In my latest entry to the Trader Performance page, I mentioned a unique idea for creating charts developed by Trevor Harnett of Market Delta. The idea is to generate bars based, not on the passage of time, but on the basis of sentiment. In this case, sentiment is assessed by the number of ES contracts traded at the offer minus those traded at the bid. Each time we hit either +3000 net contracts or -3000 net contracts in the chart above, a new bar is drawn.
Here is Trevor's initial posting on the topic, with recommended settings for different markets.
The chart above (click for greater detail) shows how we were trading at the top of the value area (yellow area on right vertical axis) and then could not sustain bullish sentiment. This led to a nice retracement into the value area--a classic "mean reversion" trade.
Reading charts in sentiment bars takes some adjustment, but it helps highlight several factors:
a) When sentiment is skewed toward buyers/sellers;
b) When sentiment is breaking us out of price ranges;
c) When trade is one-sided (the net Delta is a high proportion of total volume for that bar) or two-sided (the threshold net Delta occurs on high volume).
What we see with the sentiment bars is that markets oscillate between periods of directional, one-sided trade and bracketing periods of two-sided trade. Monitoring the sentiment bars as they relate to total volume helps identify transitions between these modes. I will illustrate this principle in future posts.
Large Trader Behavior During a Market Reversal
A Context for the Market Open
Trading Breakout Moves