Thursday, April 23, 2020

Your Trading Edge Is *Inside* The Bars On Your Chart

In the last post, I explained where true short-term trading edges in the market can be found.  I used as an example the Delta indicator that tracks the proportion of transactions that occur at the market offer price versus the amount of volume that is hitting bids.  I also included a link in that post that directs you to software platforms where you can get the Delta data.

In this post, we'll look at a somewhat similar indicator, the NYSE TICK.  It is found on many charting platforms as $TICK.  It tracks the number of stocks at any time trading on upticks versus trading on downticks.  The chart above is from Sierra Chart, and I've used $TICK on e-Signal and other platforms that carry a full feed from NYSE.  I like Sierra, because of the availability of TICK calculations specific to Standard and Poor's 500 stocks, Russell 2000 stocks, etc.  

The important point is that both Delta and TICK are calculated transaction by transaction.  As Trevor Harnett has observed, they are telling you what is happening inside the market bars.  That is where important edges can be found.

There are many sources of edge to be found in the TICK numbers.  As noted above, what they tell us is, at every moment, how many stocks are trading on upticks minus the number trading on downticks.  That tells us, in real time, where we have buying pressure and selling pressure, and it tells us if that buying or selling pressure is increasing or decreasing.  We can also use a moving average of TICK values to serve as a short-term overbought/oversold measure, and we can use a cumulative total of TICK values to track the trend of buying or selling and identify bigger picture trading opportunities.

Above is a snapshot from yesterday's market.  The top panel is the NYSE TICK on a one-minute basis.  I drew a yellow horizontal line at the zero level.  The green line going through the NYSE TICK bars is a 15 period exponential moving average of TICK values.  Where I've drawn yellow arrows are spots where price of SPY (bottom panel) has made a fresh high or low, but TICK values have dried up.  That has led to short-term price reversals.  Those TICK divergences can mark useful trading opportunities.  Extremes of TICK can also alert us to the possibility of trend days in the market.  Important changes in market direction are often accompanied by shifts in the distribution of NYSE TICK values.

It's the transaction-by-transaction data that reveal the psychology/sentiment of other traders in the market.  If we look at those data in real time, we can see sentiment shifting and quickly jump on board those moves.  Studying Delta and TICK patterns day by day gives you a sense of pattern recognition to trade the market's psychology with deeper insight and greater confidence.

Further Reading: