March 8, 2017
Isn't Volume Spread Analysis (VSA) something Gavin Holmes invented? Tom Williams? Wyckoff? Or Livermore? I'm not sure, but Holmes is beating the drum the loudest these days and has been for a decade or so. Using the relationship between volume and price to forecast future market movements is not a new thing, but modern software applications like Trade Guider make it visually appealing and analytically not so scary.
VSA requires only four inputs; the open, high and low prices and the volume during that time frame -- no fundamental analysis required.
Gavin will go into much more detail on March 23rd during his free live webinar - feel free to attend by clicking here.
The concepts seem intuitive and simple. Per Gavin, think of an over-inflated football or futbol that has a slow leak, then apply the following if-then statements:
- No Demand Bar is where the closing price of a bar is higher than the previous bar and the volume is lower than the past two bars and the spread (difference between the high and low price of the bar) narrows. In this case VSA predicts that the market is less likely to continue to rise.
- No Selling Pressure on Down Bar is when the price closed lower than a previous bar, the volume is lower than the last two bars, and the spread narrows. In this case VSA predicts that the market is less likely to continue to fall.
This isn't the definitive VSA equation but part of the basis. Like all lagging indicators, one uses it to attempt to predict the future. Not a great trade strategy in and of itself, but another tool that can be used in conjunction with the rest of your techniques.
Unlike Market Profile that looks for price "happiness" or long term fulfillment in Gaussian terms, VSA is more momentum based where anything can and does happen during the next bar and so on.
You can see the mathematical implications and benefits of a charting program that not only identifies these types of "set ups" but ranks them in terms of severity and probability.
Williams was able to take the work of Wyckoff/Livermore and update it, which Holmes was able to computerize and provide more readily actionable analysis.
February 22, 2017
Yesterday, Andrey Stepanov from Veliky Novgorod, Russia won the Infinity Futures Live Trading
Challenge (LTC330). LTC 330 included over 200 traders around the world that competed in the five day
event which featured Chicago Mercantile Exchange Group (CME Group) futures markets.
Although traders have wide leeway with respect to the markets they can trade, traders on the leader board during the course of LTC 330 focused on CME Group Crude Oil Futures, US Treasury Bond Futures and Stock Index Futures. "Light Sweet Crude Oil seemed to be the favorite go to market for this challenge", said Jim Cagnina of Infinity Futures.
The three place winners are awarded prizes. For LTC 330 prizes were provide by the trading education group Become A Better Trader. The top five participants were from Russia, Poland, Italy, United States and United Kingdom. An updated leaderboard is at http://www.livetradingchallenge.com.
Infinity Futures live trading challenge is conducted on a bi-monthly basis. These challenges are open to all traders and are qualifying events for the Annual Championship at the end of the year. There is no entry fee required. The LTC events are conducted on a real-time simulated account basis. "The architecture for the challenges is structured to provide a level playing field with parameters that closely mimic real life constraints" said Jim.
The LTC events are oriented toward both novice and veteran traders. The benefits for Novice traders include the ability of learn the sophisticated trading platform and charting, get a feel for exchange traded futures markets and develop strategies and techniques that can be used to continue to trade. There is no entry fee or funds required. Jim added "what started as a fun game turned into a powerful learning and education tool".
The next event is Live Trading Challenge 331 (LTC331) which begins in April. Registration is currently open at: http://www.livetradingchallenge.com/#register.
February 3, 2017
What is Order Flow in futures trading from a market analysis point of view? Let's start with Volume of the number of contracts that are traded during any given time frame. The below table are volume numbers from the CME Group, broken down by asset class, for the trade date of January 30th.
Focusing on the Overall Combined Total columns: 1. Volume is the number of contracts that were traded on January 30th, 2. Open Interest (CFTC definition - "The total number of futures contracts long or short in a ...market that has been entered into and not yet liquidated by an offsetting transaction or fulfilled by delivery. Also called open contracts or open commitments"). *See notes below of Commitment of Traders.
Daily volume tells us two things. First it is a relative measure of how popular a market is with traders. The higher the relative volume the more "liquid" it is and liquidity promotes lower costs for traders in the form of tighter bid/ask spreads.
Second when analyzed over a period of time periods of higher (or lower) volumes over the norm, it tells us when buyers and sellers are more (less) interested in exploiting price action. World events are obvious examples of this surprise FED move if you can remember that far back or Brexit.
For day traders, daily volume can serve as an initial basis to determine the initial "state" of the market; bull or bear, trending or range bound, etc. It is hard for day traders to use daily volume to determine actionable entries or exists - but not unheard of.
Intra-Day volume is where the action is as I have heard Treasury Bond order flow trader Jack Broz broadcast from time to time.
Today, modern charting platforms like Infinity Futures charting package (powered by Sierra) allow traders to drill down through 5 minute, 2 minute, 1 minute to tick data.
The chart below is an example of a tick chart with volume bars on a US Treasury Bond Futures chart for January 31st. This chart is an Infinity AT chart which you can get here.
As you can image the analysis cogs are turning once a trader sees the increased volume bars congregating around the 150 29/32 price range on the far right side of the chart. No science yet only intrigue.
There are a handful of true Order Flow scientists, feel free to check out Shane Handy's upcoming webinar titled Using Order Flow to Understand Market Momentum.
But the idea is that market price is set by buyers and sellers agreeing to make a trade at any given price. In an up bar (typically green) buyers are finding value at high and higher prices. Transactions are more likely to occur on the Offer instead of on the Bid. In a down bar (typically red) sellers are finding value as at low and lower prices. Transactions are more likely to occur on the Bid instead of on the Offer.
Let's complicate the charting by adding volume by price (see the histograms below) with bid volume in green and offer volume in red. The relative bid/offer volume is revealed at any given price and one can make some conclusions regarding support and resistance.
Forget about volume for a second and lets look at true ORDER FLOW or actual bids and offers in the market place at any given time. Below you will see the Infinity AT trading ladder. The numbers in the light blue column represent limit orders to buy contracts at the corresponding prices while numbers in the red column represent limit orders to sell contracts at the corresponding prices. These numbers are dynamic and can rapidly change. Most important these numbers are not balanced, there are more bids or more offers at any given time. This imbalance can results in price change. In other words buys and sells are jockeying for trades at a price that is important to them (regardless of whether or not they are opening or closing a position).
Feel free to check out Shane Handy's upcoming webinar titled Using Order Flow to Understand Market Momentum.
* The Commitments of Traders (COT) reports provide a breakdown of each Tuesday's open interest for markets in which 20 or more traders hold positions equal to or above the reporting levels established by the CFTC.
January 18, 2017
Algorithmic, Automated, Computerized Trading, Quantitative Strategies are just a few of the names we call Automated Trading Systems. Trading Systems can be thought of as a mechanical process where trades are executed based on a series of rules and parameters developed by the system architect. In other words: Mathematics and "If-Then" statements based on defined inputs.
Automated Trading Systems are not brand new; they have been around a long time. However, now with a magnified focus in academia (as well as at mainstream financial institutions) there are a lot more quantitative studs devoting skills and resources to this discipline.
The big question is "Are ATS appropriate for retail investors"?
In the futures trading world, CME Group's, GLOBEX electronic markets are ideal for programmers. Transparent first-come first-serve order books, standardized contracts, and exceptional technology for ISV's and their API access result in a tempting sandbox for the quants. Permutations and variations are virtually unlimited, no idea too complicated.
Keep in mind that the ATS are not born out of artificial intelligence (at least not yet) but are created by humans. And as we all know levels of performance vary dramatically from person to person - the bell curve (normal distribution). But when real money is on the line we seek the high performers or hyper performers as defined by O'Boyle and Aguinis Power Law Distribution. I am not referring to ROI performance but the "people behind the curtain". This requires a due diligence on the part of the investor. It's the people and institution!
With respect to ROI and trading results as always I will remind that past performance is not indicative of future results. And hypothetical results will only get you so far.
Side note: I would encourage you to attend a live webinar with Scott Andrews of InvestiQuant to participate in a discussion about Systems. Full disclosure here, I am a fan of Scott's and we have his products displayed on the Infinityfutures.com web site.
In my opinion, a smart approach should include that the paradigm of any given market may change over time and that a dynamic response should be part of the program. Not an audible per se, but a real adjustment. Interest rate policies, "Brexits", elections, supply and demand, and even the weather cause shifts.
Getting back to my original question, the investor has to examine his/her reality; do you have time trade on your own? Are you good at trading on your own? Do you have the risk capital? And do you trust the investment intuitions intent and capability? How much leverage is applied (more is not always good); Can you "turn off" the investment on your terms?
January 9, 2017
It was reported by the Commodity Futures Trading Commission (CFTC) in their latest weekly Commitment of Traders Report that Open Interest in NYMEX Light Sweet Crude increase to 2,089,324 from the previous weeks levels of 2,037,834. Nothing to see here - 2.5% increase.
However, in December we did see an interesting change in the spread between Managed Money Long positions verse short positions. Keep in mind the COT data is somewhat delayed but we are not talking about day traders here. A "money manager," for the purpose of this report, is a registered commodity trading advisor (CTA); a registered commodity pool operator (CPO); or an unregistered fund identified by the CFTC. These traders are engaged in managing and conducting organized futures trading on behalf of clients.
What I contemplate is 'what is the short term bias of the Crude Futures markets?' and that would seem to be more bullish.
Source: CFTC Commitment of Traders
The divergence in early December jives nicely with the Daily chart below. November 30th to December 1st resulted in a 6 handle rally in CL. This data would have been reflected in the December 6th and December 13 COT numbers.
Pre-Holiday through Holiday pricing seemed to have settled into a four handle range even amid the latest quota accusations. Now that the Holidays are over and the inauguration is upon us, I expect volume in the CL to continue to impress. As of this writing, my opinion is mid-term slightly bullish and day traders may be looking for places to go long.
Consistent and as expected, the Producers/Merchant's are holding a Short/Long ration of nearly 2:1. Theoretically these would be longer term positions than the Money Managers as hedges should be in place.
Invitation to the reader: Joseph Rokop of Edify Trading will launch his live InfinityAT account in his January webinar. He will look for some day trades based on his analysis techniques. Feel free to attend.
Whether you are a day trader or position trader @infinityfutures is anticipating a bountiful trading environment for the @cmegroup energy futures complex. If you are interested in learning trying a free real-time simulated account - check us out here!
NOTE: CFTC definition - A "producer/merchant/processor/user" is an entity that predominantly engages in the production, processing, packing or handling of a physical commodity and uses the futures markets to manage or hedge risks associated with those activities. Source: http://www.cftc.gov/marketreports/commitmentsoftraders/disaggregatedexplanatorynotes/index.htm
December 23, 2016
Highlighting some keen tips from @JosephTrevisani, Chief Strategist of World Wide Markets it's very possible that "The price boom in crude oil from 2011 through 2014 has transformed the industry, helping to create a new technology that in turn has installed a permanent lid on prices."
Here are some points to consider:
1. Cost of Shale production by all accounts have fallen dramatically. Some feel this is transformational.
2. Idle well operation can be ramped up quickly (note: exploration and initial development costs for these facilities have already been incurred.) If the glass is have empty you will notice that according to Baker Hughes World Wide Rig Count hit its peak in February 2012 at 3,900 compared to November of this year at 1,891. If that glass is half full, do you have a couple of thousand facilities that can flip the on switch?
3. Many foreign producing countries are RELY ON this revenue source. I am looking forward to hearing from energy trader Joseph Rokop of Edify Trading in his January webinar on this topic. Feel free to attend.
Most being in the commodities business for as long as I have would substitute "permanent" with - current market state will keep us well below 2014 prices for a while. The chart below suggested a couple of obvious shorter term price resistance levels $56 and $64.
The December 6th Commitment of Traders shows Managed Money category adding to long positions while taking short positions off the table resulting in open interest of 366,232 longs and 91,475 shorts. Alternatively the Swap Dealers and Producers are net +2X net short revealing anticipated synergies.
Check out the COT report on Monday to see changes in this weekly data. Ongoing changes may confirm a short term (range bound) price increases.
Day traders are taking notice in the inexorable volume increase in the front month futures contact in Crude Oil. More volume, more volatility, more opportunities, and don't forget more risk! Invitation to the reader: Joseph Rokop of Edify Trading will launch is live InfinityAT account in his January webinar. He will look for some day trades based on his analysis techniques Feel free to attend.
CL Month Charts Time Vs. Volume
Source: Sierra Chart via Infinity Futures
In my opinion Crude Oil prices are Off their Heels but like @JosephTrevisani I think the paradigm may have changed for good.
Whether you are a day trader or position trader @infinityfutures is anticipating a bountiful trading environment for the @cmegroup energy futures complex. If you are interested in learning more trying a free real-time simulated account - check us out here!
Happy New Year!