Thursday, November 19, 2009

Adios Wave Study, welcome Volume/Range study

The comments received on my last post (in public and in private) suggest, that FFA (Fast Fourier Analysis) will give me the results I seek, but will still fail to predict future price behavior. Meaning implementing that, I will get yet another failing study.

In the back of my mind I know, I have to include volume somehow. I use volume in my trading, when watching the tape, when watching charts form, but I can’t put it in words or formulas.

Prices move up, when there is more buying than selling. But at any given moment in time when a trade happens, buying and selling volume is absolutely equal, equities change hands. This 50 contract trade on the ES at 1105.25 means there was a seller of 50 contracts and a buyer of 50 contracts ES. Volume on minute charts tells you not really something. Sure you can see, what prices did when there was a volume spike, meaning when more contracts where traded. If they move down sellers were willing to accept lower prices just to get rid of the merchandise, but what about the buyers? Why do they buy, when sellers move the market aggressively down. Some have to, but most don’t.

Volume and time are linked, actually volume, time and price are linked. Higher volume for some time at a certain price level tells you there is someone out there, taking all that is offered and betting on a move change. On a volume and on a time chart this is seen as a flat section of the tape.

The wave is the norm, the flat section on the chart is the exception.


Euro breaking down on a 15min chart. You see Sellers making a stand and just selling into the buying after a spike down until you suddenly see the buyers making a stand. There is a spike down initially, there is again that selling, but suddenly the selling is absorbed at the 1.4850 level. There is a final spike down, prices recover and recover into the previous range above the level, the buyers made. Sellers don’t give up that 1.4870 level so easily, it’s the Asian trading session now (charts are on CEST) and volume is light. Still buyers continue to come into the market and force prices further up.

I talked about volume, so let’s add it


That huge bar down is accompanied by high volume. But what does it tell you, how can I fit that knowledge into a formula telling me that the 1.4850 level will be the one, where buyers will make a stand.

Volume * Range will give you a high value, when Volume is high and the range of the bar is high. That’s to be expected, actually. I don’t need an indicator telling me what to expect anyway.

Volume / Range will give me a spike if Volume is high and the Range is small. That sounds a bit more interesting! I should see a spike, when there is someone taking a stand, because then we see high volume and a small range bar.


I will leave it at that…and see, if I get some input from you.

Sunday, November 15, 2009

New wave study

It's Sunday morning and I have some time playing around with an idea I already had for quite some time.

Prices move in waves. I think we can agree on that and using charts means, we try to predict future price behavior from past behavior aka prices are not moving randomly.

Also looking at any line chart in any timeframe, we see waves within waves. And usually we see breakouts (up or down) followed by consolidation followed by a new wave up or down and again consolidation. We use divergence, price patterns, whatever to tell us, it's time to take a trade, because we believe to see a pattern we recognize and which tells us, that a certain move is imminent.

(Friday's 5min ES chart European time zone)

I thought of a theoretical way to get a similar chart and a simple formula was able to do that:


gives you a standard sinus wave which in it's simple form might represent buying, consolidation at the top, selling, consolidation at the bottom and an endless repetition of the cycle


y=sin(x) doesn't do the trick, but if you define x to be different distinct timeframes, each a timeframe with a group of traders working that timeframe and you just add them up, like each wave in the ocean is just the sum of all waves it is composed of, you get a very interesting picture:


Gives you this graph:


In this graph you see a lot of patterns, we use for our daily trading.

And I thought to myself, if there was a way to match the line chart of the ES above to such a theoretical chart, you might get a really good predictive study.

I have no idea, how such a predictive wave study could be implemented, but maybe it's an idea worth thinking more about. Maybe you don't need a complex neural net to try to explain market behavior within the day, maybe a relative simple Wave study is sufficient. You need to play with the parameters and the number of Waves within waves, to get a good representation of the market, but starting with the major timeframes should work. Volatility could be added by multiplying certain timeframes to match news events pre-market.


It's just an idea, but maybe you have some time to follow up on it and play around with it.