Tuesday, April 14, 2009

Integrating Time, Price, and Volume to Generate Trading Ideas

Here we see a Market Delta footprint chart of the ES futures. What we see is a sequence that I have called a transitional structure. It is a reversal pattern that recurs across different time frames in the stock market. Very often it will occur near the top or bottom of a trading range. That makes a reversion move back into the range--with VWAP as a likely target--a nice trade idea, as noted in today's intraday Twitter posts.

The downside reversal pattern begins with a high volume decline with the majority of volume hitting bids (red histogram at bottom). There is a bounce from the lows with net buying interest (green bars at bottom histogram), followed by tests of the lows on lower total volume and less net volume transacted at the market bid. The inability of lower prices to attract participation on the sell side emboldens bulls and we get a rally on increased volume (and increased volume transacted at the market offer). The idea is to get into the trade as you see the rally getting under way, so that you have favorable reward-to-risk with VWAP (red line) as the target.

(Note: for short-term traders, the target would be a move above the highs registered during the transition/bottoming period).

This transitioning process is one in which dominant selling/buying dries up and leads to a reverse move in which the short/longs have to cover positions. It's a nice example of how traders can integrate price, time, and volume information into a structural pattern that can be exploited for a nice gain.


Valentin said...

thank you for the post. I happen to be reading Markets in Profile by Jim Dalton & Co. Got to the page 50+ and started again with time frames... I think for me, as a beginner in trading, this concept of understanding who or what time frame "is in the market" will eventually work. Such posts will surely contribute and enhance my experience in "understanding the markets". Reading your blog every day! Greetings from Germany, Val

Damien said...

Dr. Brett,

Which subscription to Market Delta does one need to use the Footprints you discuss? I am intrigued and interested in their trial to see if it is a value add to my trading.

Thanks for your great insights!


Brian said...

I took this trade. Didn't work out for me.

I entered at 11:20ish (PST) as we finally broke back above 840 on the highest TICK reading since early AM. Got a great entry at 840 on slight pullback

We oscillated between 840 and 842 for 30 minutes.

I was then stopped out for a small loss when we broke down to 838.5 on a large negative tick reading of -825.

I'm just a simple trader trying to learn the trade. I would love if you could explain "The idea is to get into the trade as you see the rally getting under way".

Perhaps an entry in the 837 to 838 area while we are chopping around? It seemed to me to make sense to make the market prove itself there. TICK readings were leaning negative, Delta was leaning positive. Mixed signals.

Thanks for any additional insight you might provide.

Andrea said...

This could be spotted pretty easily using candlesticks, without the footprint chart. The MarketDelta tools are pretty, but they're too high of resolution for intraday trading, and overkill in my opinion.

Brett Steenbarger, Ph.D. said...

Hi Damien,

All the MD subscriptions come with the footprint, to my knowledge. I'm sure Trevor and his staff can walk you through the options and trial offers.


Brett Steenbarger, Ph.D. said...

Hi Brian,

You raise a great point. There has been a lot of noise in markets lately, and it's easy to get stopped out of good ideas. I got lucky and entered at 837 and just held on as long as we didn't make new lows. In other words, I'm willing to take more heat and chop than in 2008 markets.


Damien said...

Thanks, Dr. Brett. Great call today about the trend. Your determination of trend or range is one of the most valuable "confirmations" of my own analysis in the morning.

All the best,