Thursday, April 05, 2007

International Trading Perspective From

From Brett: I recently put out a call for English language summaries of international blog posts written in other languages. Jesus Perez Sanchez of the Especulacion site was kind enough to offer this interesting trading perspective. Here is the original post in Spanish; below is an English language summary. Jesus is a computer science engineer in Spain and has built his site into one of the most visited in Spain. Although he writes about discretionary trading, he has an interest in trading systems and their development. He welcomes questions and comments to his email address: jesus.perez.sanchez at gmail dot com.

The Spanish Market is the only market where you can know who is buying and who is selling in each transaction (the agency). Those data are huge, and it is very difficult to extract information to make trading decisions. There are some people that are focussed on particular stocks. They have learned which are the more important agencies that manage the price of the stock.

After thinking how to extract information from those data, I decided to generate some graphics that relate the stock price with the stocks that have an agency. My idea was to try to identify when an agency is begging to take position in a stock. As you know, some agencies manage important amounts of money and can´t buy all the stock only in one operation. That kind of agency needs to accumulate stock little by little. That is very well reflected in the graph and allows me to be able to buy at that time. That process of accumulation will make the value rise or at least to stay in the same level. This also happens when the agency decide to sell.

You can see in the BBVA graphic how Morgan Stanley stock reflects this process.

You can read the post that I published in Febraury:

The data in red colour are the stock price and the data in the blue colour are the agency volume.

From Brett:

This has some interesting similarities to my own research on dollar volume flows. It is also relevant to research on large block trading. I've consistently found that one factor that separates professional traders from non-professionals is that the former group has a good feel for who the players in the market are and what they are doing during the day and day to day. This post from Jesus reflects such an awareness. He is able to track the volume of specific market participants and use this information to ride their coattails. While there are differences between the U.S. and Spanish markets, the underlying idea holds for both markets. If you can isolate the large trades in a given stock and track whether those trades are occurring more at the bid price (aggressive sellers) or at the offer (aggressive buyers), you can gain a very nice picture of the sentiment of the market's largest participants. Reading this volume distribution in real time provides a very useful edge. Many thanks to Jesus and Especulacion; I look forward to providing further summaries of his posts.

6 comments: said...

Thanks Brett for your post.


AnaTrader said...

Thank you Jesus Perez and Brett for reinforcing the importance of Volume of bid and ask prices at a particular time frame.

As a non professional and a novice, I rely on subscribed data feeds like MarketDelta which obviates the necessity to 'track volume oneself'.

This may not be the optimum way but for those who lack the knowhow, paying for a service is the way.

Combining a data feed with other tested strategies will give traders an edge in trading the market, no doubt.

Happy Easter!

Brett Steenbarger, Ph.D. said...

Thank *you*, Jesus. You have a great site, and I look forward to English language summaries of your favorite posts if you have the time!


Brett Steenbarger, Ph.D. said...

Hi AnaTrader,

Even monitoring 5 min volume vs. average 5 min volume for that time of day ends up providing useful information about large traders. Thanks for the note--


Jim Buhrmaster said...

Some time ago I wrote some code in eSignal that breaks down volume by bid/ask and displays the net result (I think this is the same as Market Delta). I wrote it such that I can filter for the size of the trade, so I regularly look at trades > 25 lots and trades > 200 lots in the E-mini S&P500 futures. Interestingly enough the lower filter appears to do a better job of reflecting intraday market movement such that I rarely refer to the large trades any more. Dr. J (Jon Najarian) does something similar with options. Since my results with large trades were so mediocre for the indexes I asked him if he tried large trade analysis on index options with any success. His short answer was 'Not yet.'

Brett, you also mentioned looking at current volume vs. average volume. Inspired by an earlier post of yours I wrote another bit of code for eSignal that creates an average volume curve for the current day overlaying the actual volume curve. Some interesting patterns emerge and it is helpful for finding critical areas in the trading day as well as giving an early indication of whether the day is going to be a range day or a trend day.

Brett Steenbarger, Ph.D. said...

Hi Jim,

Great idea overlaying the average volume curve over the current day. I find that info very useful. Thanks also for the perspective on filtering the large trades. Your observation is very interesting and will have me revisiting the data--