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When I was a kid growing up in the Midwest I started working at age 13 for my uncle who owned a service station. Those were the days when someone (me) pumped your gasoline for you, checked your engine oil and washed your windshield. I worked for him all through high school and into my early twenties. This was long before computerized fuel injected engines were mainstream, if fact many of the engines I worked on had manual chokes and no power steering. You didn't have to have a degree in engineering to be considered a mechanic.
My uncle instilled in me a work ethic which as hard as I tried in later years to free myself from I could never make the separation. One of his famous sayings (to me anyway) was, "Do something, right or wrong!" As an example, I might be working on getting an engine to start and tell him, it's either the ignition points or the ignition coil. He would often respond by saying, "Instead of standing around here doing nothing,Do something, right or wrong!" In his not so subtle way he taught me to take a risk. Of course he being a Midwest Conservative, he always suggested the "cheap" option first, in this example, it would be the ignition points. It was his way of limiting risk, since even back then returning electrical automotive parts was a "no no."
The purpose of this post is to caution traders as to the quantity of indicators they feel they may need to make a trading decision. I refuse to get into a pissing match over price action trading VS technical trading so don't go there, thanks. Although I consider myself a discretionary trader, I use the previously outlined indicators to support my decision making.
How Many is to Many
I've seen charts posted here on BM's forum and other sites that cover almost every candle/bar on the chart. Of course since I'm ignorant of most of the indicators on the chart and don't know what I'm looking at anyway, I have no opinion of their purpose or validity, I'm just commenting on the quantity of indicators they use. To each their own of course, but the amount of data points the human brain can effectively process is proven to be limited. I'm not here to judge what other traders do, as far as I know they may plug all the visible data points on the chart and many many more into their CPU and let "it" make the decision. Again, that's another topic for another thread.
I like to keep things simple. When I prepare for a day's trading session, I look at the overnight news events, read a couple fundamental commentaries, analyze my charts and price movement all to make one of three decisions, buy, sell or wait. In the past I often found myself complicating trading as a whole by thinking there was more to it than there really is. All I can do is buy, sell or wait. The "trick" or struggle for many traders is making the decision, and that is what most traders use indicators for. When I began using indicators I considered them as "votes" assuring me my opinion of market direction was correct and fell victim to the notion the more the merrier.
The 6E like most of today's markets is in a state of perpetual motion, it never stops, only pauses. Simply put, price is either going up or going down. The distance or the enthusiasm of the last move may not alert my concern but I'm certain price is either going up or going down in the future. After taking my seat at my trading station I visualize price movement scenarios in both directions. If the market moves down, where would I consider entering a short position and where would I place my stop? How far would I expect a down move to travel, what would be a likely target area right now if price broke to the downside? I do the same for an up move, I consider an entry,a stop and a target with the information the market is showing me right now. Think of it as if you're a shortstop on a baseball field. You know who's on base, what base their on, who's at bat, how many outs and the the current count on the batter. If the ball is hit to you you need to know where to throw the ball to make the best defensive play or series of defensive plays, long before the ball is pitched. I find this true in the market as well, making the decision to wait, doesn't mean standing in the outfield with your ballglove over your face, like a 5 year old "T" ball player! In my case waiting means evaluating the congestion area, analyzing the formation of the volume histogram and keeping an eye on the bids and asks.
We've all seen the perfect setups, price touches this line or that line and pulls back or rockets off and touches this line or that line, after the fact. Then I take that indicator and throw it on a few months of old data and try and try to figure out how to trade it. Then I want to add another indicator to confirm the first one, and on and on and on. When in fact if I had the balls to pull the trigger or have a resting order sitting above/below "that line" in the first place everything would have worked out fine. I'm all for back/forward testing setups and indicators but there comes a time when a trader needs to place the order. If I'm trading off a VWAP's standard deviation line or a POC from a few days ago I might have only one chance for an entry, and price may never get within 10 points of that level again. Waiting for a moving ave to turn or the close of a 5 minute bar to confirm my decision may be the difference between getting in the position or not. It may also mean "missing out" on a nice piece of the move, the piece that's deep in the move, the piece that's not retested, the piece that allows me to add to my position with no added risk.
How many indicators are enough? As many as you feel you need, but I'm not alone when I say the human brain begins to "short circuit" with more than 5 or 6 data points. Computers can utilize an unlimited amount of data points and it's not uncommon to see small traders try to program/code themselves out of the decision making process entirely. My suggestion is this, if you're using a lot of indicators and still find yourself missing trades while waiting on confirmation or fine yourself saying "I knew I should have taken that trade" ask yourself why you didn't take the trade. If the answer is because this line wasn't red/green or this line wasn't above/below that line consider this a wake up call. A wake up of your sub conscience/intuitive mind. How many times have you repressed an inner urge to enter a trade before your indicators were in alignment with your analytical mind only to miss the trade and sit by and watch it unfold as you saw it in your mind's eye. Why didn't I take that trade? If I limited my risk and placed a stop in the market that I was comfortable with, what harm could come? Trading is about risk, and limiting risk. Do I feel better emotionally, or am I limiting my risk more effectively if I wait for confirmation?
I took this from Wikipedia, A decision can be treated as over-complicated, with too many detailed options, so that a choice is never made, rather than try something and change if a major problem arises. Can you see how this portion of the Analysis Paralysis definition aligns with the wisdom of my Uncle, Do something, right or wrong." My uncle assured me what ever the outcome, we would follow through and solve the problem. Keep in mind the fact any thing can happen in the market, is any trade really less risky than any other? I'm not advocating jumping in and out of the market haphazardly, far from it. I'm suggesting listen to your inner voice, control your risk and take a few trades based on your intuition. The key is to control your risk, and learn to differentiate between your intuition (inner voice) and emotional trading. My experience with intuitive trading is, it's in my head ,,,,,, emotional trading is in my gut! I call it sending in a soldier, I give him full ground and air support, limit my risk and enter the trade.
In my last post I cautioned the use of using to many indicators in the decision making process and how it is possible to become over stimulated and end up not being able to make a decision at all (Analysis Paralysis). The idea for that post came from the following trading session. I had planned to post these charts within the last post but time became an issue, so now you'll have to suffer through another long winded play by play of one of my daily trading sessions.
Feb 14 2012 2am Eastern
When I sat down at my trading station the market was making a new low for the session after trading thru the 1.3150 level that had acted as support throughout the night. According to my analysis each previous test of this level held and price traded higher. I've mentioned before in this thread it is wise (for newbies) to focus on a single market and a single session and learn that market's "personality and characteristics," the 6E has many. When I find, several of these "quirks and nuances" playing themselves out during a trading session indicators can become less important to my trading decisions. I'm going to back up here and restate that sentence. It's not necessarily that I find these it's more like they are identified by my minds eye, intuition. If I look deeper at all the "quirks and nuances," and attempt to analysis each one individuality the market often moves on without me, and I'm caught, as my Uncle would say, "standing around doing nothing (over analyzing)." So when this intuition of price movement becomes apparent the time to act is now. If you snooze, you loose. This brings up the ability to differentiate between intuitive trading and emotional trading based solely on the fear of missing out on a move, this is a personal judgement, like many aspects of trading.
When I sat down to trade this session this is what I saw on the chart below.
1. There was a raregap at the open of the Globex session that wasn't filled
2. Price was below the VWAP'S 2nd standard deviation band
(a) I've said before, a mean reversion trade is usually a good trade at the 2am open, but the profit potential is usually small. This particular trade however could yield 20 points with a target at the VWAP, I'm interested.
3. Price is below the Pivot, in fact it's below the Buy Number, (another potential target)
4. I've also mentioned in previous posts I give the 6E a lot of berth to maneuver around whole numbers, in this case the whole number is 1.3150 which served as support throughout the night.
{A Note} The chart above shows a volume histogram beginning it's calculation at the open of the Globex Session for trade date 2-14-2012. This volume histogram is set to show (2) two days of volume data. This setting allows for a clear visualization of the 9 point gap separating the two dayvolume profile.
The 2am bar opened at 1.3149 and began to sell off. As price traded below the VWAP'S 2nd standard deviation band I made the decision to enter long at "my sweet spot" 16 points below 1.3150 or 1.3134 (I've mentioned this area before in this thread) and target the VWAP. I felt comfortable with one half of my stop one tick below the low at 1.3127 and the other half at 1.3120. As the market moved down my momentum indicator showed a sharp drop and potential for a reversal. The drop from 3150 to the low 3130's caused an expansion on my volatility indicator (to the down side). These indicators are not on this chart but I was "glued to them" just as well. As every indicator I have was telling me I might be making a big mistake, I felt confident with my decision to enter the trade and the amount of capital at risk. While being filled on the 2:05 bar and not making a lower low, some nice volume came into the market and left me with a "BIG FAT OIL CAN" with 50/50 bid vs ask volume. I felt more confident.
I closed out half the position as price hit the VWAP. The enthusiasm to lift price off 1.3150 was still in the market and support at the VWAP seemed obvious. As price approached the "gap" volume, volatility and momentum came into the market and supported my decision, now the market was trading above the Buy Number, further supporting my decision. Also the second chart shows a volume profile for this session that begins charting at 2am. As price traded at the bottom of the gap the POC on this chart shifted above the VWAP. As the gap was filling in on good (not great) 'up' volume I decided to set a target at 1.3200.
Price is now trading above the Buy Number, above the VWAP, above the 2am POC and above "my sweet spot" 16 points above a whole number (1.3150). As price filled the gap and closed at the low of the bar all my indicators were in agreement to go long. As Price sold off, retraced and touched the VWAP I loaded the boat for a run to 1.3200.
When Price touched the 90's momentum increased and pushed price thru 1.3200. When price traveled thru 1.3200 to 1.3207 ..... 9 or 10 ticks from the prior day's POC it (the POC) acted like a magnet and pulled price right to it. You got'a love this stuff.
Trading can be an extremely rewarding experience, it can also be very frustrating. I've tried my best to keep all my posts in this thread (and on the forum) in the first person. Mainly I've written about my trading journey and my personal experiences. My intention with this thread is to help traders find their way through a lot of the nonsense and develop "Their Own" method/strategy for trading the (6E) market using Old School studies. To continue that endeavor I wanted to post some detailed guidelines that new traders might find useful as they prepare to begin interacting with the markets. This is not how I started my trading journey, mainly because the tools available to beginning traders today weren't around when I began trading. In my opinion, if these guidelines are considered and hopefully followed to some extent they may save traders from a few common mistakes and relieve some early frustrations. In this post I ask up front for your forgiveness for using a "third person objective" and probably many generalizations, thanks.
I've been approached many times and asked if I would help a trader with an issue, mentor a trader or just critique a series of trades they've recently made. I've found if I ask one question I can almost instantly ascertain the level of seriousness the trader places on his/her trading and if I can honestly be of any help or not. The question I ask is, What have you been studying?
What have you been studying?
I've found most new traders and some more experienced traders can't answer that question directly and start down a laundry list of crap they think I might want to hear, if I hear more than three topics I prepare myself for a bumpy ride. I'm listening for a single sentence like, "I'm studying channel breakouts," or "I'm studying moving average crossovers." A focused and precise answer to my question will often emerge from a focused and serious trader. The first thing anyone wishing to participate in the markets needs is a belief or theory of how or why the market moves from one level to another. This is what I'm fishing for when I ask the question, what have you been studying? Knowing the belief a trader holds about the market will often answer the question whether I'm able to help or not. For example, if someone asks me to help them with geometrical trading patterns or candlestick pattern recognition I'm quick to decline. I simply don't believe in it, and have no desire to invest my time or effort into proving to myself the theory is valid or not. There are plenty of theories about market action, finding the one that fits your personality is in my opinion a prerequisite for successful trading. The theory that fits you best may not be the first or last theory you pursue but focusing on one theory at a time and applying an honest effort toward studying it will get you much further than jumping from theory to theory and never giving any approach the time and effort it needs to bear fruit.
Once a trader settles on a theory and has made a decision on a basic concept to exploit that theory he/she can then begin to develop and test a trading system. I'm going to outline an example of what I consider the steps to developing a consistently profitable trading system, crude of course and very basic but the concept may be new to many who read my thread.
Getting Started
In my opening posts on this thread I covered the importance of identifying a time of day when the market is active and the trader is available to devote his focused attention to his trading. To refrain myself from reinventing the wheel I'm going to stick with the 2-6am et trading time frame. With a "time to trade" chosen my next task is to form a belief or identify a reoccurring movement that I feel I can exploit for a profit.
Assume I've noticed a retracement to the VWAP time and again as I study my charts over the weekend. With further study on past data I notice this retracement occurs consistently each morning while I begin my trading session. I develop a theory this movement from one level to another is tradable. I decide to design a system/method of trading this movement and test the idea. I'll call it the 2am reversion to the VWAP trade.
Simply stated I want to see if I can:
1. Limit my risk on each trade in relation to my account equity
2. Extract a consistent weekly profit
This chart shows the first trade. At 1:55 am the blue line of the -2 SD (standard deviation) was 1.3059 and price was trading above that price. At the open we place an order to buy one contract at 1.3059. At the close of the 2:00 bar our order isn't filled and the -2 SD moved down to 1.3058 so we move our order down to the -2 SD line at 1.3058 and we are soon filled. Price moves up as the analysis of our historical data indicated and we exit our trade at 2:45 @ 1.3088 for a 30 point profit.
Tuesday we return for the 2am trade and take a short position at 1.3130. This trade acts like it's going to go our way when the second bar fails to make a new high but the third bar moves against us and the market stops us out at 1.3150 Triggering our maximum stop for a 20 point loss.
Wednesday we're back for more. Today the range is a bit tight and the entry happens later in the session, on the opening bar of the London session. We take a short position at 1.3279 this trade tests our commitment to our short trade and we take 11 points of heat on the trade. Price eventually drops and we're filled at our target for 10 points of profit.
We're hard core traders and this trade proves it! Thursday's 2 am bar opened 2 ticks above the 1:55 +2 SD line and filled our short entry at 1.3305. Almost 3 hours later at 4:50 am price trades thru our target (a rising VWAP) and we're filled @ 1.3279 with a 26 point profit.
Friday's trade was filled long at 1.3252 @ 2:25 am after an hour of this trade showing us mostly a losing trade with 12 points of adverse excursion price made a move up and within one hour to the minute, price traded back to the VWAP and filled our resting order which closed our position at 1.3263 for a 11 point profit to end our week. TGIF
This series of 5 trades in 5 days rewarded us with 57 points of profit worth $712.50. Not a bad week for a newbie, trading a 1 lot! I've written about this trade previously in this thread and I've stated before I consider this is a high probability trade. If someone is looking for a simple trading system complete with mechanical entry and exits, here it is, good luck. But my real intention of this post is what follows.
Loose While You Learn
I'm sure someone will attempt to trade the 6E with this system. Maybe they'll stick with it and reap unprecedented rewards, that's great, I hope it works out that way. But I'm here to offer guidance to struggling traders and offer them insight to devise their own unique method of identifying trading opportunities. I believe the hard work of trading is finding a method that fits your personality. IMO, the best tool for this job is the trading simulator, if used properly. There's no reason to Loose While You Learn any more, those days are gone. The lure of money makes people do things they normally don't do, and the market will prove that to you again and again. How many readers of this post could take one trade per day win lose or draw, shutdown their trading station and walk away for the day? How many readers would or could take the five trades posted and sit tight until the stop is triggered or the target is triggered? If I altered any of the rules pertaining to these five trades the outcome would be negatively reflected in the weekly P&L, it's that simple. When using a trading simulator the level of benefit is proportional to the level of seriousness you assign to the simulated equity account. The more you treat the money in the simulated account as "real money" the more benefit you'll receive. The simulator allows you to learn how to trade with 0% of the cost. Trading is a business, and learning how to trade doesn't come cheap but many traders play around with their simulators and have no idea if their strategy works or not! They play around with position sizes they only dream of trading, they enter stop orders far beyond their acceptable risk tolerance. They hold trades for hours just to prove to themselves "they were right" regardless of the drawdown. A trading simulator is a powerful tool and should be respected.
If you have identified a trading setup write down the rules on paper. It was suggested to me to keep the required parameters under 6. For example, 1. the 5min chart must show an up trend 2. this MA needs to be above that MA 3. enter long when price pulls back .618% of the last 5m bar 4. enter stop loss order 1 tick below the signal bar and 5. always take profit on whole numbers
Always know your risk level. Have a maximum loss per trade. A maximum loss per day when you will stop trading for the day. And a maximum system loss. Example, if the system draws down your account 15% stop trading and reassess the system.
Set weekly goals for yourself and develop the discipline to follow thru on weekly intervals. Example, I'm going to follow my written rules to the letter each day and evaluate my progress each Sunday. I'm not going to make any changes to my system between Monday and Friday. Make notes of changes, analyze the changes as the week progresses and slowly (one change per week) perfect the system.
When you can consistently extract profit from the market on a weekly basis allow yourself to trade live. Expect your live trading to be 50% of your simulated profit.
If you can focus your efforts and maintain the discipline needed to achieve these goals your "final frontier" will be managing the emotions involved with trading real money. The benefits of the simulator are many. I've found the comfort of knowing how the system preformed in forward test after forward test over several series of trades helps curb emotions tremendously when taking a system live in the cash market for the first time.
A final word, prepare for "what if's." Locate the phone number to your brokers help desk and tape it to your computer. What if, your computer crashes, data server or internet goes down. You want to be able to stay calm call the help desk and flatten your positions.
Most of today's markets never sleep, the 6E is no exception. The information, price and order flow from around the globe is seamless and instantaneous. At anytime from anywhere …
The VWAP builds continually throughout the entire session, with price weighted by the volume traded at that price. An uptrending market that is attracting volume from buyers will show a smooth rising VWAP, price will remain above VWAP and will build distance above it.Conversely, in a downtrend that is attracting volume from sellers, we will see a steadily falling VWAP. Price will remain below VWAP and will build distance below it. When we see price crossover the VWAP several times this is an indication we are not trending on the day. On range days, fading the oscillations above and below the VWAP often proves to be a successful trade.
The Perfect Trend ?
I don't know if it is or not but "in my book" this chart was to perfect to pass up and not post, (sorry, "other" Euro thread ). Identifying a trend can be done many ways, trendlines and moving averages are probably the most common. I use the VWAP and remain mindful of the paragraph above. I stripped out the volume histogram, pivot line and buy number line from this chart to make it as clean as possible. If you trade with a VWAP you may notice it is not uncommon for breakouts to occur at or near the +/- 2 standard deviation line. Conversely, pullbacks and reversals also originate at or near the +/- 2 standard deviation line quite often. That's the uncertainty of using the SD line as a trigger (on it's own). But, as the paragraph above states, "Price will remain below VWAP and will build distance below it." I'm looking for this "distance" to be below (down trend) /above (up trend) the 2SD line, this chart shows that. What makes this "the perfect trend" (IMO)? The pull backs. These are 5m bars that plot the range and the close. The black dot is the close, the open is not charted. Look closely at the chart beginning at 2am until price touched 1.3200. Count how many times the 5m bar closed above the -1 standard deviation line, (red line) never, IMO, "the perfect trend." I use this (-1 standard deviation line) as a "built in" entry trigger, or a place to add to the position on these slow, boring, long drawn-out trends. I use the VWAP (black line) as a stop (gives me something to do ) I just keep trailing the position down to the target. Same with adding to a position just trail along on the 1 SD line, usually the position goes profitable quickly. This is not a "no brain'r" trade, they're rare. They're hard to identify, hard to enter, and hard to stay in, but if I sit back and let the trade work, on it's own timeframe, (I fixed a lamp on my desk during this trade) it can be very rewarding. That's why I wanted to post this chart of the (IMO), perfect trend.
When it comes to stupid mistakes I've committed them all, and still do on occasion. Journal after journal speak of the same common mistakes all traders are predisposed to making. I believe the situations that cause me to make trading errors are a constant and will never "go away," they're embedded in the uncertainty of the market. If my back/forward testing suggests a particular setup has a win rate of 80% for example (this is an example) and price begins to approach my stop I can commit a trading error in one of two ways. I can move my stop toward price with the notion of taking a smaller loss than my predefined risk amount. This may seem like a good idea at the time but often before the bar closes (and I'm out of the trade with a loss) price turns and continues in the favorable direction without me. Or, I can move my stop away from price with the intention of giving the trade a little more breathing room this time, then maybe a little more, I'm sure we all know how this turns out. Both of these actions of moving the stop are common trading errors. IMO, the events that cause me to react in either of these two situations is firmly based in my false belief that I can somehow predict future price movement, I can't.
Consider this; When I preform my due diligence and identify what I believe is a tradable edge, it's most often based on reviewing past data on several charts. As I continue to evaluate the edge and ascertain if the amount of risk necessary to trade the edge fits my personality or more importantly my account size, I'm still basing my findings on past historical data. Basically I'm finding a hidden diamond, a totally mechanical edge. Like the 2am reversion to the VWAP trade I outlined up thread,
Trading can be an extremely rewarding experience, it can also be very frustrating. I've tried my best to keep all my posts in this thread (and on the forum) in the first person. Mainly I've written …
both the stop and the target are fixed and known before the trade is entered. Stringent adherence to following the set parameters is necessary to trade a mechanical system, any deviation of any parameter can cause the edge to fail over the course of time.
I'm not an automaton, and my human brain starts to believe things that aren't there, I begin to imagine price movements in the other direction, or beyond my set/fixed target and I find myself meddling with the extensively back/forward tested edge during the trade. Sure, sometimes I don't get my fill on entry and sometimes I don't get my target, this is why I only expect my "live fire" trades to generate 50% of back/forward tested results, when trading a mechanical system as a discretionary system. This post could go on forever if I wrote of automating the strategy or other common errors like chasing the market to get a fill on entry or exit. My intent in this post was to scratch the surface and reveal the inherent complexity of simply moving a stop.
I believe finding and trading a mechanical system is a valid step when learning to trade. I also believe as a trader becomes more comfortable with a markets unique price rotation and learns his/her market's "personality and nuances" they will become more proficient as a discretionary trader. This obviously takes time (10,000 hr ??) for me the change was subtle and non eventful.
A More Complex Example
Anyone following my thread should know the indicators I use and the price levels I consider when making trades. Prior to 2am the 6E traded in a continuation of the Wednesday-Thursday down move. Since the Globex open it traded down within +/- 10 points of Thursday's low. When the 2am "oil can" opened at +/- even with above average volume making a new low and sentiment skewed to the downside, signified by 75% of those trades traded on the bid, the reversion to mean trade was definitely out of the question. Price traded down through Thursday's low and rotated around the Buy Number. The Bollinger Bands were signaling increased volatility as price traded just "inside" the BBs and the -2SD line. All the indicators on the chart were signaling a short trade, the only question was were and how to enter, where's the stop and where's the target.
After price penetrated the buy number with 71% bid volume I began trailing a sell order on the -1SD line. This order would be near the top of the bar if price attempted to test that level again, my stop was on the VWAP 11 points above and my target is sitting on 1.3250.
After another move down, making another new low on 78% bid volume, the London session was open and price rose to the -1SD and filled my sell order resting at 1.3286. However, several things of note happened in those few bars from the low at 1.3266 to the high 1.3288. The upper BB turned down, at the close of the 2nd bar after the recent low. This signals a possible consolidation or reversal, when this band turns down very often I'll see a test of the most recent low. The high of the down bar was tested to the tick, and the next bar exceeded that high, this is where my order was filled. At the close of the last bar on the chart the spread between the BBs was contracting, this is signaled by the red fill color within the bands. When this last bar closed, it closed below the 1st SD line. Also the red dots above the bars is the 20MA of the BBs, price never touched this area. Lastly, the new low is 1.3266, this is IMO a sweet spot in the 6E. It's 16 points above the whole number 1.4250, I've stated before on this thread I give the 6E 16 points on each side of whole numbers 00 and 50s for normal price rotation. Seeing this level tested again and taken out will surely drive price to 1.3250.
Price approached and tested the 1.3266 low with increasing bid volume and continued to close below the -2SD line and out side the BBs. The BBs once again began to expand signaling an increase in volatility. With these factors in mind and no sign of exhaustion I moved my target lower to 1.3234, 16 points below 1.3250.
Price traded through 1.3250 to 1.3247 failing to trade on 1.3234. At this point I wait and let normal price rotation work the trade.
Price rotated around 1.3250 for over an hour making another new low at 1.3241, then began to move higher, price crossed above the -2SD line and touched the 20MA of the contracting BBs. Price moved up sharply on high ask volume penetrating the -1SD line but closing below it. The high of the last bar on this chart is 1.3266, exactly the 16 points I consider normal price rotation around whole numbers. Since this level held and price closed below the -1SD line I decide to add to my position, I enter an order to sell at 1.3260 the -1SD level.
This chart shows another hour of price rotation after adding to my position. The market has been consolidating here around 1.3250 for 2 hours the BBs have contracted to the tightest point since the session began. The 1.3266 level held and the 5m bars continued to close below the -1SD line and didn't make much of an attempt to trade outside the upper BBs. Price moved down and tested the previous low but didn't penetrate it. Using the rule of three (three attempts to break support or resistance) I decide to exit half my position at 1.3234 and lock in some profit and move my target for the remainder of the position lower to 1.3200. I'll close out the whole position if price closes above the -1SD line.
Price traded at a low of 1.3235 on two 5m bars and closed both times below the -2SD line. When price did trade on 1.3234 the flood gates opened with heavy volume creating a new low at 1.3213 outside the BBs and below the -2SD line.
My normal trading session has long pasted and another 2 hours after making the low at 1.3213 price trades above the -1SD level again. I add to my position and get quick results, price falls straight down on increasing bid volume and my target is filled.
But wait there's more. This trend showed absolutely no sign of turning around all night. The news weighed heavy on the Euro all week and this was the bottom (as of then) of a 300 point drop in three days. It was like throwing spaghetti on a wall, every down move stuck only to be followed by another. As I was closing down my workspace price began to climb and as it traded above the -1SD line I thought what the hell and sold more at my sweet spot of 16 points above a whole number 1.3216 an hour later I was covered at even.
Thanks for your question. Yes I begin my VWAP at the Globex open. The problem may be with the data point used for the calculation, my setting is O+H+L+C / 4, not the close. I've found the VWAP similar to a compass reading, if I'm off a degree or two at the origin of my journey I'm off a lot at my destination.
Cashish, looking at your post #65 above, I have a question:
You said in the first chart that the market went below your "buy number" with 71% bid volume. Your equivolume candle shows 71% shaded blue -- by "bid volume" I assume you mean volume transacted at the bid, which are market sell orders. Typically one would think of this as "red" and is usually color coded as such in the time and sales, for example. The only thing I can think is that you don't mind blue volume indicating market selling. Am I right?
Also a question on this:
The VWAP should be calculated based on tick data only, and I would assume it is on all modern platforms. Maybe I'm misunderstanding what you're saying? But the VWAP has nothing to do with bar OHLC. Did you mean something else?
Thanks for your thread by the way, I have enjoyed reading it!
Thanks for reading the thread, I've tried to make it informative and yet somewhat entertaining. As a side note to anyone reading this post, (especially you @josh) I consider josh's posts and his opinions worthy of considerable contemplation, I find his experiential knowledge of the markets and indicators of great value. I believe he enhances the quality of the forums he frequents.
I edited your post with A & B to assist my replies.
A The short answer is yes I don't mind the color. When setting up the parameters I "thought" blue = bid, and never changed them. It's not really a red light green light study but your idea may be helpful for anyone building such a Bid/Ask volume display. Good eye.
B This is where we disagree, kind-of. You are correct, "The VWAP should be calculated based on tick data only, ........." The key words are "should be." In theory the VWAP is the summation of every single tick on every single price, but I've found this is not the case on most "modern platforms" available to us retail traders. The problem lies in the fact that a tick by tick calculation of the VWAP is extremely resource intensive and hence the tick by tick calculation is seldom (if ever) used. I believe the most common VWAP calculations are derived by first identifying the typical price of the time period (e.g., 5m, 15m or 60m). Many common calculations of the typical price are the close, H+L/2, H+L+C/3 or H+L+C+O/4 not every tick traded on every price within the bar (time period). Again, you are correct that the true/absolute calculation "should be" (and is) calculated on every tick on every price. But like I said above I find this calculation to CPU (resource) intensive for our (retail traders) computer power. Now while you chew on that! Some platforms allow users to change the calculation of the typical price from the close to H+L/2, H+L+C/3 or H+L+C+O/4 or something more out-of-the-box. This is the calculation parameter I'm referencing in my response to @TempletonPeck
For those wishing further clarification and evidence of my findings, consider these sources.
Calculating VWAP: From the above link
VWAP is calculated using five steps. Firstly, the typical price for the intraday period needs to be computed. This is the average of the high, low and closing prices of a stock.
Secondly, this computed price has to be multiplied by the trading period's volume. Then, one needs to create a running or cumulative total of these values. Similarly, a cumulative total of volume has to be created next. Finally, the running total of price-volume has to be divided by the running total of volume.
Choose your time frame (tick chart, 1 min, 5 min, etc.)
Calculate the typical price for the first period (and all periods in the day following). Typical price is attained by taking adding the high, low and close, and dividing by three: (H+L+C)/3
Multiply this typical price by the volume for that period. This will give us a value called TP*V.
Keep a running total of the TP*V values, called cumulative TPV. This is attained by continually adding the most recent TPV to the prior values (except for the first period, since there will be no prior value). This figure should always be getting larger as the day progresses.
Keep a running total of cumulative volume. Do this by continually adding the most recent volume to the prior volume. This number should only get larger as the day progresses.
Calculate VWAP with your information: cumulative TPV/cumulative volume. This will provide a volume weighted average price for each period and will provide the data to create the flowing line which overlays the price data on the chart.
There are five steps involved in the VWAP calculation. First, compute the typical price for the intraday period. This is the average of the high, low and close {(H+L+C)/3)}. Second, multiply the typical price by the period's volume. Third, create a running total of these values. This is also known as a cumulative total. Fourth, create a running total of volume (cumulative volume). Fifth, divide the running total of price-volume by the running total of volume.
Cashish, thank you for your kind words and for your helpful information.
I think that the calculation of the VWAP may not be quite so CPU-intensive. As it's simply an average, it should be as simple as:
store A, which equals the cumulative sum of all price * volume so far
on each tick, multiply price * volume, and add to A
VWAP then = A / totalvol
So for each tick, there are only maybe four or so operations. In today's billion-cycles per second, multi-core world of computers, it's probably truly so small that a human cannot perceive it. In fact, my program reports that it takes less than 1ms to calculate the VWAP. The key is that there is no recalculation of past ticks when a new tick comes in--it's simply an addition to a running total. In algorithmic terms, I would venture a guess that for each tick the calculation time is O(3). Whatever the case, it's definitely constant and importantly, not dependent on the size of the whole data set--only on the initial load of the VWAP does the data set matter, and even for a large data set of billions of ticks, it should take less than a second or two to compute.
Now, for historical data where tick data is not available, then we must estimate. But I'm surprised that some programs do not use tick data to calculate if it's available.
