I took a few decent setups this week – I shorted the gap up in European equities on Wednesday but only took 25% of what it offered, getting shaken out at the first sign of strength.
I looked at the range for yesterday. I watched another setups pass me by and I did not trade it and I did not worry. I have a few reasons to trade smaller than usual at present:
1. The supposed light volume in December – not sure this really happened, same with the Santa Rally (more on that below)
2. ES contract rollover confusion and data equalization.
3. ECB interest rate decision.
4. Eurozone news driven market rumours causing market schizophrenia.
5. Today is Friday and a huge move yesterday has to be digested. Maybe something or nothing will happen but I do not want to be stuck in front of the computer at 9pm.
Having said that I did trade small every day this week. Yesterday was pure insanity. It was a test to see if the plate spinning could continue and bring the market to 1300. It crashed down to earth as hopes of a resolution to the EU crisis dissolved.
I took a screenshot of what happened:
I can only say that yesterday reminded me of the day QE2 was announced last year (EURUSD 1 minute chart):
Now. To try to piece together what happened with the “santa claus rally”:
Volume can be broken down based on either of two methods: – Ask Traded vs Bid Trade Volume – Volume that trades at the ask price is considered buy volume, while volume that trades at the bid is considered sell volume.
It can be seen that the delta did increase from near the 1145 level. (My data is equalised for the front month so this is 1150 on the December Contract).
It increased gradually but it can be seen that sellers were growing stronger and hitting the bids more than buyers were lifting the offers from 1/12 to 7/12. Clearly there is hindsight bias with this but to me it was an important sign of underlying weakness. Long term delta is something I will watch for more carefully in future. Unfortunately I did not use this to to inform any trades I made. I had my doubts about the price being this high but it has proven dangerous to short the market lately so I remained on the sidelines most of the time.
I remembered this sort of analysis when I was re-reading an old book about volume spread analysis by Tom Williams. The name is kind of paranoid conspiracy stuff but it is nothing of the sort. A download pdf is available at therogueinvestor.com
It is a must read to try to give some structure to what you are seeing and if you are trying to trade using volume profiling. It was this book that first confirmed what I needed to see in order to have any chance at trading. At the time I had been using tick data as a proxy for volume data while learning to trade using EURUSD.
There is a summary of some of the phrases on traderslaboratory.
1. Volume is activity. Hence tick volume can be used where actual contract volume is not available.
2. Two ways of looking at volume:
* relative volume: volume in relation to the previous bar or bars.
* actual volume: the amount (size) of volume an individual bar represents.
3. Strength comes in on down-bars and weakness comes in on up-bars.
4. Markets do not like high volume up bars with wide spreads? Why because there is a possibility of Professional Selling into such a bar.
5. Professional Money deals in large amounts and thus sells into up bars so as not to be hurt by their own selling. The converse would also be true.
6. 85% of a volume histogram represents Smart Money activity.
7. Smart Money is active on all time frames. Various time frames are used to hide their actions from those that can read a chart and each other.
Title of the post is from the lyrics of Pink Floyd’s dogs. It is a grim enough song but some of the lyrics remind me of trading.
You’ve got to be crazy, you gotta have a real need
You gotta sleep on your toes when you’re on the street
You’ve got to be able to pick out the easy meat with your eyes closed
Then moving in silently, down wind and out of sight
You’ve got to strike when the moment is right without thinking