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Our Most Popular Blog Posts of 2011As the year winds down, we were looking over what you thought to be the most interesting blog posts of 2011. We also wanted to include one from late 2010 that had lots of traffic and lots of comments. Most Visited Blog Post of 2011 Most Commented Blog Post of 2011 Winner for 2010 Forex Buy/Sell Signals with Delta DivergenceDelta Divergence is our commercial signal package for automatically generating buy and sell signals on charts using our order flow analysis tools. The signals are good in rotational markets as they seek to identify reversals when order flow moves opposite price direction, suggesting an imminent turn-around in prices. Traditionally, the Delta Divergence signals use Ask and Bid volume to measure the sentiment of market-priced trades. The Forex market is many times larger than the equities and futures markets – combined. Spot Forex remains one of the largest markets in the world and is particularly popular with short-term traders and scalpers. However, as this is a de-centralized market with no true “exchange”, there is no true and accurate volume information available. So, how can you use Delta Divergence on a market like Forex, if you don’t know Ask and Bid volume information? We provide the features to set our order flow studies based on “up tick” and “down tick” so you can compare the price ticks in a positive direction with those in a negative direction. This is a form of order flow analysis, but does not use the actual contract size of those individual trades and ticks. What are the results? Here is an example from this week on the EUR/USD spot forex instrument:
Click for a larger view.
Step Through of a Trade SetupEarlier today we tweeted out that “cumulative delta is deteriorating..”. This was based upon the fact that cumulative delta was putting in new lows for the day while price was not. Many times we see cumulative delta lead price. Either way, when cumulative delta is making a push and price isn’t, something is going to happen, its just a matter of time.
Why? Well either price will follow cumulative delta and the aggressive order flow will prove to have been correct OR the shorts (as was the case when we tweeted) are getting sucked in at the low of the rotation and will fuel an often quick move in the opposite direction. Now for a very important observation that is extremely valuable when you see it. Today’s price action up to the time we tweeted was tight and range bound. Just a very well defined 8 point rotation. This lends to more rotation inside the well defined range UNTIL proven wrong. The delta was deteriorating but at a very well defined support. So, the trade opportunity is actually a long at this support level with a tight stop. The tight stop is suggested because if price does start to breakout it should be accompanied by some follow through and range extension. See the Footprint chart of this example below.
If this deteriorating cumulative delta pattern were to occur on a day that was not tightly range bound, then a breakout would be more likely versus a snap back from the well defined support level. Market Profile for StocksMarket Profile charts are famous in the futures industry, as that is where they were born and remain essential tools for many futures traders. A question we often receive is: “Can you use Market Profile for stocks?” It is important to understand that Market Profile is nothing more than a way of viewing financial auctions. In this regard, there is no difference between futures, options, stocks, bonds, commodities or other financial instruments: they all follow the same basic auction process. Thus, Market Profile is perfect for understanding where the value areas are in any particular market, whether it is the ES future or the stock of Apple. Here are a couple examples. First, when setting up a Market Profile chart, it is a good idea to change the price range of each letter. A stock trades in pennies and may sway by many dollars a day. Depending on the stock, 1 dollar may represent a small part of its range, while for others it is a large part of its range. You will probably want to find a letter size between 10 cents and 1 dollar, which you can do in the Custom Letter Range box:
Enter 0.1 or 1 or whatever you feel is appropriate. Here are some examples of AAPL stock using a Market Profile set to 10-cent letter ranges.
Here is a classic example of Market Profile value areas in action. The market broke above value, and then rejected efforts to fall back inside that value. This confirmed that new value was successfully established. Here is another one:
The market falls and trades below value for an entire day. On the following day, the market attempts to push back up in to this prior value, but the value area low stops it cold. Market Profile charting is an extraordinarily powerful tool, and we recommend that anyone serious about it give those charts a try. You can learn a lot about Market Profile concepts, theories and strategies in the books by James Dalton, Markets in Profile and Mind Over Markets. Paint Bar for Cumulative DeltaA very useful indicator that is built into MarketDelta is called the Paint Bar indicator. This indicator allows you to either paint the actual bar or background of the chart based upon a set of conditions. The conditions used to “paint” the bar or background are defined in a scan, signal, or custom indicator. With all the powerful volume and price related studies in MarketDelta, the possibilities are almost limitless in the types of things you can “paint” upon. In the example below I have taken the volume breakdown indicator and created a signal to plot the background based on whether the cumulative delta is positive or negative for the current session. In terms of applying this information, you could use the cumulative delta as a confirmation for trade direction. If green, buy pullbacks, if red, sell rallies. A more aggressive way to apply the indicator would be to use a Footprint chart with the shaded paint bar background. A Footprint chart inherently provides more data than just a bar chart and will give a better idea of order flow. This means you can jump on breakouts if the order flow is present instead of waiting for pullbacks. Here is how to do it, or just download the chart definition here. Create the signal first. The signal is just VB>0. Next, add the Paint Bars indicator, choose Signal, and select the signal you just created. Choose to Paint Background. Click “View” to update the settings or just view how the signal is setup. Double click Volume Breakdown to see the settings for the “VB” token. Here is the result once added to the chart. Iceberg OrdersWith the availability now of our new trading software called MarketDelta Trader, iceberg orders are much more obvious. This is because the new software combines depth of market (DOM) data with a tightly integrated Footprint. This combination of the pre-trade data with post trade data shows iceberg orders more clearly. For those who do not know much about iceberg orders, the simplest way to describe them is to simply think of a real iceberg. Only a portion of the quantity is shown in the depth of market. As the order is filled, more quantity is automatically refreshed in the order book. A simple example would be an order for 500 contracts. The trader uses an iceberg order to only show a set quantity, say 50. As the 50 are filled, another 50 are automatically, and almost instantaneously, sent into the market at the same price. This will continue to happen until the entire iceberg is filled. The purpose for these orders it to hide the actual intent to buy or sell large quantities. This helps institutions and large traders to not be “front-run” by others who look to jump in front of their larger orders. One benefit of now being able to better track this activity, especially at key support and resistance levels, is have absolute knowledge of how much volume is trading without having to rely on the order book. Obviously the order book will not show this data without the Footprint. A simple example of an iceberg is shown in this video. Better examples present themselves every day, but we happened to be recording the market when this occurred.
Iceberg Order from MarketDelta on Vimeo. For more information on MarketDelta Trader or to demo the software, visit http://www.marketdelta.com/products/trader/brokers. Delta Tracking and MeasuringThis 4 minute video shows how to use the traditional charts and trend line tool to quickly measure the delta of a particular move. You choose the start and stop point by simply drawing the trend line and it will calculate the delta over that start and end point. This would typically be used measure rotations in market or a swing low to swing high level, etc. Those that use this tool want to be able to gauge one move against another and use the delta, along with the total volume, to qualitfy trading opportunities. Two-month Market Profile since August BreakdownFor two months, the market has received much attention for its high volatility, dramatic drops, increased risks and uncertainty. We’ve brushed with “bear territory” as the news media like to often repeat, and have had significant intraday declines reminiscent of 2008. What’s a trader to do? Here is a very simple chart with two useful long-term indicators added to it. This is a daily chart since the August “crash” that shows two trend lines and a volume profile of all trades during the last two months.
The first notable event on this chart is the triangle pattern with lower highs and higher lows over many weeks. Most traders understand that on any timeframe, a contraction of volatility precedes a notable move in one direction or the other. You can clearly see on this chart when the breakout of the triangle occurred, offering strong reasons to expect further declines. In fact, selling the bounce back into the triangle was a good short setup with good risk-to-reward. Now we are at today, October 5. The market has enjoyed a good rebound yesterday and, as of 1:40pm Central, another nice rebound today. But where do we put this in context? One of the immensely powerful and unique features of MarketDelta is the ability to create custom volume profiles over any period you wish. Using the Profile tool, we can build a distribution starting at the August breakdown to the present and clearly see where the value areas lie in today’s market environment. We can clearly see that, at the time of this writing, the market is touching the Value Area Low of this last period of rotation over two months. In fact, in the last few minutes while writing this article, the market sold off 5 points from this level, so anyone shorting this Value Area Low would have enjoyed a decent scalping opportunity. But when looking at the bigger picture, it is easy to see that, despite all the dire predictions among the analysts, the actual market activity is telling us something: The point of control (POC) is at 1157.25, making that a very reasonable and probable trading price, and the top of the Value Area isn’t until around 1200. To demonstrate how successfully Value Areas capture and predict market rotations, here is another graphic of the same chart, but the Profile is drawn to end at an earlier date:
By only showing what the Profile looked like at the time you might have traded it, you can see very clearly how the Value Area Low at that time effectively captured the market reversal that moved from around 1130 back up to 1200. And actually, the distribution has been so normal that the value area did not change much over the course of the following two weeks, showing just how predictable all of this volatility actually is. These are volatile times, but you can often simplify all the uncertainty with some basic views of the greater auction taking place over many days.
Changing How Traders Use the DOMWe just launched MarketDelta Trader and are already hearing great things from many of you. Here is a recent comment: There is something quite unique about trading the ladder right next to the Footprint…it makes execution decisions that much quicker and also clearer to see. The secret is not another indicator or super duper, fancy named, complex system. The secret is taking what you already understand and adding another layer of precision and transparency. The secret is combining the Footprint chart with depth of market (DOM). This simple combination unlocks a lot of the mystery about the DOM and captures exactly what happened by showing how much volume traded at each price and if that volume was buyer or seller motivated. From our experience, many traders see the DOM and believe it is holy grail. What they fail to realize is that the DOM is the canvas from which the professional market makers, institutions, and prop traders use to paint what they WANT us to see. It is the perfect setup. Show people what they believe to be real and then take advantage of that belief. Never fear, the Footprint is here to help! The benefit of the Footprint coupled right along side the DOM is everything is immediately exposed the moment the trade occurs, meaning you don’t miss a thing and have better, more complete information to base your trading decisions. If you want to experience MarketDelta Trader for yourself, start here. MarketDelta Launches New Trading Platform
MarketDelta has just launched an exciting new trading platform!
All you need is a demo account and license key. Just click the big yellow button below to visit our approved brokers page. Sign up using their signup form, and a demo login and license key will be emailed to you.
 MarketDelta Trader Testimonials
“If you trade, you need this platform! “ “There is something quite unique about trading the ladder right next to the Footprint…it makes execution decisions that much quicker and also clearer to see.” |
