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I thought I'd start a discussion about how you guys use volume and specifically cumulative delta when interpreting price direction, since market profile/volume analysis seems to be the trend amongst retail traders these days.
Here's the problem I have with cum delta: it gives too many false positives. When cum delta indicates a lot of selling/buying with relatively less price movement, it's usually seen as absorption. The assumption is that 'whales' buy and sell using limit, rather than market, orders. But there have been countless times when the price just continued to fall/rise, disregarding absorption.
And there have been just as many times when the converse occurred: when price felt/rose a lot with correspondingly little change in cum delta.
I think the assumption that whales primarily buy using thick limit walls deserves to be questioned. Why would any reasonably smart whale make their buys/sells so noticeable. Since whales are usually operating at a longer time frame, it makes more sense to mask their orders in drips across several price points.
After trying to incorporate volume analysis into my trading, I feel I have become too paranoid. Trying to guess or 'interpret' what this volume signal truly means via split-second decison-making makes it harder to focus on the price action and it gives me analysis-paralysis.
Maybe cum delta is just not for me but before I give up on it, I do wanna seek out the wisdom of more skilled traders here, many of whom I know incorporate volume well in their trading.
I agree with you and mid 2018 I removed volume on my 5 minute chart. I develop my zone based plan and with Price Action have eliminated many false trades.
Cumulative Delta only indicates that there is some kind of imbalance forming. It doesn't tell you which side of that imbalance is going to win. It tells you there's a trade opportunity, but it doesn't tell you if you should go long or short.
I've found it's most useful when some kind of reversal has occurred driven by market orders. If the move up was driven by market orders then the reversal will usually take the CD back to even.
I think you first have to start with the assumption that any tool is going to have a low amount of signal and a high amount of noise or else everyone would use it and arbitrage away the signal. The amount of signal to noise is always going to be changing too.
I really wanted Market Delta to be some magic piece of software 10 years ago because it looks so beautiful but it just never worked for me.
If anything you might be able to figure out a counter trend strategy of shorting the move based on delta as opposed to trying to ride some kind of momentum.
If you google "probability of informed trading" (PIN) that is another way to use this kind of information but it has mostly been stuck in the econometrics literature. I have never read much about it on forums.
Edit: The HTML is highlighting PIN but that is not what I am referring to as far as a Pin Bar.
From what I have seen, everyone is looking at the wrong things. Transacted volume, level 2 and even level 1 volume needs more context to be helpful. I have never seen a software company, indicator guru, or retail trader get any of this information correctly classified in terms of a meaningful micro-structure. There are bets you can make regarding volume that are very good, but most of these are in the HF space.
While I can't share any edges with you, I can get you thinking a little bit about this from a different angle.
Every single price level has a fight between the bid and ask right? But if you look deeper there is much much more going on that everyone misses. Every price level starts with one side dragging in resting volume from the DOM, and the other side will start with 0 because it is a newly created price level. So statistically speaking 95% of the time, the ES for example clears the weak side that started with 0 volume. So you can predict with very high certainty which side will win the immediate price level. The obvious issue though is the participation paradox, where you can only participate in this edge by a toxic fill, so this alone will get you nothing more than a 1 tick toxic fill that will 95% put you neutral by flipping to the adjacent strong side price level.
The real price fight, that I have never seen anyone discuss or even notice... (Not saying people haven't found this, but that no one is discussing it here at least) is between the two adjacent strong sides that keep breaking their respective weak sides over and over.
Enclosed is an example of a fully flushed out micro structure of the ES.
If you follow the data in the example, you will see that the Ask has heavy starting volume on one level and wins, then on the next level the bid has heavy starting volume. Each of these keep flipping back and forth with their respective weak sides breaking until something special happens. One of the two weak sides gets a huge surge of limit orders that stack their level up. This in turn temporarily freezes the price level and exposes for the first time the adjacent strong side to the heat (Market orders). Once the market orders hit 25% to 50% of the starting volume, the HF guys bail and you will see the cancels hit in mass on the strong side.
These are the kinds of events that occur on a micro-structure level and really do move the market, but everyone is mostly looking at lagging stuff that has no context, isn't correctly even sequenced, and has little to no predictive value.
I can show this just to give you an alternate perspective, but the bad news is, 99% of people will never be able to participate in these types of edges for obvious reasons.
Best of luck.
Ian
In the analytical world there is no such thing as art, there is only the science you know and the science you don't know. Characterizing the science you don't know as "art" is a fools game.
right, at a granular scale, it's kind of like an ongoing game of flexing/bluffing/calling one's bluff. i always thought of it as a distant, more legal cousin of trad spoofing. thanks for laying it out more clearly like this with an example though. always grateful to get a professional's insight.
I use Cumulative Delta all the time....it telegraphs the move....here is today's ES....note...using GOMcd cum delta...as an indicator....works well with NQ and ES.....not so good with RTY....you have to analyze it before you go with it...note it tells you if buyers are coming in or sellers are coming in....that really helps in the direction....Notice the RTY is not as good as the others....lots of buyers and sellers but not much movement on the price....
you try to read too much into it, if CD is positive then market likely to move up and vice versa. If CD is positive but market is falling, keep watching, market will show its hand eventually.
I don't watch ES anymore, but I see it in slow-mo on ZB daily. Points well made, but unless one watches order flow daily, and thinks about what is happening on the micro level, this, I imagine, makes no sense to most people.
You are never in the wrong place... but sometimes you are in the right place looking at things in the wrong way.
