Trading the 6E with the Trade Size Analyzer for NT
Several weeks ago I asked the question what people use as a trigger (see https://futures.io/traders-hideout/16822-finding-trigger-signal-indicator.html). While I appreciate the varied responses I must admit I was somewhat surprised and somewhat disappointed. And so I took it upon myself to answer my own inquiry and wanted to share what I had in mind. I assume this initial post will be somewhat lengthy so I apologize in advance but for the sake of clarity I think it would be beneficial to first assure that we are on the same page.
I have always considered volume to be a critical component. With the advances of gomi and Zondor and the ability to utilize and store persistent volume at the bid/ask (I use NT7), a whole new realm of volume trading is now available.
Whether naive or intuitive I began with a simple assumption, if the market is going to change direction, either on a pullback or for a market reversal, something must change in the way that buyers and sellers are entering the market. If the market is to rally higher (as from a pullback), there must, at some point, be a change in the way that buyers are entering the market and the frequency by which they are doing so. The same would have to hold true for sellers who want to drive the market lower. Something would have to change within the order flow.
Often we speak of one side or the other being more "aggressive" in terms of Buyers lifting the offer or Sellers hitting the bid. gomi's volume ladder certainly provides evidence when this occurs. My difficulty in the ladder, however, is that it only tells me what has happened and not the extent to which I can gauge that it will continue. I can see for example Buyers lifting the offer and Sellers hitting the bid but have little confidence in the duration that they will continue to. My point is not to predict or to suggest that it is possible to know what someone sitting on the sidelines is going to do in the next minute or the next 5 minutes- that would be impossible. But my point is to suggest that the ladder only suggests what has happened but doesn't give any indication of what is likely to happen. For that, we need Zondor's contribution building off of gomi's work.
I think that Zondor's Trade Size Analyzer is a phenomenal contribution. By taking gomi's ability to capture and store trading at the bid and the ask and by adding the ability to quantify those orders according to size, a whole new level of possibilities emerge. Before I go any further I need to make something perfectly clear. Volume, as I use it, is not a stand alone tool. It is a single voice in a quartet. Volume, without a preexisting ability to identify potential Support and Resistance levels is worthless. Volume, as I use it, can confirm a level/area is going to hold. A reliable methodology for identifying potential Support and Resistance levels is required. A trader could get highly frustrated using volume alone. (I'll address S/R in a later post.)
When trading volume it seems to me that there are two possible scenarios: First, one side loses strength, interest, momentum or call it what you will. Simply put, they run out of buyers or sellers for whatever the case may be. This makes it much easier to change direction.
The second scenario is that the conviction of the opposing side has a greater conviction to over come whatever short or long term conviction of the current direction. That is, there is no loss of interest, and it is brute force by which a direction change is accomplished.
Volume size becomes the key.
In the first scenario, this loss of interest would be manifest by a significant drop in overall volume (one side runs out of buyers/sellers thereby reducing the overall volume). It would also be seen as an increase in volume sufficient to change direction.
There would have to be a halt or a stoppage in the current direction followed by an increased interest in the opposing direction. What does this mean, or more to the point, what would this look like?
First, it would be a significantly smaller volume bar and Second, there would be a significant increase on that bar of one side over the other to push it in the opposite direction. For example, if the market were trending up and the market pulled back on short term selling to resume the uptrend, according to the first scenario, the volume bar would be small and would show an increase in buyers with a decrease in sellers. The opposite would be the case in a down trend. That is, the volume bar would still be small and would show an increse in sellers with a decrease in buyers. This is the confirming Volume bar.
The second scenario is more difficult. As there is not a decrease in either side, the volume bar would be quite large. Further, depending on the order flow within the bar, volume could be greater on the sell side than on the buy side and yet have the bar close higher on increased buying. This means that buyers were lifting the offer inter-bar and the buying volume is masked by an increased attempt of sellers hitting the bid. Eventually one side will have to emerge victorious or the market would never move.
What does this mean, or more to the point, what would this look like?
First, it would be a large volume bar and Second, there may not be any increase at all on one side over the other. Using the same uptrend scenario and pulled back on short term selling, according to the second scenario the market could trade higher on what appears to be increased selling. Eventually, of course, buyers will be revealed by both price and volume but it could be at a less than ideal location.
I have not found any way to trade the second scenario. Unfortunately, it occurs more often than I care to admit.
I pass on the trade as I am not going to chase it.
Choosing the right timeframe would be a critical consideration. If the time frame is too big then no advantage is gained as both sides are muddled in the mix. If the timeframe is too small then there is a tendency to get a lot of false reads.
Why I don't use Range charts. I like Range charts. The idea of bars that are purely driven by price is very appealing to me. Very early in my trading career I saw their value and began utilizing them. However, when it came to combining them with volume I ran into a snag. As Range bars are not dependent on and are unrelated to time, time could become my enemy. I found that often a Range bar could spend quite a bit of time trading within that Range bar. All the while it was trading within the bar, volume was building up on that bar skewing and distorting what was going on and who, if anyone, was gaining an advantage.
I trade the 6E and there are times when trading slows. It doesn't stop but it does slow. It's at these times that volume on Range charts was not my friend.
Volume charts, imo, are the best type of chart to use for using volume analysis. First because there is a constant (400Vol, 1000Vol, 2500Vol) on every bar. That constant becomes a valuable frame of reference when gauging between which side is gaining the upper hand and when. If every bar has the same number of contracts traded then using that as a base would make it easier to spot when one side is gaining an advantage over the other using the Trade Size Analyzer for NT.
Unfortunately I don't use Volume charts. It's not that I don't like them. Far from it. I like the "constants" of both Range charts and Volume charts. For me, it's a trading platform decision. I trade with Ninja Trader and I have multiple time frames on my chart. Anyone familiar with Ninja Trader who uses multiple time frames on one chart understands the issue. Any other bar type, other than a time based chart, can get heavily messy as the whole equidistant bar thing gets negated. Since I need to have multiple timeframes on my chart and in order to get equidistant spacing between bars I have settled on a 20sec chart. For the 6E without the need for multiple charts I liked the 3 Range and the 400 Vol charts for my decision charts.
Trading volume on the ES can be very difficult. It's one of the reasons I stopped trading it. Because it is so commercially traded, different institurions have different agendas. An institution, that is only interested in a few ticks can alter the volume by entering the market to drive it counter to the direction, sufficient to make their ticks and then get out. The result is volume that is inconsistent and confusing. I don't like the ES. A year ago you'd never get me to look at any other market other than the ES. Now, you'd never get me to go back. It's too difficult, for me. There are much easier markets to trade than to have every tick so heavily contested.
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Trafford I never looked at them so I thought I'd throw a tick chart up just to see what it looked like. To be honest with you, I didn't like it. The volume bars were very uniform and nothing really jumped out as a significant change in any of them- even in hindsight. If they aren't obvious in hindsight then they aren't going to be obvious on the right edge of the screen when it matters most.
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I discovered a long time ago something that changed my trading mentality and the way that I approached the Markets from a methodology perspective. It subsequently became my gauge when listening to vendors peddling their product. What I discovered was that in order to put on a successful trade, I first needed to answer three questions: What? When? and Where?
What? deals with Market direction. What side of the Market should I be on? A Buyer? or a Seller?
When? deals with Market timing. When the Market does this- then I look to take a trade.
Where? deals with the Market area and/or price at which I want to engage the Market.
Colored Simple Moving Averages answer the first two questions. The first trading course I ever bought was from Todd Mitchell at Trading Concepts. Todd traded using Keltner Bands. He used them differently than how other people apparently use them. He used the area between the centerline and the lower band as the Buy Zone and the area between the centerline and the upper band as the Sell Zone. I utilize the same concept. As I realized the centerline is just a Simple Moving Average I decided to drop the upper and lower bands. There is an indicator on the NinjaTrader forum that colors the centerline according to the direction that it is trading- Green if the SMA is rising and Red if the SMA is falling.
I apply Simple Moving Averages to an 8 Range Chart. I like the consistency in price as opposed to time intervals and others that vary in size. It's a personal preference that works for me. I have three Simple Moving Averages: 25; 75 and 150.
Now I can begin to answer my three questions. Answering the What? question is a simple matter of reading the color of the SMA- When they're green I'm a buyer When they're red I'm a seller. When they're different colors and crossing I can expect chop- like today. They are telling a story and it's my job as a technical analyst to read that story.
The Simple Moving Averages also answer the When? question. When the Market trades back to one of my SMAs then I can begin to look for my trade. It's worth noting that in order for the Market to trade to the 75 SMA that the 25 SMA has to fail. I can't get married to trading only the 25 SMA. I trade it at most twice and then wait for it to trade to the 75. The same holds true for the 150 SMA- the 25 and the 75 both have to fail in order for it to trade to the 150.
A trick I use is to extend the moving averages out using the Ray drawing tool (F3) in NinjaTrader. It helps me to gauge the general location of where the moving average is going to be.
The Simple Moving Averages begin to narrow down the universe as to when and in a broad sense where I am going to start to monitor the Trade Size Analyzer for a change in trade size.
Last edited by Aragorn; February 8th, 2012 at 09:16 PM.
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Just like to thank you for your posts and observations and for drawing my attention to Zondors Trade Analyser.
I've been trying to understand how to use volume for some years. i'm always drawn back to it when ever I leave it alone.
Don't know if you've come across a trader by the user name of ElectronicLocal, not on futures.io (formerly BMT).
I have no association with him, just that much of what you say reminded me of his approach and it may be of some benefit I don't know.
What I find interesting is the "context" we're all trying to find, or at least it's the lack of context within which to trade that seems to render almost all approches inconsistant.
EL uses an EMA 33 and EMA99 on a range chart with what he calls "order flow" to trigger entries.
I recall he uses MP only for levels within which to frame his expectation.
Expectation and not predication.
EL aside, I have tried to put volume in context from learning a method that relates volume to price, in so far as volume moves in cycles of dominance and non-dominance. That cycle is a repeatable "phrase" if you like.
just as price moves and retraces etc...
The main question for me is when does a retrace become a reversal, not withstanding that every reversal starts with a retrace.
Using the containers (trend lines) within which price moves, in association with the volume cycle to which those containers relate has helped me maintain a context of which direction is dominant or non dominant.
Knowing this means I am able (to the best of my ability) to see if/when I am on the right side of the trend and then trade accordingly.
Sorry to ramble, but your thread, which I've just found, is very interesting for me.
Your question of What, when and where are at the heart of it all.
What I've learnt in my volume analysis is answering those question to a large degree, although I still have issues with what's termed "fractal level" (ie what fractal am I on ? as a volume cycle (fractal) is built by faster cycles) but it's not a problem that cannot be dealt with in real time.
I happened to post a few charts in tigertraders ES Spoos thread today if it is of any interest.
Lastly my thx again and if I may ask, is the Zondor TA available in futures.io (formerly BMT) ?
Ps I've attached an example from today posts in tigertraders thread if it's not an intrusion.
The shorts at around 12.30 was due to me selling into perceived weakness.
I was able to correct things by covering and going long once I saw that doninance was long and that what I read as an up retrace in down trend was in fact the first leg of a dominant up trend and volume told me that.
It's important to mention that I'm using the volume cycle as a leading indicator of price.
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Last edited by zt379; February 8th, 2012 at 10:17 PM.
zt379- I haven't ever heard of ElectronicLocal. I do hope to reiterate, for my own peace of mind, that volume, and in particular Zondor's Trade Size Analyzer, while it is a phenomenal tool is not and probably cannot be something that is used on it's own. It's a piece, and an important piece. Identifying potential Support and Resistance Levels is a critical precursor to trading volume.
I am not an expert on volume and don't claim to be. Nor can I claim that what I've posted is the only or even the best way to trade volume or to use the Trade Size Analyzer. It is a work in progress. I have posted my remarks as observations in the hopes that others, more knowledgable than I, can also share their observations and discoveries.
As I read your remarks I was pained because I am not adding posts in sequence of importance. My trading is a top down approach with orientation at the forefront. Having studied Market Profile for a number of years it has ingrained a sense of understanding where the market is trading in relation to yesterday, the last few days, the last week and how it traded in the overnight. From these considerations I can get a "context." I call it orientation. Is there strength? Is there weakness? Is there indecision?
Orientation comes first. The Simple Moving Averages come second. Support and Resistance levels come third and Volume comes last.
This Order is important because it puts in perspective why the SMAs failed yesterday morning about 7:30-8:30 EST. Market Orientation comes first and there has been strength in the Market as it had traded continually higher for the last week or so. Around that time it was beginning to show some signs of weakness well below the 150 SMA (8 Range). The 25 SMA was red and the 75 SMA was flickering red. Between how far it traded below the 150 and it being enough to effect the SMAs a consideration of Market weakness could have been considered. Not so! It made an abrupt reversal and traded well past the red SMAs. The point I am trying to make is I don't just trade the SMA's. I have to put them in the context of where the Market is trading and how it has been trading overnight, in relation to yesterday etc. Obviously with the Euro the whole European debt crisis and the manner in which issues are being resolved are going to effect it. It can turn out to be a house of cards.
Zondor's Trade Size Analyzer for NT can be found on this page in the Elite section: https://futures.io/download/vip_elite_circle/page-1.html&page=9 I have the settings for mine at 1,3,5. I want to come back to this topic again but saw your post and wanted to respond ASAP. I think that understanding where the Market is trading and all of the signs and clues it gives are critically important.
Thx for the reply.
I made my post at about 3am GMT. Perhaps I came across the wrong way, my apologies, my fault for posting so late.
I do follow what you say. A kind of "order of events" in respect to your list of priorities that starts with orientation.
I only mentioned Electroniclocal as it is very much on the same page. He has a blog under that name so easy to google. Also I only mentioned it, as with my volume analysis with intention it might help in what is a large topic.
I'd say finally, that from my perspective, volume can indeed be the first in the list. What price is doing in terms of that volume involves it's relationship,which you spoke of so well in your first post. Where perhps we differ is that because volume goes through a repeatable cycle (dominance/non-dominance and a return to dominance) which is the process defining a trend, if we can learn to know which leg of that cycle we are in, we then come to see the where, why and when to trade.
Many thx for the zondor TA link, i wasn't finding it via the search facility.
Every moment I wake up I realize I know nothing, and then I smile...
Last edited by zt379; February 9th, 2012 at 05:53 AM.
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I've integrated some of Electronic Local's methods into my trading, but as far as I know he does nothing with trade size analysis. Barry Taylor at Emini-Watch.com would be a better research resource. His ProAm indicator: Volume Patterns – How to Spot the Professionals at Work
is similar to the Trade Size Analyzer, and he has numerous videos demonstrating its use. I used this indicator for a while, but it was too discretionary for my taste.