Monday, June 30, 2014

End of Q2, 2014

Now that Q2 is over, here's a quick look at the markets since the start of the year.

Stocks, USDOLLAR, gold, oil, etc...

Major currencies...

Using Multi-Compare indicator, available for FXCM MarketScope 2.0. The values in parenthesis are the % change (gain or loss) since the start of the year.

Saturday, June 28, 2014

Real Volume vs Tick Volume Study

FXCM recently released an indicator that provided "real volume" for several of their spot currency pairs . I wrote an initial review of this here.

The "Real Volume" indicator is currently limited to only a few major currency pairs.

Normally, spot forex and CFDs only have "Tick Volume" available. Tick volume is simply the number of price changes that occur. FXCM are now providing their actual traded volume (as well as transaction volume, i.e the number of transactions) through these special indicators.

I wanted to know how well tick volume stood up to the real volume data. This is important to know, since a) the majority of instruments only have tick volume, and b) real volume is only currently available through this special indicator, which limits how it can be used.

I studied 4 major currency pairs: EUR/USD, GBP/USD, USD/JPY and AUD/JPY. I studied these using daily bars (D1), hourly bars (H1) and 5 minute bars (m5). For each of these I calculated the correlation coefficient using a spreadsheet.

Correlation shows the statistical relationship between 2 sets of data. The correlation coefficient is +1 when the sets of data are totally correlated, 0 when the sets of data are uncorrelated, and -1 when the data sets are anti-correlated. The results are show below...

The correlation for daily bars (D1) was between 0.4 and 0.5 (somewhat correlated). Hourly bars (H1) and 5 minute bars (m5) was much better 0.6 to 0.8 (well correlated). The result for the daily bars was a little on the low side, compared to the other results, so I performed an additional analysis for daily bars, this time only taking the last 100 days of data. This was a lot better than when using the whole data set, and gave values of between 0.6 and 0.9 (well correlated).

The reason for the difference is not entirely clear, and would require further study to analyse fully.

In practice, volume information (whether tick or real volume) is usually used in a relative sense, e.g. is the current day's volume bigger or smaller than the last 1, 2 or 3 days' volume. So, the fact that the data sets are less correlated over very long periods is probably not so concerning.

In general the tick volume seems well correlated with the real volume. This has also been the conclusion of a number of academic papers and articles (e.g. [1]). This is good; it means we can use tick volume as a reasonably good proxy for when real volume is not available. Of course, when real volume is available, it should always be the first choice, but tick volume is not a bad second.

FXCM Webinar on "Real Volume"...

One further point to note, the real volume data provided by FXCM is their own data, i.e. the number of lots bought and sold by their customer's accounts. This is retail volume. David Rodriguez of DailyFX says in the webinar that, although this is retail volume, a lot of this volume is cleared through banks, which might well be the case. However, this doesn't mean they are buying or selling in the same direction as retail. Ultimately, volume should not be used on its own, you need to consider a lot of other things.

[1] : Article from FX Trader magazine, April 2011

Wednesday, June 25, 2014

S&P500 trade

Interesting day today. After a big sell off in US yesterday, markets continued to sell off all morning. This accelerated on very bad US GDP data, but as soon as US opened they just rallied higher. I suspect a lot of folks got caught by that and sold the lows expecting a flush.

Anyway, I did make 1 trade today, on the S&P, just before the close. R1 and Initial Balance High (IBH) 200% extension looked like a good level, and there was a High Volume Node (HVN) just below it. I entered at maket on the HVN and had an entry order at the R1/IBHX2 level. As it happened, I didn't get a fill on the entry order so the total trade was only half normal size.

Scaled out into the last few minutes before globex session break.

Back To 1960...Soon!

Line Sync is now available on FXCM App Store

Line Sync is now available on FXCM App Store.

Here's a short video showing Line Sync in use.

Friday, June 20, 2014

RANsquawk - Weekly Wrap 20th June 2014

Discovery Trading Group - Webinar series

Rather long but interesting multi-part webinar series. I particularly like the 2nd webinar, where the presenter goes through his pre-market analysis marking his charts based on volume profiles.

DAX trades

Was trying to short the DAX this morning, but got only scratch trades or small losses. Longs would have been better. Eventually there was break-upwards, and I faded at IBH 300% extension and R2 which were both stopped out. Tried again at R3 (actually entered by market order since it looked like it was not going to reach R3). This worked out a lot better, scaled first lot to cover the stop. Took another scalp entry on pull-back, and then scaling the rest out into the pivot area.


Gold selling off this morning. Not surprising after such a big up-move yesterday. As further USD weakness seems possible, and geopolitical risk still present, long gold might still be a possibility. Possible support levels are show on the chart. The median from yesterday; the 10-week POC, and the lower area that I pointed out a couple of days ago.

Thursday, June 19, 2014

Hammer candle on S&P

A hammer candle at the top of a trend is usually a bearish sign, but I don't think much can keep the S&P down. Using the Candle Profile, we can see inside the candle. The clear High Volume Node (HVN) at the mid will be key resistance overnight. If it holds above then we may well see higher highs tomorrow.

However, the weekly profile shows a lot of weak structure (no volume, no levels, "gappy") due to yesteday's FOMC & Yellen inspired move. So further downside to 1942 (cash) could be on the cards.

Friday is the "Quad-witch".

Gold, up 3.5% this week !

S&P500 chart with buy/sell volume indicator

This chart shows the buy/sell volume indicator quite well. The new mode shows average buy volume and sell volume, which I'm referring to buying / selling pressure. Also, the difference between the 2 is shown as a histogram.

The indicator was showing sell imbalance (mainly red histogram bars) pretty much from the start of session, with only occasional small green bars. Mid-day the low was found around the IBL 150% extension, and then the buy pressure takes over into the close.

More articles on buy/sell volume.

Gold surge on USD weakness

Yellen's testimony and the FOMC minutes yesterday weakened USD. This has an effect on gold since it is priced in gold. Gold made further gains today.

Here's another chart from an hour or so later. Price rallied right to the High Volume Node (HVN) which also happens to be the Point Of Control (POC) of this 10-week profile, and stalled. It's been building volume here. The fact that price was not instantly rejected suggests this area will chop around for a while in this range.

Here's another post from even later! Well, I was wrong, price had stormed ahead above that POC. This is the biggest 1-day up-move on gold for a very long time.

Slightly frustrating that I was stopped out of my long at 1260 2 days ago. Remember that POC at 1293 though, it will act as support later on I think.

Major markets June comparison

Looking at the major equity markets, gold, oil, USD, and USD/JPY for June. FTSE (UK100) has been lack-lustre, US equities up, gold up, oil up, dollar down.

The Currency Strength Meter is available from this blog or via the FXCM Apps Store site.

Currency Strength Meter (post FOMC)

Well, FOMC minutes and Fed chair Yellen's session really but the burners on yesterday. USD falling rapidly, and still looks like more downside. Yen also fell, so EUR and CHF where the main gains.

On the MACD chart (upper panel) you can see that the currencies are all fairly closely bunched together - whilst technically NZD, AUD and GBP are the strongest on this chart, no one currency stands out. On the weak, well clearly its the USD, which might have more downside.

The Currency Strength Meter is available from this blog or via the FXCM Apps Store site.

Wednesday, June 18, 2014

FXCM's Real Volume indicator

I dowloaded FXCM's new "Real Volume" indicator. Here it is on the GBP/USD, with the usual "tick volume" below...

I need to do more study, but so far it looks ok. It seems to work on any timeframe. Here it is on 1 min chart.

The encouraging thing is that the tick volume looks very similar. Obviously there are subtle differences, but on the whole it looks proportional. This was expected, and I am relieved that it meets the expectation and not some nasty surprise.

Tick volume data: This is basically how many times the price quotes changed.
Real volume data: This takes into account the actual size of trades taken
Transaction volume data: This is the number of action transactions made (buys or sells)

Tick volume is quoted price changes. Prices change to reflect the best bid & ask of the underlying instrument. Prices can change without any actual trade taking place, but in general it is the order-flow that affects the bid & ask prices. However, a single "tick" could be anything (e.g. any number of transactions or any number of lots traded). Additionally, a broker might not record ticks for every single price change (just for logistical reasons). So, maybe ticks are aggregated and only updated at some lower rate. Tick volume is not very transparent, and the broker can do anything with it.

The real volume data is just FXCM's volume of course, but this is supposed to be fairly representative of the whole market (at least from retail perspective).

However, despite the short-comings of tick volume data, it does appear to be a good proxy for real volume data. When I get some time, I will do some further studies to check the correlation over a number of instruments, time-frames and events (e.g. news events, etc.)

Tuesday, June 17, 2014

S&P Back and Fill

FXCM Volume Information

FXCM is now starting to share some of its volume information. They are publishing twice daily volume and transaction figures for 14 major currency pairs on DailyFX site (here).

There is also an indicator for MarketScope, but this seems to be a Beta version, and on limited distribution. I have signed up for it.

Here is an article on DailyFX about FXCM's new volume & transaction volume offering.

Here is a quote from the article...

"Unlike in centrally-traded and cleared markets such as Equities and Futures, forex trading does not trade in any single exchange. That means that there is likewise no single place for volume data, and as such we have historically been unable to use important volume indicators on our FX charts. Why might we view FXCM data as a proxy for such figures?
FXCM Inc. (NYSE: FXCM) is a global online provider of foreign exchange (forex) trading and related services to retail and institutional customers world-wide. It reported retail customer volume worth $263 billion in May, 2014 and an average of $12.0 billion daily. And though this represents a tiny fraction of the $5.3 trillion in daily FX turnover reported by the Bank of International Settlements as of October, 2013, it captures a non-negligible share of Retail FX trader volume."

Well, about time is all I can say. But I do not quite know what they are offering, details seem very vague at the moment. on DailyFX the data is updated just twice daily. Does the indicator do the same? The charts on the DailyFX article look like daily charts, and not intraday. Also, it is only for certain currency pairs - not for CFDs (DAX, gold, oil, etc.).

But still it is better than nothing. However, one thing I will be looking to do is see how well it correlates with tick volume data. If there is high correlation between tick volume and real volume, then it adds support to the idea that tick volume is a good proxy for real volume.

DAX daily profile

Yesterday was inside day. Today, DAX range-extended both sides taking out the stops and probably confusing a lot of people about market direction. Consumer Price Index from UK and US caused a lot of movement today. UK's figures falling short of expectations, US figures exceeding expectations. Oil and gold dropped overnight, but rallied in the afternoon.

I took a number of scalps on DAX, FTSE and S&P, but failed to grab the major moves. Bagged about 20 pips in total. My gold trade was stopped out (in the US CPI spike), but would have been in the money if the stop hadn't been there.

Profiling the DAX

Volume profiling can't forecast market direction (at least not directly), but it can help identify key support / resistance areas. Price action at these levels helps us to understand the sentiment of the market, i.e. was price accepted or rejected at the level.

Price action on today's DAX shows up as a doji candle on the daily chart. However, looking at the profile (Composite Profile of last 10 weeks on the right hand side, and Candle Profile for each daily bar) we can see support / resistance levels. Today was a balanced day, with range extension both sides of the Initial Balance. The low of the day was at the key Low Volume Node (LVN) from Friday. The high of the day was just below the High Volume Node (HVN) on the composite profile.

Ultimately price was rejected from both these levels, and ended up back at the mid (median) price. Where will it go next? One thing to think about is the path of least resistance: below Friday's low is low volume area down to 9750-9780 region; price moves quickly over low volume areas. On the up-side, there is high volume area, and price action will likely be choppy.

Which chart would you rather use - the one on the left or the one on the right?

Monday, June 16, 2014

Buy Sell Volume Indicator

Still messing around with the buy/sell volume indicator.  Although I implemented the Bulk Volume Classification model by Easley, Lopez de Prado, and O’Hara, I found that it has some short-comings, and the A/D (Accumulation / Distribution) formula from the indicator of the same name seems to work a lot better (at least intuitively).

However, I found that sometimes the raw data is a little bit hard to follow - after all the accumulation / distribution rarely manifests itself on a single bar. Instead it is spread over a number of bars. So, in the latest version of the indicator I simply added a moving average to the buy volume, and sell volumes, and I also draw the outputs a little differently too. The 2 lines (blue and magenta) are the buying and selling average volumes (I call them buying pressure and selling pressure here) and the histogram is the difference between the two. Of course the moving average adds some lag, but it still seems quite useful.

Friday, June 13, 2014

RANsquawk - Weekly Wrap 13th June 2014

How did the markets do this week?

I don't normally use Multi-Compare for weekly chart, but I thought it would be interesting today. Equities down, and gold and oil up on the week.

Here is the Currency Strength Meter chart. NZD and GBP strongest this week

Iraq weighs heavily on European equities this morning

 Geo-political risk into the weekend causing a lot of downwards movement today.

DAX trades this morning

I wish I had sold the open - I very nearly did, but to be honest I was expecting an early bounce today, followed by downside later.

As it turned out, it was all downside so far. I eventually got into a trade on the DAX by watching FTSE price action, it had broken lower this morning, and retraced most of the break down, failed again and was looking like it would fail its S3 support. I shorted into DAX (tight stop in case FTSE break didn't materialise). I was in luck, a nice breakdown of FTSE and DAX, closing 1 position for 12 pips profit, and scaling the other at S3. A runner remains.

Thursday, June 12, 2014

GBP/USD fade Carney

Well, after Carney's comments, GBP/USD made a bit of a surge, and took out stops above, but this is all after hours and I felt it would run out of steam. Indeed momentum did drop, and I faded the GBP/USD at R3. This is a short-term scalp trade. Already scaled to cover the stop-loss, so this trade is now already at break-even whatever happens.

Pivot levels (and support / resistance) lines are calculated using well-known formula, utilizing the daily high, low and close prices. For session based instruments like equities, indices, etc. the daily start and close is clear. But what about 24hour spot forex and other 24 hour markets? Some systems use 0:00 GMT, others use 17:00 EST, or should we use 08:00 UK time, or 08:00 EST? Maybe use the FX futures open at 7:20 CET?

Here I am using 08:00 EST, (i.e. 13:00 UK time). This seems to be an important time, and often accompanied by initiative moves in currencies. It seems to put R3 and the daily pivot in reasonable locations with appropriate price reactions.

Pound surges on Carney comments

Pound surges on BoE governer Carney's comments, amid renewed global tensions in the middle east and Ukraine.

Also today, gold and oil higher due to uncertainty in Iraq and Ukraine. Equities down but found support late in US session.

GBP/USD takes some stops and heads towards 1.6930.

S&P Flunk-A-Dunk

DAX trades

I didn't make the best of this trade, but still very profitable. The idea was to expect continuation of the downside when the US opened, so I shorted pull-back to the opening range. I scaled in to this, but ended up taking one of the positions off as there was a sudden increase in buying pressure. I kept the other portion of the trade on, and was duly rewarded. I had targets at the IBL 200% extension, and the daily low (which happened to be around the IBL 300% extension). I had a stretch target the yesterday's low, but more buying pressure came in, so I ended up taking the final scale at a higher price than I intended originally.

I also had a 3rd entry on pull-back to the close, but treated it as a scalp.

Line Sync Release 6

I made a small (user-requested) change to the Line Sync indicator.

Release 6:
  • Added parameter for the section timer value

This is the timer that keeps selected lines active for a few seconds after the last action. The default is 10 seconds, which is the same as previous versions. The change allows you to make this shorter or longer as you require.

Wednesday, June 11, 2014

S&P500 trades off Initial Balance and Extension

After early declines in Europe, S&P settled into a fairly tame day. It's roll-over week and volumes are low.

I went long on pull-back back to the Initial Balance Low, but I was stopped out on this. I tried again at the IBL 150% extension. I also had another entry order at the IBL 200% extension but this didn't get hit.

Profit target was the POC, which was hit on the late day rally, for 40 pips, more than making up for the earlier stop loss.

More on Bulk Volume Classification

Following on from my previous post, I did some further analysis.

The ELO BVC formula uses changes in closing price. Whilst the close price is an important piece of data, it is somewhat arbitrary for time-based bars (except perhaps for daily closes), I wondered whether there would be any benefit (or otherwise) of using median or typical price. Median price is (high + low) / 2 and typical price is (high + low + close) / 3. I didn't find the results particularly any more informing.

However, then I had another intuition: the key piece of information I would like to know is the trades made by the "smart money", the "informed trader". These traders tend to hide their volume, for example selling into up-bars, and buying into down-bars. If we used the changes in median prices as a proxy for the average trader (and assuming the average trader to be uninformed), then we can subtract this from the changes in close price, thus revealing the hidden trades of our "smart money" "informed trader".

Let's give it a go. Simply I use the BVC formula by ELO, but rather than modelling changes in close price, I use the (close - median). The following chart shows the result, the lower histogram is using the new formula, the one above it is the old formula. Looks promising!

I'm not saying ELO got their formula wrong, but what I want to know as a trader is where the informed trader is entering the market with strength, and they generally do this by hiding their volume.

Other ideas, rather than using the median, it would be interesting to use other averages such as the mode (Point of Control), or even VWAP. However, these can not be computed from simple high, low, close data points.

Bulk Volume Classification

I implemented the Bulk Volume Classification (BVC) proposed by Easley, L√≥pez de Prado and O’Hara [ELO, 2013]. This algorithm splits the total volume into buying and selling volumes. It uses a bulk technique (i.e. taking whole bars) rather than using the more usual "tick rule". The advantages are efficiency, and also it works when tick data is not available (or inaccurate). It is supposed to give trade classification accuracy of 80-90%, although this claim has been contradicted by other researchers.

The formula is like this...

Their paper can be found in various places, for example here.

Here are the results on 1H bars of GBP/USD. Note, I am using tick volume here, as real volume is not available for spot forex. However, the ratio of buy:sell should still be representative.

Intuitively, some of the results don't look quite right though. Take the pin-bar that I circled. We understand this to contain lots of selling, since the bar pushed high but closed near the low, yet the bar is an up-bar since its close was higher than the previous bar's close (but only just). However, the BVC classifies almost identical buy & sell volume.

Tuesday, June 10, 2014

Weis Wave on steroids

This is something I've been thinking about for a while, but didn't get the chance to follow-up due to other projects. I have tried to combine the Zig-Zag (Weis Wave) with some Volume Spread Analysis (VSA) methodology. This is very much a prototype, just to get the basic frame-work and idea running.

The ZigZag indicator changes direction when the "delta" between the last swing high/low and the close changes by a certain amount. Thus is makes a series of up and down waves. The Weis Wave accumulates the volume over the wave to get the total wave volume. Thus it finds the volume for the whole move rather than looking at individual bars where it is not so clear.

My enhancement is quite simple so far, simply to colour the waves according to demand or supply. For example, waves are coloured as "High demand" if they exhibit the highest demand (volume on up-wave) in the last N waves, where N is a look-back parameter (10 in the screenshot below). Similarly, the waves are coloured for "No demand", "High supply", "No supply", etc.

This is just a prototype. I plan to incorporate the concept of the close in relation to the range (sometimes referred to as churn). Other concepts that I want to look at: buy/sell volume, shortening of thrust, ease of movement, etc.

Sunday, June 8, 2014

Market Profile Release 16

I just uploaded a new release for the Profile indicator.

Release 16:
  • POC, VAH, VAL, High, Low outputs can now be set to “None” this means they are still used (including labels), but there is no visible line

The change is minor, user-requested change so that POC, VAH, VAL, etc. labels could still be used with no visible line drawn for the output.

The new version is available on the download site for existing users. The indicator can be purchased here.

Candle Profile Release 10

I just uploaded a new release for the Candle Profile indicator.

Release 10:
  • Added up/down colouring style
  • POC, VWAP and Median can be set to “None”, this means the output is still used for the profile colouring, but with no dot or line on the chart

The new version is available on the download site for existing users. The indicator can be purchased here.

Saturday, June 7, 2014

Composite Profile Release 14

I just uploaded a new release for the Composite Profile indicator.

Release 14:
  • Bug-fix for “Previous day” mode
  • Bug-fix for “Manual” mode

The new version is available on the download site for existing users. The indicator can be purchased here.

Session Lines Release 4

I just uploaded a new release for the Session Lines indicator.

Release 4:
  • Added VWAP bands
  • Added Initial Balance Extensions
  • Added R4 & S4 pivot levels, and ability to select “standard” or “floor” pivots
  • Label font, size and displacement can be set
  • Internal changes to cope with larger number of outputs

The new version is available on the download site for existing users. The indicator can be purchased here.

Friday, June 6, 2014

Using Volume Profiles in MarketDelta to help form Trading Ideas

Further rallies in US equities

Market rally again - into the weekend.

S&P made a final push up on the close to the Initial Balance High Extension 150%. You can see this on the chart. Also, I see the guys on the Chicago pit called that target too.

DAX also tagged its IBH Extension 300% on the close too. These lines really are looking promising.

Indicators for Scalping with FXCM MarketScope

Here's my recommendation for scalping instruments like DAX, S&P, FTSE, etc.

Session Lines: Set the session start time, and it tracks the key intraday levels from there. For example, high, low, mid, VWAP, POC, Value Area, Initial Balance, pivot levels, etc. The latest version also shows IB extensions and VWAP bands.

Gap Fix: This indicator fixes a problem with the FXCM data feed for instruments such as DAX and FSTE that have session breaks. FXCM data feed starts the session at the previous day's close. The "Gap Fix" uses tick data to correct this and show the real open price.

Composite Profile: This indicator is good on any time-frame, and generally used for profiling large periods of time, but it works just as well on scalping chart, even tick chart.

VWAP: A standalone VWAP indicator. I'd recommend Session Lines because it has a lot more, but if you just want VWAP, then this indicator does that (including VWAP bands).

VWAP indicator

My Market Profile and Session Lines include VWAP. However, I also have a standalone indicator that can be used. I don't have documentation for it, but it's quite simple. Just set the VWAP mode (normally "Daily") and the start time.

(Update: This indicator was enhanced to use FXCM's Real Volume mode, and is now available on the store. More information can be found here).

EUR/USD: anatomy of a news-spike reversal

Some spectacular action today due to ECB's historic rate reduction news and following Draghi press conference. I posted higher time-frame chart showing the levels (from February) that the EUR/USD probed into. However, I thought it would be interesting to look at closer detail inside the few hours around the spike.

A rate reduction was expected, and the markets have factored this in already, so why such a big reaction. It's all smoke and mirrors.

Composite Profile and Candle Profile indicators are available from this blog, also on FXCM App site*.

(* NOTE: On FXCM App site, the Composite Profile is sold under the name Volume Profile, but it is essentially the same indicator.)