Indicators

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Market Internals based Signalling System | Intraday | Covid 19 Lockdown Project

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For long I wanted to code a Market Internals based signalling system for Scalping, just didn’t have time. Thanks to the lock-down, I spent some time on the system and brought it to life.

The system operates on a very simple logic,

If the # of stocks above (VWAP + 1 SD) (Standard Deviation) in the universe (NIFTY 50 or Top 25) is greater than the number of stocks below (VWAP - 1 SD) go long, if the reverse happens go short.

As you all know its more about getting your bias right, so that you don’t take some probabilistic-ally stupid trades.

So here is a snapshot.

If you see below you get two different colored arrows, light green and dark green, likewise for reds, Dark green has been configured for the the top 25 stocks, and light green for the balance, that way I get to know which segment of the index is turning bullish or bearish. as you can see in the image below, in the morning it was the lesser weightage stocks that turned bullish first and then the heavy weights joined, but the reverse was true when the index fell mid day.

8th April’20 - NIFTY Futs

Working on refining the system more, earlier I used to set it on 1min TF but that gave several false signals, so move to 3 minutes now, lets see how this works.

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Live Orderflow and Market Profile Charts | How do you get them?

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The regular readers of the blog must be wondering as to why am I writing about this when I myself don’t use any of it. Well the reason is, I get at least 2 to 3 emails a week asking for this, so I thought may be writing a blog post about it would help me manage my inbox better. So here it is. Please read the disclaimer before you move ahead.

There are three elements to charting , 1-Data Feed, 2-Charting Software, 3-Indicators, we will discuss all the three in this post. Lets first look at how do these charts look.

Market Profile Charts

They look like this image below

Screen Capture from Fin-Alg Website

Screen Capture from Fin-Alg Website

This post is only about how to get these charts and not about its interpretation. So I will stick to the intent there.

These TPO (Time Price Opportunities) or Market Profile charts do not need tick data, meaning they do not need information about volume executed at each bid and ask price point, they can work with normal price volume data, and hence its easy to implement.

Order-Flow Charts

The next thing that you are looking for is Order-flow Charts or Footprint Charts. Remember conceptually there is no relationship between both the order-flow and the Market Profile charts. You can choose to trade purely based on Market Profile or purely based on Order-flow.

The Order-flow or Footprint charts look like this - they need tick data i.e. In NinjaTrader there is an option called “Tick Replay” which need to be enabled to get these charts working.

Screen Capture from Fin-Alg

To get the above charts working for yourself you essentially you need three things, a data feed, a charting application and some Indicators.

Data Feeds - Data feed providers take data from the exchange and provide it to you through an adapter, specifically for the charting platform that you are using. For example for Market Profile you can use either Amibroker or Ninjatrader (There are others but I do not have first hand experience with them, hence not recommending) - Amibroker is paid or licensed and NinjaTrader (NT) has both paid and a free version to use.

So you have the following options for your data feed.

  1. http://viratechindia.com/ - They are the official providers of the E-Signal data feed. Expensive for retail traders. Call them for pricing.

  2. https://www.truedata.in/ - They are the best in terms of quality and price for data, I use them not for market profile or order-flow, but for my own proprietary indicators. I endorse them for their value and high level of customer centricity.

  3. https://globaldatafeeds.in - They are the next best option after True Data, personally I have found some issues with the quality of their price data, but that may be just me.

  4. https://www.ticanalytics.com - These folks are newer compared to others, I really do not have any first hand experience with them. No harm in trying though.

Remember they all provide only L1 Data, which is data available post trade execution. They do not provide L2 is Market Depth / Order Book data.

Ok with Data feed thing, sorted, you can now move on to the next thing ie the Charting platform.

Charting Platforms - Charting platforms matter as much as the data feeds themselves, because at the end of the day the platform has to process the data that comes into it from the data feed. I will stick to the two major platforms - As stated earlier I recommend only the following two charting platforms as long as L1 data is concerned.

  1. https://www.amibroker.com/ - This is a very powerful platform for both charting and back-testing. If you are keen on using Order-flow charts may be they are not the best, but for anything else, including Market Profile.

  2. https://ninjatrader.com - This is a very powerful platform in terms of its ability to process tick data. If you are looking at Order-flow charts this is your best option.

  3. https://www.linnsoft.com/ - Investor RT as they are called is another high quality platform in terms of its ability to process tick data and also to back-test. May turn out to be expensive compared to the other two options. They have their own Indicators for Market Profile and Order-flow which you would have to buy separately. This works with E-Signal for sure, don’t know about other data feed providers.

Date feed. Charting platform done, now we need the indicators.

Indicator Providers - There are several indicator providers for both Market Profile and Order-flow Charts you would essentially buy them to use it on your charting platform.

  1. http://fin-alg.com/products.html - These folks have some of the best order-flow and Market Profile indicators. Only for NT.

  2. http://www.ranchodinero.com/ - This is your next option, but a lot of traders I know have not liked their Order-flow Indicators. Market Profile indicators yes.

  3. https://www.belltpo.com/ - We have an Indian vendor as well. They too have almost all the features of what others offer. I do not have first hand experience with them.

  4. There used to be another vendor by the name Market Delta wo were the pioneers here, but guess what they have filed for bankruptcy.

Remember its recommended that you have at least a 2k resolution monitor or more, 4k is always better to view the orderflow charts well. Also do remember that it takes some time to getting used to, you would have to play around with the settings to get to see what you want to see.

Lastly there are also players like Vtrender in India who offer a live broadcast (Screen Share) of these charts based on their own proprietary settings, they use Investor RT and Esignal (I guess so), I am not sure you can directly contact them. You do not get to play with the time frames or the settings. Nor can you choose the instruments that you want to chart.

Hope this post answers your questions about Order-flow and Market Profile charting.

If you have any further questions fee free to write to me or comment below.

All the best with your Trading!

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Segmented Cumulative UpVol-DownVol | Making of Trend Days

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As traders we are always fascinated by trend days, for novices it a great day, for the ones who trade reversions to the mean, its dreadful.

In this post we look at what happens in the underlying stocks on Trend Days.

The indicator that we have chosen to analyse trend days is a % Cumulative Upvol-Downvol for a Segment of Stocks. There are three segments of stocks that I have taken.

Segment 1 - Top 10 Stocks By Weightage - Constituting (60%) - Solid/Red/Green - Top

Segment 2 - Next 15 Stocks By Weightage - Constituting (20%) - Dashed/Red/Green - Mid

Segment 3 - Next 25 Stocks By Weightage - Constituting (20%) - Solid Yellow - Bottom

So what do you see here?

a) You need the Top Segment to be trending.

b) If the Mid segment goes along with the Top good.

c) Bottom Segment unless makes a massive impact , does not really matter.

Figure 1 - 25th Feb’19

Figure 2 - 11th Mar’19

Figure - 3 - 5th Mar’19

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Through the Looking-Glass, & what NiftyScalper found there | Market Internals - Part 3

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This is the third and last post in this series,

Part 1 - Here

Part 2 - Here

**Read about what RSI is over here

In this post we will look at the good old RSI Indicator which has been re-purposed to be used as, both a trend indicator and an oscillator.

The math - We took the top 25 stocks (by weight-age) of NIFTY 50 and Averaged their RSI Value. So we have a Average RSI of the top 25 stocks vs. RSI of NIFTYFUT or RSI of 50 Stocks. Since the 25 stocks have close to 80% weight-age the cross over of the Average RSI and NIFTY RSI acts as a trend Indicator.

Notice the RED colored (NIFTYFUT RSI) Crossing over the Yellow Dotted line of (Average RSI).

We also back-tested for ideal Oversold and Overbought levels - you will see it marked with Blue colored markers in the images below. Typically a RSI Absolute Difference of 10 - 12 i.e (NIFTY RSI - Average RSI)

So here you have a Market Internal based Trend Indicator + Oscillator all built into one since indicator.

There are several other setups for trading pullbacks using this indicator, but thats for another day..

Please do not ask for the RSI Period settings on this one, but its no rocket science. Also, at NiftyScapler we don’t use any of these three indicators in Isolation.

Image 1

Image 2

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Behind the ‘veil’ of Price | Indicators that signal market microstructure dynamics | Part 3 of 4

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Part 1

Part 2

In this part we will explore the third indicator that I use which helps us in understanding the dynamics that happens in the Limit order-book before large moves, in a way this is one those “predictive” indicators as it signals oncoming volatility a few minutes before it actually does – The Average Bid-Ask Spread.

In the slack room, I call it SOS – No not “Save our Ship” but “Spikes on Spread” – Which indeed is an SOS signal if you have any positions on, as it signals one to be alert.

Before we get to the mechanics of this indicator, one needs to have a basic understanding of how the Limit Order book (LOB) works.

So if you look at the L2 market depth, this is how it would typically look at a given moment (Graphically i.e.)

 

Now let’s see what happens when a Market Order hits the book. In this example a Market Buy Order hits the book.

The contracts marked in Yellow are the one which are consumed by the Market Order. Now do compare the spread in the two illustrations. In the first one we have a spread of 1 and in the second, because of the market order coming in the spreads doubles to 2. Now let’s see what happens next.

As you can see in the above illustration, the limit orders (Bids) come in to fill the spread. This Expansion-Contraction of spread due to market orders coming in can happen and can be observed over different timeframes. But the concept remains the same.

Microstructure academicians also call this the Liquidity Cycle or more specifically the Make – Take Phases

Typically you have shorter “Take Phases” and longer “Make Phases”, which fits in with the fact that we would typically have lesser market orders compared to limit orders.

With theory covered now let’s move to practice.

Look at the NIFTY Futures 1 minute time frame chart (Date – 8th May’18)

On the top pane is NIFTY Futures Price, the second pane has Average Bid-ask spread as a Histogram aggregated for each minute. On the Second pane is a 5 minute (Orange) over 45 minute (Grey) SMA of the Spread, the last pane has Volume rate which we’ve looked at already in part 1 of this series.

If you notice the spread for NIFTY Futures oscillates in a range of 0 to 2.

So how do we use this indicator?

Observe the spread from 12:05 to 12:45 – If you see the price has largely been range bound but the spread moved from the upper band to the lower band – Remember the concept of “Take Phase”?

My conjecture is this is a period where liquidity takers are sort of sweeping the book, the price remains range bound up till the point where adequate liquidity exists, the moment there is an imbalance we see large moves or volatility come in, and as these initial bursts come in, perhaps herd and threshold behaviour takes over causing extensions of these moves.

Since this indicator is like an oscillator with a fairly defined range – it’s easy to spot deviations and be prepared for an upcoming move, however one must remember this indicator does not predict direction all that it does it predict volatility.

As of now I am still testing and collecting data to do back-tests on this indicator, so I do not have any statistics to support my claim, but people in the slack group know – how often I call out an ‘SOS’ and how accurate or inaccurate it turns out to be.

The usual disclaimer applies to this indicator as well – this indicator  is to be used within the context of the market structure and in combination with other indicators discussed in this series.

Update - Another screen shot of NIFTY FUT 10th of May'18

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Behind the ‘veil’ of Price | Indicators that signal market microstructure dynamics | Part 2 of 4

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Previous part here 

In this part we will explore the second indicator that I use which helps us in understanding the dynamics which happens as price action unfolds, i.e. points where price turns, also known as "Imbalances". Adam Grimes in his book "The Art and Science of Technical Analysis" says something interesting about Imbalances.

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Imbalances happen in the Limit Order book (LOB), however in the absence of LOB info. we can use executed order info. as a proxy to access LOB imbalances. The indicator known as “Volume Delta” tries to do just that. It looks at volumes executed at ask vs. volumes executed at bid to make an assessment of an imbalance.

Delta here is defined as - The net difference between the buying and selling (volume) at each price (footprint delta), each bar (bar delta), or the entire day (cumulative delta).

All that you need to know about delta is here - https://marketdelta.com/what-is-delta/ and it makes no sense to reinvent the wheel, what I think is of more value to the readers here is to know how to use it in the context of NIFTY.

Delta becomes important only at points where there is a divergence, meaning price moving in one direction but delta getting skewed in the opposite direction or in other words – More aggressive buying as the price goes down and more aggressive selling as the price moves up  Such divergences point to a possible change in trend or a reversal.

Now it’s important to understand that this indicator measures divergence caused by aggressive buying or selling i.e. through Market Orders, but in reality passive limit orders could also cause both reversals and continuations and in NIFTY the ratio of market orders to limit orders would be close to 30:70, so one has to factor that in.

At this point I want to categorically say that as far as I know there is no programmatic way of determining if an execution is a market, limit, or a stop order. So the idea that attributes “aggressiveness” to market order driven (long/short) at that price point is not correct, it could always be stop’s being hit as well, or for all you know it can also be marketable limit order. This is the reason why divergences per-se can be both a point of reversal or continuation.

Let’s look at the following chart.

In the image above – The Red colored candles mean (Greater than “x” size volume at Ask compared to Bid) and the Green candles mean (Greater than “x” size volume at Bid compared to Ask) in that specific bar. X can be set to a User defined value or you could ignore it totally and let the indicator point you to every imbalance that occurs. This is an illustration of "Per Bar Delta" which is what I use.

As you can notice there are some divergence signals which act as points of continuation and some act as point of reversal, meaning some Red markers which don’t lead to a fall instead cause further up-move and some green candles which don’t lead to a raise but instead cause a further fall.

I repeat this, because a lot of novices buy into the fact that this (Indicator ie not the idea of Imbalance) is some sort of a holy grail and all that they need to do is follow the divergence signals and buy or sell accordingly, twitter traders and indicator sellers don’t make life any easy either.

That’s the reason we really need to use this indicator within the probabilistic context of the market structure of a given product.

There is another nuance in terms of the input factor for this indicator usually Volume Delta Indicators come with two modes of inputs – Up/Down Tick and Bid/Ask, choosing either of these can also alter the output.

At the end, like all other indicators this is no holy grail stuff, however can be an extremely useful reference if you can combine it with market statistics and other indicators referenced in this series.

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Behind the ‘Veil’ of Price | Indicators that signal market-microstructure dynamics | Part 1 of 4

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As most of you in the slack group know, this year my focus is on finding indicators which would help us get better, more refined entries and exits in our existing setups.

And I was sure that these indicators either have to be some sort of visualization of the Limit Order Book (LOB) activity or at least must signal the change in state of the book, even if it takes inputs from executed orders.

In this post we will look at the concept of Trade Rate/Pace of Tape/Trade Intensity  - these are conceptually the same. Essentially we are looking at the time taken for the price to move from 1 tick to another or volume acceleration in a given time.

Let me tell you how I landed on this idea – After having watched the market depth (L2) for years, I knew for sure that the beginning and the end of a micro-trend usually happens with a flurry of orders and then the pace comes down and the price retraces a bit or coils around for a while. Being a visual person, I wanted to chart it and that’s where my search for such an indicator began.

I did find several mentions of it for different platforms but didn’t find one for NT8.

To read more about it, some good soul has collated all the information here

https://www.sierrachart.com/SupportBoard.php?ThreadID=345

Similar Indicator for a Different Platform

https://www.jigsawtrading.com/2018/03/26/jigsaw-smartgauge-pace-of-tape/

I later found this one

https://readtheprospectus.wordpress.com/2009/04/16/sponsored-indicator-davinci-trade-rate/

Since it had a selection for both Volume and Trade rate I thought it would be better to play around with. So I got this one coded for NT8

Now let's see how to use this indicator. If you have read the links above you would have guessed by now that this indicator is used mainly to identify the location of a trend or micro-trend change. As always it cannot be used in isolation and without relevant context of the market structure.

Now let’s look at a an example from NIFTY Futures

Look at the areas marked with a rectangle, what you see in the above chart is Price (100 Tick)/Volume Rate/Trade Rate (Green Line Chart)

You will notice that trend reversals coincide with the Trade rate being in the upper band. You will also notice that it coincides with the spikes on the Volume Rate. More importantly one needs to observe what I call the “Trade Rate Cycle” and look at turning points in the Trade Rate, which is easy to identify as it operates within a range/band.

Again, this is no holy grail, but at least offers information that is behind the veil of price.

 Note – I am still testing this and would in future do some back-tests as well.

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Honest Serving Men | Finding Indicators that work for you | Part 3 of 3

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In the previous two parts of this series, we looked at aspects like

a)      How to go about looking for Indicators?

b)      Do Indicators have any predictive value?

In this part we will explore the idea of leading vs. lagging – the concept of leading vs. lagging can get confusing if you compare it with the previous post on “predictive value” of Indicators.

I look at it this way – Any indicator that uses “Price” or “Volume” as the input is lagging, simply because a given price point does not cause another price point and a given level of volume does not cause another level of volume.

That is the single biggest reason indicators like Moving Averages or Volume Underlays look so elegant in retrospect but are not tradable as such.

For something to be categorized as “Leading” – We would need to look behind the “veil” of price and volume. Market microstructure aspects like (Simple - 'Executed Order Info.') Bid-Ask Spread, Delta Divergence, Executed Trade Rate - and more (Complex - 'State of LOB Info.') Limit Order Book (LOB) Slope, Relative Depth of the LOB, LOB Volume/Order Arrival Rate etc. are the factors that “lead” to the midpoint of the spread a.k.a “Price”. 

Again, one has to understand that irrespective of whether the input for the indicator is Leading or Lagging, one has to do backtests to check for validity, and predictive effectiveness.

That brings me to the end of this 3 part series. In the coming posts, I will explore some such (Simple) Indicators and see how they work for NIFTY.   

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Honest Serving Men | Finding Indicators that work for you | Part 2 of 3

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In the previous post we look at two issues a) What are Indicators? b) How do we go about finding Indicators that would aid in our trading process or strategy?

In this part we will look at the question - Do Indicators have any predictive value?

Since we discussed that indicators are essentially representative of past, lets re-frame the question. Can past data predict future? 

In other words, if I tell you that in 2016 - Monsoon started in June and in 2017 it did in May. That is past data. Will the mere knowledge of past data help you predict the future? Will knowing the above 2 data points tell you anything about the chances of Monsoon this year?. The answer is obviously No.

However, what we can do is to analyze past data of adequate number of occurrences and then calculate the probability of an event occurring in the future. Remember we are only calculating the "chances" that X would happen given that it has happened Y number of times in the past.

But it still does not mean, X will happen for sure.

So if you can create an Hypothesis based on the Indicators or without them even, you can test it for its validity.

So to sum it up, Indicators by themselves are not predictive in nature, however, you can back test the Setups or Hypothesis-es to know how often a particular Cross-over or a breakout leads to a specific outcome that you are looking for - So it's the back-test which determines the probability of an event happening not the Indicator itself.

Of course there could be different indicators with varying degrees of accuracy for a given hypothesis. Our attempt should be to test them all and find what works best for us.

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Honest Serving Men | Finding Indicators that work for you | Part 1 of 3

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When it comes to indicators, there is one significant difference I have noticed between novice traders and experienced ones.

The novice trader will put an indicator on the chart, scan it for a while, and would get an orgasmic high - Oh that cross over, oh that divergence, that's all I need to catch. And, those of us who have been through it know, that looking at charts in hindsight is different from trading them on the go.

So what is the way out? Abandon them all? Trade naked charts? Which one's to use and which one's to leave?

In this short series I will share with you some perspectives on Indicators and and their use.

Let's start with the Question - What is an Indicator? 

An Indicator is nothing but an analysis of historical market data, I use the word historical because its "past", we cannot calculate or analyze an event till its done. If you are looking at a Moving Average crossover it will calculate only after an event ie Open or Close of a price point. So essentially its history, its an analysis of the past data.

Does it have any predictive value? Hold on to your horses, we will come to that later.

Question 1 - How do we go about choosing indicators that would aid our trading process?

Not many know, but I am a PhD program dropout not once but twice, and one good thing that happened because of that is, I ended up attending the basic research coursework twice, and one of the things that they drill into you in that course is about the idea of Inductive vs Deductive reasoning.

So basically this is how we would apply this idea to Indicator selection -

Deductive Approach - Hypothesis first! -> So we would form an hypothesis, say you have been observing the markets for a long time and you see some pattern occurring several times - Lets say you have seen that once a crossover of 10 period EMA and 60 period EMA  happens it stays that way for some time. So what you have is a hypothesis that you have arrived at based on observation - Now you need to use data to test it to see its validity - If it holds well, then you use that indicator to trade.

Inductive Approach - Data first! -> So lets say you have historical data, and you see a pattern in the data based on tests that you run, you see that the average trend duration is 60 minutes in the market that you trade, now if you want to trade that pattern (in that data), you could use an indicator to help you catch those trends - A a crossover of 10 period EMA and 60 period EMA could be one of the ways of doing it. 

So these are two broad approaches to getting to indicators, but as you can see in both approaches a "back-test" is a must.

In Part 2 we will explore the question - Do Indicators have any predictive value?