Sunday, September 20, 2009

Reading Market Delta Charts On TraderFeed

Several readers have asked for explanations of the Market Delta charts that I post during the week. Details about the "footprint charts" can be found on the Market Delta site, but this post should bring newcomers up to speed.

If you click on the chart above, you'll see that we're looking at 60-minute bars from the preopening trade of 9/18/09. I've blown up a segment of the chart for easier viewing and annotation.

Within the bars, you'll see two numbers. The first is the number of contracts traded at that time and price when that price was the market bid price. The second is the number of contracts traded at that time and price when the price was the market offer price. When the volume at the offer exceeds that at the bid, the color inside the bar is coded green. That shows that buyers are more aggressive on average: willing to pay up for the offer price. When the volume at the bid exceeds that at the offer, the color inside the bar is coded red. That indicates that sellers are more aggressive: willing to take the lower, bid price to get out of the market.

We can look at shifts from green to red (and vice versa) both within bars (to show buyers or sellers becoming more or less aggressive as we move up or down and to see if total volume--the total traded at bid and offer--is expanding as we move) and across bars (to show if buying or selling pressure is waning or heightening over time).

The red line on the chart represents the market's volume-weighted average price (VWAP), which is the average price traded since that day's session began, weighted by the volume of transactions at each price. VWAP thus is more affected by trading during regular trading hours (when volume is highest) than during overnight hours. During trend days, we stay consistently above or below VWAP; during range days, we tend to oscillate around VWAP. False breakout moves will reverse toward VWAP; sustained breakouts will reject VWAP on solid volume and not return to that average price.

The histogram at the bottom of the chart sums the volume transacted at the offer minus the volume transacted at the bid for each bar period (in this case, 60 minutes). If more volume is transacted at the offer, that difference is coded in green and is displayed above the horizontal axis. If more volume is transacted at the bid for that bar period, the difference is coded in red and is displayed below the horizontal axis. Seeing how we shift buying and selling sentiment from bar to bar gives helpful clues as to whether buying or selling pressure is waning or strengthening over time.

Finally, the histogram at the right of the chart displays the total volume transacted at each market price. This gives us a distribution display similar to Market Profile. From that display, we can see where the majority of volume has been transacted. That area represents the market's estimate of value; weak volume moves above or below that area will tend to fall back into the value range, while expanded volume above or below the area suggests breakout moves and acceptance of value higher or lower. The volume bulges at various prices can be conceptualized as near-term resistance and support; the shape of the total distribution can offer helpful clues as to the market structure on the day timeframe: whether we're building a trend day, range day, double distribution day, etc.

If you review my posts that feature the Market Delta charts, you'll pick up on patterns that are useful for short-term traders. I will be adding to those posts in coming days and weeks.


Steveo said...

Dr. Brett, thanks for the annotated chart. It makes it real easy to follow and understand. When I get into a business mode which will allow daytrading, I will be following this closely.

Noam said...

Great Post!!! Thanks

Dr., Do you see any value to Market delta of Upticks Vs. Down Ticks instead of Bid Vs. Ask?


y@mp0 said...

thanks brett. what are the red or green vertical lines on the left of each bar? they aren't the length of the entire bar, so i know they are not just borders

Gary said...

I do not know if you will see this as it is months later but here goes; I was wondering if you have looked at different time scales for the histogram at the bottom of your Delta chart; you have one hour. Would there be an advantage to having the bars every 30, 15 or even 5 minutes? Thank you, Gary

Brett Steenbarger, Ph.D. said...

Hi Gary,

Yes, the shorter time frame charts are useful for executing trades and for trading very short-term patterns--


John Gilner said...

Dr. Brett, I'm currently experimenting with Market Delta and have it up and running. One thing that seems to be of potential value to me is watching for divergences between price and delta across various time frames; for example, intraday price highs but negative delta for a given bar (time interval, etc.). I see that Market Delta sells an indicator for that, but it's also possible to just watch for those divergences as they're easy to see and it seems to me that if a trader is watching carefully, it isn't that hard to indentify those divergences.

My question to you is: Do you watch for such divergences, and if so, have you found them to be useful - particularly in combination with other reversal clues like waning volume at a range extreme (i.e., if a delta divergence coincides with reduced participation at a range extreme, do you find that adds evidence to the reversal hypothesis?).

As always, thanks!