this indicator report that they often use these divergences to filter false spikes. They execute on the divergence and not on the spike.

 

Sometimes, as is the case here, this signal can allow for a very small stop at the beginning of a 10 point move in just over an hour.

 

After this low was established, the second chart down shows the surges in commercial buying that propelled price for 10 points.

 

Please Click to Enlarge Image

 

Please Click to Enlarge Image

 

 

Cheers

 

UB

Edited June 17, 2011 by UrmaBlume

[jurotraderslab 10]

One question that comes to mind immediately: do you distinguish between spikes that occurred on a fast directional move over an extended price range (let's say > 4 ticks in ES, i.e., > 1 point move to "stop" the price) and spikes that only appeared to play out in a 1-2 tick price range? The first category might just suggest desperate unwinding of positions (or jumping on a move), the second one seems more promising as far as reliability. Does your indicator pick this up?

 

On a related note, I find it surprising that someone would be continuously hitting the bid (in case of intense selling near a future bottom) which is being continuously replenished. How would you explain that behavior?

[steve46 12]

Interesting and amusing

 

The gentleman's indicator gives you "up to a 7 minute warning"?........

 

Well, thats a nice way spin it but no sale here....the fact is that longer time frame participants are using bigger stops (most of the professionals I know are using about 6 points for the S&P contract). As a result they enter differently (scaling in and starting that process earlier) than the retail crowd (who are usually late the party). So it is more likely that the resolution of this indicator is not very good, and again, you have to either read the tape...or take a bigger stop yourself...(traders choice)...

 

As with most things in this world, there is a trade-off....you take signals from an indicator and you have to give up accuracy, or you develop your own skills...Hey I get it...why work at it, if you can buy it.....

 

Please continue as you were folks.

 

Jurotraderslab....the reason you have people hitting the bid at the bottom is that they are making the cardinal mistake of A.)entering late hoping for continuation.and B.) not taking the time to see where in the past, the previous uptrend originated

This happens all the time because there are both institutional participants (some of whom have similar training) and short term participants who have different training and beliefs....What you see is how it plays out when the short time frame players don't do their homework....plain and simple.

Edited June 17, 2011 by steve46

[SIUYA 11]

I'm sorry if I am missing something here - while all you guys are talking about trends and hitting bids and institutions....look at the time frames you re looking at - If I read it correctly the time frame is so short and the zone of 11.44 to 12.20 - 40 minutes is less than noise and not on the radar screen of a true institution. (correct me if I am wrong)

These guys the true institutions shift volumes over days, weeks and months and hey also dont use stops as most traders view them.

day trading algos, market makers and HFT traders might move around in these areas as UB points out (80% of volume is by day traders - I dont know if it is or not).....the bigger institutions do not have the impact that is implied here. The hitting of bids in an oversold market on a day trading point of view is irrelevant when you are selling over longer time frames.

While as a day trader you might be trying to profit out of short term overbought extremes.....dont pretend that the institutions are necessarily always stepping in....I think this does a whole disservice to the underlying rationale of your system.

[steve46 12]

I'm sorry if I am missing something here - while all you guys are talking about trends and hitting bids and institutions....look at the time frames you re looking at - If I read it correctly the time frame is so short and the zone of 11.44 to 12.20 - 40 minutes is less than noise and not on the radar screen of a true institution. (correct me if I am wrong)

These guys the true institutions shift volumes over days, weeks and months and hey also dont use stops as most traders view them.

day trading algos, market makers and HFT traders might move around in these areas as UB points out (80% of volume is by day traders - I dont know if it is or not).....the bigger institutions do not have the impact that is implied here. The hitting of bids in an oversold market on a day trading point of view is irrelevant when you are selling over longer time frames.

While as a day trader you might be trying to profit out of short term overbought extremes.....dont pretend that the institutions are necessarily always stepping in....I think this does a whole disservice to the underlying rationale of your system.

 

Well I don't know where to begin...first institutions decide when to move inventory depending on things that I am not privy to....I was an order taker not a decsion maker. So there's a limit to what I know about that...

What I do know is that institutions are likely to come into the market with size at specific turning points. That is the basis for time-based pivots. Its easy to see when and where this happens (in other words you don't have to take my (or anyone's) word for that)...also there used to be a commercial data base that listed the activity of commercial traders by code..so one could in effect see exactly where and when institutions and speculators were active...its no mystery...

To your point, yes institutions do on ocasion move size and yes it does take a while to place that inventory, or to liquidate it...but not months certainly, more like a week to 10 days depending on the size of the position and the related hedges and options positions.

Today was a good example in that price retraced to an area that was formerly a yearly low. At that point I can say with some confidence that many institutions start to "get interested" because some of them have positions dating back to that time, and some are interested (for tax reasons among others) in defending those prices. Other institutions and speculators look at those prices as representative of "wholesale value" thus they are willing to step in and try to mark it up hoping that others will agree. It is a noisy market and there are myriad reasons why these things happen, but in a market dominated by profesional interests, these are some of the motivations for institutions to take action...both intraday and on a longer time frame.

 

As an aside, I have no motivation myself to distort the role of institutions (or speculators for that matter) in the markets. I'm not selling indicators.....just the opposite...

 

Hope this helps you

 

Steve

Edited June 17, 2011 by steve46