Estimating How Violent a Puke-out Will Be???

[lastninja2 10]

Hi,

 

This could take a bit of explaining... let's see if a picture can help:

 

http://s3.postimage.org/pmlxk4w6r/puke_volume.png

 

Basically if the market seems to have settled in to a range-type day, rotating around an area of high volume in the middle, is there any way at all of estimating just how severe the reaction might be if either of the extremes of the day (the upper resistance, or the lower support) are broken?

 

One idea I came up with was to use Cumulative Volume Delta to somehow estimate how "short" or "long" the market is, and therefore give some indication as to how many contracts will be "puked out", in the event that the market strays too far from the high volume area for players to bear.

 

I am not expecting to get some magic formula haha, but can anyone offer any insight besides "rely on your experience, you will come to learn that a typical puke-out on the bund is 7 ticks" etc etc.

 

Much appreciated - I can clarify if the above did not make any sense!!!

 

thanks!

[DbPhoenix 42]

Generally speaking, if the breakout fails, you can expect price to return to the midpoint of the trading range. If that doesn't hold, expect it to return to the opposite extreme.

[lastninja2 10]

to clarify: I am particularly interested in the initial puke-out. The knee jerk reaction over the first several seconds/minute or two.

 

my CVD idea was just an example of a random approach I thought up, but would welcome alternative suggestions.

[BlueHorseshoe 10]

One idea I came up with was to use Cumulative Volume Delta to somehow estimate how "short" or "long" the market is, and therefore give some indication as to how many contracts will be "puked out"

 

Hi Lastninja,

 

I tried to do exactly this last summer (it's a bit like trying to compile your own intraday COT report on the fly!), but I couldn't get it to work. Unfortunately I can't remember why, which probably isn't very helpful to you . . .

 

One definite problem is that you can't know the trading horizon of those hitting the bid or lifting the offer in these zones - if they're a trend-following fund establishing a position they'll hold for the next five months then they won't get puked out when the market goes a few points against them.

 

Another problem is that you don't know whether buying is to establish or to cover a position, and likewise whether a seller is shorting or just closing a long.

 

I would guess that maybe participants become more panicky around breaks of the high and low of the day than they do in trading ranges, but that's just a hunch.

 

Hope that gets you thinking at least . . .

 

BlueHorseshoe

[lastninja2 10]

Yeah thanks for the response - intraday COT report haha I didn't think of that way.

 

Good to hear that it wasn't a totally stupid idea, although your point about horizons - fully agree.

 

Still, I'll keep an eye on CVD over the coming weeks. Perhaps the occasional peculiar CVD reading can provide a red flag when especially large puke-outs are in prospect, even if that CVD reading is diluted with long-term traders/closing trades rather than initiations.

[BlueHorseshoe 10]

Good to hear that it wasn't a totally stupid idea, although your point about horizons - fully agree.

 

I don't think it's a stupid idea and I didn't mean to totally discourage you! I would guess that the answer is more likely to be found in volume/order book data than price, as you suggested - it's just having a smart enough way to break it all down.

 

Regards,

 

BlueHorseshoe