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I need some help understanding footprint charts (number bars in Sierra). I hear FT71 talks a lot about it and @trepidation briefly described it in his YOLO journal here
It appears to be an excellent way to guage what is truly going on in terms of volume and positioning. In the screenshot at number 1, there is a delta of -1433 showing and that bar appears to have had stronger selling pressure than buying pressure.
At point 2, the delta is 3306 and the market appears to be moving up off those lows. This makes sense in my world, positive delta = more buyers hitting into the offers than there are sellers hitting into the bids, and therefore the market moves up.
At point 3 however, there is heavy negative delta showing, yet the market still moved up. A cursory look through the individual volume at each level appears to show more selling pressure than buying. How does this happen?
My sierra numbers bar configuration is set to show: 'Bid Vol X Ask Vol'
The calculated values at the bottom are set to show:
'Delta - Ask volume Bid volume difference'
'Negative delta sum'
'Positive delta sum'
Can anyone recommend a good resource for learning how to read footprints?
Buyers are absorbing the selling. Sellers keep hitting the bid (see 31553) and the buyers took it all (without hitting the offer and so delta can be negative). Said in another way, lots of selling but price doesn't move down.
Youtube maybe? Search for "Footprint trading".
For example "How to Interpret the Footprint Chart":
This isn't about reading footprints but it does explain well how you can move up on negative and down on positive delta based on the market to limits ratios.
Everything can be explained with 1 simple graphic.
This means is that sellers are aggressive hitting the bid or selling via market orders.
Buyers are lifting the offer or placing market buys.
Look at the graphic above. If there's very negative delta that means that sellers are selling into the market, and the buyers have alot of limit orders. However, as soon as the market upticks, the buyers move their large limits at that level. It can be thought of as a shield wall advancing and despite the sellers throwing everything they can at them (market orders), they aren't able to break the wall and that continues again and again as the buyers force the sellers back simply marching forward with their shield wall.
There is a misconception that price moves because there's alot of buying or selling pressure. That is only a half-truth. The reality is that prices move due to a lack of liquidity. This is most apparent in news events. Price isn't wildly fluctuating because there's alot of orders. It fluctuates rapidly because the liquidity thins out as market makers aren't interested in taking the risk of being on the wrong side.
Well, you've gotten some comments on this so far. But I'd like to point this out:
This is really spot on and relevant. So @Grantx, let's ask a couple of questions:
1) When we say "the market," what are we actually talking about? What is a market?
2) How does "the market," as defined above, actually move? (when we say "the market went higher," what does that mean? what are the mechanics?)
I don't mean to go all abstract on ya, but questions encourage thinking and active discussion.
For some more immediately practical info --let's say you're short, and you see lots of buyers taking offers, but the offers keep stepping down. This is a great situation to be in, but at some point you do need sellers to start hitting bids. If they don't, you aren't really getting paid, and you will do what everyone else will do: buy to cover, often sending the market higher rather quickly as the shorts exit. (Same for the long scenario). So, while divergences between price/delta are incredibly valuable to recognize, to get paid you really need the delta going with you. This is evidence of the other side exiting, new positions initiating, or something else, but in any case, if it's going with you, it's usually the desirable situation.
For example, if I'm long and at the HOD a lot of selling comes in which doesn't move the market lower, this is ok.... but I'd rather see buying come in which doesn't take the market much higher. The best case is of course for a nice pop, leaving low volume above the high, with volume building in a rotation above the high to attract interest for what is hopefully the next leg up.
Last thing about this current market: take anything and everything with a grain of salt. It's not "normal" and people/institutions do things out of the norm, due to emotions (their emotions, or their client's emotions) -- a client who might normally say "get me out above the VWAP today" (in which case the algo will almost certainly offer to sell) may say in this environment "get me out at any price", in which case someone will just hit bids. So, delta is a bit wonky at the moment, IMHO.
Thanks @Mich62 and @ninjus. Quite informative videos.
@trepidation that pic makes a lot of sense. Thanks for posting.
@josh
my understanding of a market is that its a place for buyers and sellers to do the business of exchanging contracts. When there are no buyers, the market advertises lower trying to find a price that traders are willing to deal, when there are no sellers, the market moves higher to find a price level where sellers are willing to deal.
The mechanics are (I think) that for the market to move higher, a buyer must be willing to lift the offer which means the market, therefore, advances up a price level. If the buyer has a higher contract requirement than is available at any single price level, then he has to keep advance through the levels until he has filled his inventory. Thats how I understand it.
What do you mean here? What does that look like on a chart?
Ive been youtubing and charting and thought I would load up the ES chart from Friday afternoon as a starting point. Attached are the charts with notes, for your amusement. I loaded up the 5 minute chart and identified a price level where a few swings had occured. Then went to the footprint chart to see if I could make any sense of the flow of volume. Obviously its all hindsight but where else does one start?
I would consider using Cumulative Delta because it will allow you to visualize the flow of market orders and compare it directly against price. Some people like to trade the divergences between the two and it makes sense: Alot of market orders are being absorbed by limits and thus price isn't moving higher. Below is a 5 min chart of friday.
Some notes so far. Sorry Im not in the mood to post pics. Just the one that cant be described in words. This is a very interesting topic and I cant believe I disregarded volume so easily. I mean I can understand why...I just wasnt digging in the right places but when I saw ft71 charts and listened to his analysis in which he constanly references volume and delta, I felt it was worth another look.
Delta divergence
A higher/lower price is not being supported by delta
Example: Signs that a bull trend is losing strength is when delta is decreasing but the market continues to move up.
Things you should look for on a footprint bar:
What delta means in each bar
What delta means in relation to price
What delta means between bars
What delta means at each price level
What absorption looks like.
Passive/aggressive action and responsive/initiative action:
Is price moving in a passive or aggressive fashion? Limit orders are passive. Market orders are aggressive.
Is price being responsive or initiative? Responsive means the market reaches a level on increasing volume, the market is starting to respond but not react just yet. Initiative means the buyers or sellers turn from passive orders to market orders.
In a ranging market with low volume between extremes
As price moves into support, sellers find passive buyers in the form of limit long orders. As soon as buyers turn responsive, ie buyers start lifting offers, sellers back off and start unwinding positions. Thats when you get a reversal. Now buyers initiate towards resistance (aggressively lifting offers) and when they find that passive selling (limit short orders) they back off buying and the market chops around a bit. Sellers go from from passive selling to initiative selling which cause a rotation downward as longs exit positions and take profits.
Consolidation trading
Is when the market rotates on low volume between two points. Absorption and auctioning is where the market is facilitating trade ie you have initiative off lows and initiative off highs which means it makes sense to be seeing higher relative volume at areas of interest. High positive delta coming into resistance and low negative delta coming into support. This makes sense now. It didnt before.
Responsive vs initiative
In a ranging market or one coming into t a level on responsive buying you should see delta increasing. Example: As buyers lift offers into a level you should start to see increased positive delta this is because buyers are coming into passive selling in the form of limit short orders and those limit orders are more than what the buyers can buy. In order to see a reversal you would want to see responsive selling in the form of decreasing delta which means sellers are actively hitting the bids. In a perfect world those buyers unwind their positions and the market rotates back down on low volume.
Delta strength:
A good question to ask is what is the closing delta value in relation to the the bars highest delta value? Ie. If the bar has a maximium positive delta during the formation of the bar as 10 and the closing delta of the bar is 9 then the bar has closed strong in line with delta. You want to be going with this kind of bar EXCEPT when price has not moved in the direction of delta in which case you might be seeing absorption. You can see this in the bar spread. If 10 contracts normally moves the market 5 points but the market gets to a level and 10 contracts only moves the market half a point then perhaps you are seeing absorption.
In an ideal world, price is supported by delta in other words price rises accompanied by strong buying and falls on strong selling pressure evident by strong negative delta.
You want to look within a bar to see where big traders step in. If they are successful then the market should continue higher and the price level they stepped in at should become support as they attempt to protect the level on the retest. If the level fails then it becomes resistance as those traders cover their losing positions. This helps to push the market down because all those buy orders become sell orders as they exit losing positions.
Unfinished business on a numbers bar means a low that has both bids and offers. Finished business means that buyers or sellers had no more left to clear a level.
