Thursday, April 12, 2007

Large Trader Behavior During A Stock Market Reversal

Several readers asked me about the market reversal this morning. Here's a Market Delta chart of the morning turnaround. As always, within each (10 min.) bar at each price are two numbers. The first is the volume transacted during that time when that price was the market bid. The second is the volume transacted during that time when that price was the market offer. Note that the price levels are colored green if volume at the offer exceeds that at the bid (net buying interest), and the color is red if volume at the bid exceeds that at the offer (net selling interest). On the bottom, X-axis, we have two numbers for each bar. The first is the total 10-minute volume in the ES futures. The second is the difference between the volume at the offer and the volume at the bid during that 10-minute period.

What makes this chart unique is that only trades of 200 contracts or more are charted. I'm only looking at what the large traders are doing.

Note that large traders started lifting offers once we got below 1443. We got a nice bounce and then, on the next pullback at the 9:20 AM CT bar, we can see that selling volume among the large traders really dried up. That led to a fierce rally that reversed the morning decline, with significant lifting of offers among large traders. On the subsequent pullback, we hit a negative TICK reading below -650, but note that volume at the bid among large traders was *very* modest. From there we moved steadily higher.

Quite simply, large traders bought the lows and stopped selling the market after the initial decline. We don't know all the reasons why, but I'm not sure that 's necessary. All we need to know is where the institutions and large locals are doing their business within the bid/ask matrix. That reveals quite a bit about their sentiment. And it's something the vast majority of traders, looking at simple bar charts and candlesticks, never detect.

6 comments:

EnglishTeach said...

Hello,

Thanks for the informative posts and articles. I have yet to start daytrading--still doing my research before beginning--but have been swing trading stocks for a few months now.
After looking over the Market Delta website, I have a couple of questions about the footprint charts.

1) Basically the advantage of the footprint chart is the ability to see several minutes worth (two dimensionally) of the same info that comes through time and sales?

2) Would it be practical to expect the charts to work well with one minute bars trading stocks? (assuming fast connection and no computer problems)

Thanks,
EnglishTeach

AnaTrader said...

Brett

The unique advantage of Market Delta lies in the REAL bid and offer volumes as against FICTITIOUS volumes in bid and offer prices that we see on most datafeeds.

Hence, those who use MDelta are able to detect actual volumes to decide when the market is reversing to enter a trade, for example.

jb said...

Brett,

First time poster long time reader. Enjoy your informative and interesting blog. Keep it up.

Thanks,

jb

Rajdeep said...

Hi Dr.Brett,

Thank you for your excellent contribution to your valuable insights on Trading.I trade full time from MUMBAI,INDIA. I just wanted to add to your observations.I have extracted this Data from Tradestation and reported 1 min volume at Bid/Offer.

Volume @
Bid Offer
9:31 3005 2564
9:32 1279 2036
9:33 2748 1110
9:34 356 1879
9:35 184 1172
9:36 2796 2250
9:37 276 2019
9:38 782 1943
9:39 1799 580
9:40 315 3752

13540 19305

Net -(5765.00)

Volume @
Bid Offer
9:41 3686 2981
9:42 761 2398
9:43 1184 428
9:44 518 587
9:45 752 527
9:46 2335 324
9:47 4098 451
9:48 12093 6173
9:49 2271 3099
9:50 1284 3574

28982 20542

Net +8440

On your MD Screen we observe that the Net Negative Delta for the period ending 9:40 is -600 as opposed to -5765. THAT MEANS ONLY 600 OF THOSE 5765 CONTRACTS WERE SOLD BY LARGE PLAYERS, WHICH TELLS US THAT THERE WAS NOT ENOUGH PARTICIPATION BY THEM,THEREFORE CONFIRMING A POSSIBLE UPMOVE.

This is confirmed by the Net Delta of the Next Bar which is Positive by +8440 contracts and the days high TICK reading of 1062.

Taking View of Both Large Participants and overall Delta can give a added advantage.

I have another question. In your book, you mention Scott Pulcini , who after a struggle excelled at short term trading. Since someone who is trading so frequently , IF his average winner is 2-3 ticks in the S&P , then is his average Losing Trade also 2-3 ticks. In such a tight stop, market noise could get you out .For a STOP to be triggered it takes 1-2 downticks and another trade at the next tick below for your stop to be taken out. If the market were to bounce back , how does one handle that mentally.

Because I am trading with such a small stop as my profits are Scalps (2-3 ticks) it becomes difficult to see yourself get stopped out and the market reversing.

Any thoughts on how to remedy this would be appreciated.I am trying to keep my Average Loss less than or equal to my average profit ( 2-3 ticks).

Thanks once again for your brilliant contributions.

Rajdeep Jain

Brett Steenbarger, Ph.D. said...

Hi English Teach,

Market Delta is not the same information as T&S, in that Market Delta parcels out volume at bid vs offer and aggregates this information over various time frames. I do find one minute bars helpful when markets are moving quickly. I use MD for the index futures primarily; I'd encourage you to get a free trial of the program and see if it is useful for the stocks you trade. Best of luck--

Brett

Brett Steenbarger, Ph.D. said...

Hi Rajdeep,

Great observations with Tradestation! Thanks for passing along.

Scalpers such as Scott work orders above and below the market and read the order flow to decide when to pull orders and when to get them filled for an edge. They trade very frequently, repeating a small edge many times.

Because of the increasing presence of automated trade close to the market with large size, I don't believe that this classic mode of scalping offers the same advantages it once did. It's a trade much more successfully conducted with large size and the ability to enter and pull orders electronically.

Brett