Trading for Value, Part One

And now for something completely different.

I’ve posted a lot over the last few months about patterns and contexts where price and volume disagree. Today I am starting a series on what I (and probably others) call value trading. Basically, it’s the flip side of the auction coin. It’s about when price and volume work together – agree – to tell you what might happen next.

This way of looking at price and volume that is not suited for all instruments on all timeframes. As the series progresses, a plethora of examples will appear. But for now, suffice to say I think that value trading tends to make the most sense for instruments that have inherently mean-reverting tendencies.

In this case, I don’t really mean mean-reverting in the strictest mathematical sense. As in a magical attraction and desire to return to some average. What I mean is mean-reverting in the sense of returning to value. And what is value?

Value, in this vocabulary, is a statistically-defined range of previously accepted prices.

This is also known in TPO and volume profiling terminology as areas of balance. Now, lots of folks try to trade for value using moving averages of various lengths. There are really a few drawbacks in this approach, in my opinion:

  1. A moving average equals only one price at any time. Thus I think it creates an expectation of precision in the minds traders which doesn’t exist in reality. Trading is an inherently imprecise game on all but nano-second time scales. To compensate for this cognitive dissonance, or because averages were the only tools they had, I’ve seen folks create “ribbons” of multiple moving averages to represent zones of prices. Good start, but there is another way, as we’ll see.
  2. Moving averages lag. It’s a mathematical fact – what a moving average is telling you is what happened in the past. There are lots of variations on the formula which give recent prices greater influence on the current output. But at the end of it all what is happening now takes additional time to be meaningfully represented in the average.
  3. Averages are self-referential. What I mean is that a moving average of price is only measuring itself. And price action can deceive you. As I’ve said before, price is what the market says, but volume is what the market does. So “deceptive” prices calculated into averages still contain some deception, even if smoothed by time.

So what if you could use volume as a kind of real-time, non-lagging “test” for the veracity of price action? What if the range of statistically-defined, previously accepted prices could be overlaid on a chart? What if – at least for some instruments with value-reverting tendencies – you could use this tendency and these statistically defined ranges to trade against? What if you had a chart that distilled most of the most important principles of volume profiling (namely identifying unfair prices)?

Well, if you’re still reading then I’m going to guess you’re interested in some answers. I don’t know that I have the answers, but I do have some example charts to show you that illustrate the points above.

The Basic Setup

  • The ES on 15 minute bars, RTH session. The ES might be the king of the mean/value-reverters, so we’ll start there first. The only reason 15 minute bars are shown is because you can fit a lot of time on a reasonable sized chart, and there is less noise. We really only care about the “edges” in this example, and fewer bars show that better.
  • There are two instances of the Acme Volume Value Channel on the chart. The first one – the gray channel – shows only the traditional session value area, which is 1 standard deviation of volume clustered around the VPOC. The second one  – the outer white lines – is also the Acme Volume Value Channel, but instead set to show 2 standard deviations.
  • The chart is from January 3rd 2012, to January 25th. This is 17 trading days.

Now on the chart I’ve circled all the instances where price touched or breached the 2nd standard deviation and then reverted to the same day’s value area or the previous day’s value area in the same session (or immediately after the open of the subsequent session).

ES 2sd Value Chart

The Big Picture

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ES 2sd Value Chart - 2

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ES 2sd Value Chart - 3

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Closeups of the Big Picture

Conclusion

This type of value reversion happened 22 times in 17 days, under pretty sane/normal market conditions. It’s not a coincidence. It’s the market doing its job, re-testing previously accepted prices to see if buyers or sellers are still interested.

What I like most about this chart is its simplicity and consistency, both visual and conceptual. We are leaning on volume to help us gauge the “truthiness” of price (yes, I am a big Colbert fan). And I think one of the ways to become and remain successful in the markets is finding at least 2 – maybe even 3 legs – to stand on. How long can you stand on one leg? In this metaphor, that one leg would be price averages. You need two to cover any real distance. 3 legs might be even better but let’s keep it clean, amigos. This is a family blog. ;-}

In the simple example above we would have theoretically had a little better than one quality entry per day had we used that and only that to read the auction. Not bad, huh? There will be more examples to come that illustrate this approach to analyzing price action.

So as they say… watch this space.

Updated

Making a Great Impression

When the Acme Volume Impression was named I never really thought about how many puns I could make with the name in post titles. But there are a lot. Trust me, I’ve been holding back. ;-}

Anyway, today we have an update to the AVI that includes a slew of visual refinements & enhancements. No fixes or new features, really. In the strictest technical sense, there are several  new features, but many of them just allow you to more finely tune the visual aspects things which already existed. Most of these are member-requested enhancements, by the way, that we’ve been accumulating for the past couple of months.

For example:

  • Enhancement: The volume footer rows now have 3 display styles: Background, PlainText and ColoredText. ColoredText is the “legacy” display style. It’s the one you’ve been looking at day in and day out for quite a while now. The other two are new, and once you see the screenshots on the pack page or load it up it will be pretty obvious why this was added. Makes viewing the footers much easier on most all chart color schemes.
  • Enhancement: Footer row colors (when using the Background footer display style) can be set separately from the Impression bar buy vs sell breakdown colors. Opacity for the footer rows can also now be controlled independently of Impression bar opacity ranges.
  • Enhancement: Footer row text colors can be set independently of the Impression bar buy vs sell breakdown colors.
  • Enhancement: The grid column lines can now be turned off without affecting the grid lines drawn around the Impression bars.
  • Enhancement: The high-volume price highlight width can now be set for better visibility/emphasis.
  • Enhancement: Last but certainly not least, the parameter names were cleaned up and are better-organized now, which is a blessing given that this one is accumulating quite a number of them.
Some detail and new screenshots can be found here.
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In addition to the pack update, the chart templates have been updated to include the enhancements. Never fear, your existing templates will still work, though you may need to do a little tweaking given the additional, new parameters.

You’ll find the updated Acme Volume Impression templates in the chart template library as well.

 

Trade ’em well…

fractal

TPOs and Fractals – Pack Updates

2 brand-new studies and one update today! As with the other update this week, one of new studies and all the new features were all requested by the Acme loyal. The other big deal today is the release of the entirely new Acme TPO Evolution long-term study. A post waking through the details was published earlier today. Have a look.

Anyhow, without further delay, here is the lowdown on the updates:

Acme TPO

  • Feature: the study now features 2 display styles – profile and bars view. The Profile style is already familiar, but by popular request the Bars style allows you to ‘”explode” the TPOs out onto the bars.
  • Feature: Also by popular request, and bringing this feature up to par with the Acme Volume Profile, the TPO now has a configurable IB duration.

Acme TPO Evolution

This is a brand new take on a familiar idea that has been in the works for quite some time. It fills a void in the long-term analysis of markets, and it’s explained in detail on both the pack page and the post linked above. I’ve been using it on a daily basis for some time now and it’s brought a new level of clarity to my daily analysis of the big picture, particularly for instruments that’s don’t really have volume information such as spot FX.

Grab it here.

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Acme Fractals

Another brand new study that has been requested time and time again over the last several months. It features configurable fractal periods as well as “naked” price extensions and audio alerts for both peak and valley extensions. I think it’s a great addition to the Time and Sales Pack lineup.

Have a look.

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New Chart Templates

To go along with the pack updates, several new chart templates have been posted to the chart template library too. Might want to check them out now.

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That’ll be it for pack updates this week, amigos. Trade ’em well…

 

evolution

Acme TPO Evolution – A Walkthough

Well, at long last… here it is.

This is a study that has been in development on and off for quite some time now. While I have most certainly have shifted my technical analysis attention to volume profiling and order flow analysis, I started out as a TPO profiler. And even after shifting the focus of my strategy, one thing that has always stuck with me is that there is simply no escaping the clock.

Something about volume profiling I have always found a little unsettling is that it tries to ignore time. Many hard-core VP’ers think time is irrelevant to the market. I could hardly disagree more. Sort of (ha). At least one piece of evidence shows time does matter.

But how much it matters depends on your time frame. See? There it is. That word. Time. In the very, very short run, time is not so critical to trading. There’s just not that much of it, right? Only price and volume action matter – what I call the say and the do of the market. Price does the talking, but volume does the walking. In the short run, there is an edge to be gained by learning how to tell when what price is saying and what volume is doing agree or disagree. I’ve written a numbers of posts on this topic.

But in the longer run, distance is covered in terms of both price and volume and that distance blends the say and the do together into a cohesive picture of the auction. Basically what I am saying is this: you can make time your enemy in trading; you can try to relegate it to the sidelines; or you can make it your ally. I choose the latter. And in the physics of this alliance, the concept of distance is really the same as time. In my opinion, time is the great arbitrator of price (monkey says) and volume (monkey does). Why? Because humans are so very deeply tuned into time, and at the end of it all markets are composed of humans (even if participation is indirect). So given that, how can time not matter?

So you’re probably saying to yourself “blah blah blah, get to it already.” OK, here we go.

Evolution – Not Revolution

Nothing in this study is revolutionary. The concept of the TPO has been around a long time. But where it starts to differ from the ordinary is that the Acme TPO Evolution emphasizes 3 key dimensions/axes implemented more subtly in the session-focused Acme TPO. Those features are aimed at helping you understand the auction process on those 3 distinct axes:

  • Height/Range: How much vertical distance has the auction covered? For example, wide ranges indicate disagreement (aka 2-way trade), small ranges indicate indifference/lack of information or a high level agreement. Since these are relative terms, we can rely on the relative measures of moving averages to gauge the degrees of disagreement/indifference/agreement.
  • Width/Time: How much time have we spent in disagreement or agreement? At what prices? Lots of time spent at a tight range of prices means we have agreement (aka balance). Agreement and balance also foreshadow that eventually, inevitably, the market must fulfill its purpose of finding prices at which agreement or indifference are no longer possible (aka unfair prices in market profile terms). So, then, where wide areas indicate agreement, thin areas indicate disagreement over the “fairness” of price.
  • Color/Sentiment Evolution: That “fairness” is a human judgement and thus subject to change with new information, or even just a good night’s sleep. So TPO Evolution colors attempt to tease out how sentiment/emotion/perspective changed in the market over periods of time that are important to the decision-making processes of humans. Namely days, weeks, months and years.

There is a cadence or rhythm to all markets, and they resonate at the frequencies the participants. The time periods in this study are the frequencies at which the participants generally, er, participate. With the coloration at time intervals which are important to people, you can begin to see those “resonances” not as a series of trades but as an evolving (even emotional) story with a beginning, a middle and an end. But the end is never the end. It’s just the start of another start. Just like the evolution of a species and even life itself. TPO Evolution – get it? ;-}

So here’s the deal. If you learn how to understand the overarching story line of the markets, just like in books and movies, you can learn to anticipate the player’s next moves with a not insignificant level of confidence. Not to be too glib here. This is easier said than done.

The Elements of Evolution

So let’s look at the interplay of of range, time and sentiment evolution in 2 very different markets on the weekly time frame and see if there are themes in the stories that play out over and over again, and that the TPO Evolution can help a bring to the fore.

Fortunately, the elements of all market plots are pretty simple. When market participants generally agree (or agree to disagree/call a truce/wait for more info), eventually some of “them” become bored or receive new information that revalues a market. So “they” decide to pick a fight. They become provocative and try to start moving price somewhere away from agreement or balance.

A struggle for control breaks out (conscious or unconscious, it matters not) and eventually one side either defeats the other, concedes the battle or simply runs out of bullets. Either way they auction phase ends in agreement, and (generally) after a rest we start all over again. So, let’s see how the Acme TPO Evolution helps you read the plot.

The images below are very large and heavily annotated. Maximize your browser for the easiest reading.

Example 1 – EUR.USD 1 Week

Acme TPO Evolution - EURUSD - Week

Example 2 – ZB 1 Week 

Acme TPO Evolution - ZB - Week

(Not) The End, The Beginning

Really, these annotations are my personal, retrospective Cliff’s Notes of the auction. There are other (better?) ways to interpret the profiles. And there’s lots of nuance that I could not possibly fit on a chart. There’s also no way to know for sure what will happen next, but the point is that the addition of a 3rd dimension (color) – intentionally synchronized with time frames meaningful to humans – to the other 2 typical TPO metrics can bring an extra measure of depth to big-picture market analysis.

As I said above, the same plot elements play out over and over again in the auction and in each battle/act/chapter the characters leave tracks of intent. You just have to practice reading the auction as a story to turn those tracks into something you can use to stalk your next entry or exit.

Until next time… trade ’em well.

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Here are some additional screen shots. Stories already written, waiting to be read…

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Acme TPO Evolution - ES - Week

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Acme TPO Evolution - ES - Month

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[one_half first] Acme TPO Evolution - EURUSD - Month[/one_half]

[one_half] Acme TPO Evolution - ZB - Month[/one_half]

index

MLK Holiday Pack Updates

Hope everyone is having an enjoyable MLK day (or at least the afternoon) off.

Today we have two pack updates: the Acme Trade Planning Pack, which adds some significant new features to the trade plan; and the Acme Market Internals Pack which has one totally new study.

What’s awesome about this particular set of updates update is that about 95% of it was contributed by you, the individual Acme faithful, for the benefit of the Acme collective. I don’t mean to get all new-agey on you, and I’m definitely not a communist. That’s not how I roll.

But I am saying that Rancho Dinero was started with a dream. ;-}  A dream of letting the membership largely steer the, er, ship, in the direction of value it recognized. And I think that’s one of the things that really sets Acme apart from the other products of its ilk. Sure, you’re not actually slaving over the hot code compiler or anything , but in no insignificant way Acme is by you, for you. I love that.

But I digress. Again.

Here we go…

Acme Trade Plan

  • Feature: The trade plan now features notes per level. You can give it a name or jot down a thought and it will appear opposite the price label on the chart.
  • Feature: Each level can now also have its own audio alert. When price comes in contact with the level band, it will play a sound of your choosing. Each level can play a separate sound if you like, so it will be easy to know when price enters a particular band when you are anywhere within earshot of your trading desk.
  • Feature: When creating a new plan file for a given instrument, the file is automatically named with the symbol of that instrument. This makes setting up a multi-instrument chart/plan set a bit more automatic, especially if you don’t “get” the Windows file system layout. ;-}
  • Feature: Price level bands now have an optional highlight line that runs across the price level at the center of the level band and also encompasses the price and note labels. The highlight line can make levels on certain colors of charts easier to pick out of the background.
  • Feature: The default color for new level bands can now be set by the user in the indicator properties. Previously it was always Gray.
  • Feature: When the same trade plan is on multiple charts, edited and saved on one chart but not refreshed on another chart, the user is warned if (s)he tries to save over the newer plan file.
  • Fix: When used on charts where NinjaTrader does not format the price scale as a decimal number, such as with interest rate futures for example, the level band price entry would fail. This is now resolved.

Grab it here.

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Acme Tick Accumulator

Today we have one brand new study in the Market Internals Pack. This was requested by several Acme loyalists over the past few months, and was originally brought into popular consciousness several years ago by noted trading psychology expert Dr. Brett Steenbarger. It accumulates the values of the NYSE TICK index throughout the course of the session, and works in much the same way as a volume cumulative delta study. It’s useful as a gauge the strength of overall buying  or selling sentiment over the course of the US equities RTH session. You can read about the theory behind the tick accumulator from Dr. Brett here, then head on over and…

… grab it here.

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Acme Chart Templates

A few chart templates have been refreshed and some new ones added to the library in the last few days. Most notably for the TPO, the Volume Impression, and the market internals charts. So if you have not visited the library in a while you might want to…

… head on over now.

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That’s it for today. Trade ’em well…

 

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… as Detective Columbo used to say. There’s been a whole lot of folks getting tripped up by trying to install newer packs over the top of the same packs they already have installed. In other words, they grab a new version of Pack X, and try to install it over the top of whatever version of Pack X they already have installed.

The fact is that doing this can cause hard-to-unravel issues in Ninja because of the way it caches indicators in memory. Not a big deal, because you can ensure a quick and uneventful update (the best kind there is) by reading and following the pack install & update procedures in the FAQs. Or watch the screencast. Your choice.

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Kicking the Hornets Nest

Tick by Tick Volume Analysis – Futures Redux

Yep, I am gently kicking the hornet’s nest once again. I’ve refreshed one of the most widely read and (some say) provocative market studies on RD.

Read the just-published results here.

Have a great weekend, everyone…

Price vs Volume

When Price and Volume Disagree, Part Six

It’s been far too long since I’ve posted on this topic. I just looked and my last post in this category was all the way back in September! Man, things have been busy on The Ranch.

Anyway, I think you may be in for a treat today. Or not. We’ll see. But I’m going to walk through an example of one of my favorite setups – yes I said that, a setup – in the ES. Perhaps many of you have seen me post screen shots of this setup on Twitter. I’ve done that many times in the past, but now I’ll step through the elements in more detail. As always, I have a “clever” name for all my setups. And this one is no exception. It’s what I like to call the Flush-N-Flip®, or F-N-F for short. This is really an order flow pattern combined with a significant price level, and it occurs literally over and over and over and over and over again in the ES. It has proven to be a very reliable entry over time.

The F-N-F takes into account the elements of a good short time-frame trade:

  • A pre-identified price level selected from the greater market context… from the big(ish) picture
  • Hesitation or stalling of the price action at that important price level
  • Visible discrepancy between the order flow and the price action at or near that level
So let’s break it down visually. I’ve simplified some of the charts to make them less noisy and easier to follow.

The Bigger-Picture Price Level

Low-Volume Areas/Nodes (LVNs or LVAs) are my personal favorite for potential entries, and here we have a good one. Yesteryday the 1281 area was the bottom of the range, and we can see there was definite buying interest at that level. Yesterday we hit that level and moved all the way up to the next major LVN area – 1289 – so it’s a fair bet that the same buyers might be interested at that level should we find ourselves there again today. So I marked 1281 on my trade plan as an interesting potential long for today. Spoiler alert… that’s exactly what happened.

Here is my intermediate term study with the 1281 and 1289 LVNs. They were found automatically using the Acme Volume Profile Composite, by the way:

Intermediate Term Chart - LVNs - ES

The Price Action

Once the levels are defined, it’s time to hurry up and wait. It’s called stalking a trade for a reason. You have to wait for the price to come to you, then see if it’s worth taking a shot. And just before 7:30AM Pacific Time, the quarry entered the gun sights. And by the gun sights, I mean the Acme Volume Impression (AVI) together with the Acme Volume Balance (AVB).

As price moved down to 1282.50, we were starting to see some selling fatigue. Not classic exhaustion, just fatigue. This was visible in the AVI as a breakup in the deep reds on the sell side of the bars around the 1283 area, as well as the wicks underneath the AVB bars. AVB wicks mean that at one point during the bar, the imbalance was all the way at the bottom of the wick, but that pressure from the opposite side of the trade was beginning to assert itself on the order flow. Then there was the hesitation or stalling of the pace of the price action. Careful observers will note the 5 Range bars on the AVI were beginning to take longer and longer to complete. This is why I like fixed quantity bars so much… I like to see and feel the pace of the price.  Time and PnF bars just dont’ give you that. See Note 1 in the screenshot below.

Next, the in the final element of the setup, we made a new session low and an AVB divergence appeared and was marked with a green circle-arrow on by the AVB right on the Impression chart. This was a definite signal to pay attention! At this point, I was already… trust me. ;-} By the way, regular readers know how I treat divergences of any kind. To me, divergences are not gospel and they certainly don’t mean do something now. They mean pay attention. Examine the context. Something interesting might be about to happen. And in this case, it did.

Right there at 7:47AM, after the pace had slowed significantly, we got what I call a tiny tick at 1280.75… only 154 contracts! This is significant because it means there simply was no real selling interest at that price. Moreover, there was a nice tail underneath the negative balance on the AVB, and the next bar showed a positive delta, also with a lovely tail hanging below it. No question about it, buyers showed up at the 1282 area, and with nice volume too. That’s a pretty solid signal to get long with a logical target at the 1288-1289 area given the current ES average ranges. This is a trade I could feel good about with a stop below the 1280 area, had a nice risk-reward ratio and several scale-out possibilities along the way. See Note 2 below.

Acme Volume Impression - FnF - ES

So let’s review – and I had an important price chosen within recent market context, hesitation of the trend at my price and visible evidence of opposing forces. These are the essentials that make the F-N-F such a solid trade for me in rotational days such as this.

Hope this was informative for you. And as always, amigos… trade ’em well.

double_feature_graphic

Double Feature Monday – Two New Screencasts

Amigos,

I’ve been trying to whittle down my to-do list for the Rancho web site, and making pretty good progress so far this week. Yeah, I know it’s only Monday. ;-}

Anyway, couple new screen casts that I have been meaning to create forever. These start at the start, so to speak. One shows the the end-to-end process of downloading, saving and loading chart templates. The other one is all about installing and updating Acme packs.

Enjoy…

 

Happy New Year

Happy New Year + Updates and New Releases

Hope everyone’s first week of 2012 was a good one.

So today we have a couple of pack updates. First, the Pro Edition of the Acme TPO pack makes is debut. And we also have what amounts to 2 new brand spankin’ new relative volume studies.  Or, more precisely put, 2 new modes for an existing study.

Here’s the lowdown on the updates:

Acme TPO

As mentioned, the Pro version of the Acme TPO Pack busts its way out into the open today. At this point, really, the key difference between the Deluxe and Pro Editions is that the Pro Edition has the ability to export profile statistics just like the Acme Volume Profile. Oh, you didn’t know it could do that? Well, how about having a look at the screencast. As I like to say, it makes gettin’ your curiosity on very quick and super simple.

Here’s what else is new:

  • Change: a small change was made to long-term profiles, including the date display and the TPO block coloration. The date above the profile is now displayed as a range instead of just the start date. Next, the coloration change was necessary because the auto-gradient feature was not consistent across colors due to a couple of boring technical factors. So the long term TPOs (week/month/year) now just use the “start” color. Simple, crisp and clear.
  • Change: The indicator parameter names and descriptions were cleaned up and a grouped together a bit more sensibly in the parameters list.
  • Change: Bold fonts were turned on by default for TPO bracket letters (if shown), and the default font size was increased a bit.
  • Fix/Feature: The transition between displaying and not displaying bracket letters was  improved when the scrolling or manually scaling a chart. Previously, some prices would show the bracket letters while some would not at certain vertical scales. While this was not incorrect in any way, it could be a little visually distracting and was caused by the fact that not every price on a Ninja chart is allotted the same number of vertical pixels. Now, in 99% of cases, all or none of the bracket letters should be shown when their display is turned on and the transition is cleaner and quicker now.
  • Feature: Since long-term profiles only update once per TPO bracket period (30 mins, for example), an optional text display was added to let you know what time the next update to the profile will occur.

Grab it here.

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Acme Relative Volume

Even though it existed previously, at request of multiple members the Acme Relative Volume study in the Volume Extras Pack now includes the ability to display relative volume, relative bar range and relative volume churn. The type of data displayed is now a parameter, and you can have multiple instances of this one on a single chart. All the details are on the pack page, so…

Grab it here.

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That’s it for this weekend’s updates, amigos. There will be some substantial updates and releases in the weeks ahead. So as they say, watch this space.

And as always, trade ’em well…