2 replies to this topic

[davewooldridge]

The following I copied from Bretttsteeneberger. Interesting Volume has increased significantly during the last few sessions in the ES futures, and I believe that this represents a shift in market participation. In other words, the market is not only quantitatively different than before (more volatile), but qualitatively different. This is because a different class of trader is active in the market place. Specifically, I propose that large shifts in volume are primarily a function of the activity of professional traders in the marketplace. There aren't enough small, retail traders trading size to account for significant increases in equity futures volume. Indeed, my speculation is that it is the high frequency "black box" trading that expands most significantly during times of enhanced market movement. This would explain why volume would be above normal throughout the day during times such as this past week. To a trader who follows the ES market closely, a market dominated by automated trading simply feels different than one in which the black boxes are quiet. The automated trade will engage in spurts of buying or selling, often pushing the market just beyond a recognized resistance or support level. This pushes other traders to cover their positions or jump aboard, further exaggerating the move. The automated trader, however, has resting orders above or below the market to take quick profits on the move--which leads to rapid retracements. The net effect of this trade is, at multiple time frames, many false breakout moves. It also leads to sudden rises or declines that often end up going nowhere on balance. This is what traders refer to when they say a market is "choppy". Bottom line: the market at 10 VIX is both qualitatively and quantitatively different from the market at 24 VIX. Trading patterns are not the same (the assertions of technical analysts to the contrary), and the expectations following given setups are not uniform. This is what statisticians mean when they say that stock market returns are non-stationary: they are not generated by a single, common process. This is because the makeup of the market--its participants--differ as a function of volume and volatility. This is why good traders can have a feel for the market at one time and seem to entirely lose it at other times. When markets shift volatility significantly, they become different markets and discretionary traders need to immerse themselves in the new patterns to regain their feel. Very high volatility markets may be the hardest to trade of all because they rarely stay at highly elevated levels for enough time to allow traders to gain their feel. For that reason, volatility is as likely to represent risk and danger as opportunity.

[Jnavin]

Trading patterns are not the same (the assertions of technical analysts to the contrary), and the expectations following given setups are not uniform. This is what statisticians mean when they say that stock market returns are non-stationary: they are not generated by a single, common process. This is because the makeup of the market--its participants--differ as a function of volume and volatility.

I disagree with this part of his statement. Trading patterns ARE the same, they simply change fractal dimension during periods of intense volatility.

Otherwise, he's on the mark.

[flyers&divers]

[quote name='Jnavin

Trading patterns ARE the same, they simply change fractal dimension during periods of intense volatility.

[/quote]

Exactly,

This market is a daytraders dream because intensity changed.
Chart patterns are clearer to read because there is intense two sided market at every turn. One of the most reliable patterns the flag or pendant formation on the 1, 3 and 5 minute chart is appearing several times a day in its perfect form, meaning after a move with robust volume - which we now have on impulse moves- the market pulls back a bit on much much less volume. This ebb and flow is not readable well in aquiet market, only in an active market. Most of these patterns in the last week met their measured targets, again textbook. This afternoon teh high volume bottom at 2:30 ESTwas followed by three waves up on less and less volume and the "surprise"drop.Textbook.

On the other hand if one is a swing trader, because momentum leads to somewhat bigger overswings it is easier to catch a turn or at lest when one does catch one targets are met quickly(rubberband effect), one can act with more confidence if the breadth reading are lopsided in the direction of one's trade. Four days ago downside volume was 20x the up volume. Needless to say even the simplest oscillator can pick intraday tops in those conditions.

As far as blackbox trading I have my own theory, when the market is intense it is a free for all and noone can control the market. If you are a BB operator and stand in front of the freight train it will run you over even if you are GS or MS. The only blackbox person I personally know chips away at moves at their extremities so they are actually containing market moves rather then exagerating them. I do the same as a scalper.

I was commenting on intensity the other day in one of NAV's threads:

" There is one aspect of market movement I don't see discussed much is what cycle in the market is dominant.
I don't mean cycle in the regular sense but more like on what time scale the ebb and flow of intensity is at the moment. Skilled traders try to figure out thisd ebb and flow and if they are tuned to it it's like magic. You and the market are one.

In individual stocks (unless it's a MOMO stock), the dominant intensity may be daily as the stock is dragged up and down by the ebb and flow of the market, with an occasional jolt from a news item or right after a breakout/breakdown.

In futures the dominant action (where there are clearly formed tradeable patterns)are both intra day and inter-day because of leverage more attention is paid to every little move.
It takes a lot of learned skill and stamina to figure out,track this and consistently be good at it. NAV and Mr.Dev are on this wavelength (where the futures action is most of the time) and they are gret at it.

When the market is in a crisis mode or after important releases the dominant intensity becomes microscopic. In the last few days the 1 and 3 and 15 minutes charts of ES, EQ, YM had as many good formations as one would have on hourlies in months and dailies in two years.

When peole don't understand a sudden move it could be because dynamics of a different wavelength are in play then the ones the trader is used to. It is the best to stay clear of these situations - one should chose one battles carefully and stay clear of slower or faster markets then what one is used to."

Regards,

GC

Edited by flyers&divers, 31 July 2007 - 07:42 PM.