Iâm struggling to find time to devote to this thread at the moment so Iâll just post interesting MD related setups as they occur.
One of the really neat forms of analysis that MD enables is the ability to study what the big guys are doing versus the small guys. The VB indicator and the footprint charts allow you to filter trades by size (<,> etc), like most T&S windows.
Coventional wisdom suggests that one should âfade the retail guys because they are always wrongâ. I find a certain amount of irony in the fact that this axiom is even widely held by retail guys themselves (eg: most ETers). Anyway, be that as it may, I think this is largely received wisdom.
One caveat to this sort of analysis however. It works well on liquid markets where decent size can be done. In thinner markets (eg: one that I trade sometimes the MSCI Taiwan on the SGX) settings filters sizes of say 50 lots to polarize the big guys is a futile exercise because nobody can do this size. There maybe 50 lots orders done in the market, but they will go across the tape as partials (5, 2, 6, 3, 8 etc.).
So hereâs my thinking on the big vs small guys debate (refined with aid of MD):
1. In most markets only the big guys can really move the price meaningfully. That is, unless a move has âinstitutional participation/sponsorshipâ it ainât going too far and probably should be faded.
2. The small guys are generally FIFO â ie: they are often early, entering and exiting.
3. A lot of moves are started by the small guys with the big guys coming late to the party (in fact they are the party in most markets).
4. In some markets the small guys are fairly good traders (eg: ESTX).
5. Sometimes the big guys and small guys are completely in sync (thatâs when the market can really move), other times you can watch the big guys selling to the small guys etc.
6. You need to study what proportion of the total trade is done by the small guys (say <10 lots) in order to understand what impact they have on the market. For example, I would estimate 10% of the ES, 5% on the ESTX, and 50% on the Nikkei (SGX). Hence, you could filter out the small guys complete on the ESTX, but you need to watch them closely on the Nikkei.
7. But generally, you do want to be on the same side of the trade as the big guys (assuming your profit horizon is more than a few minutes).
Having said all that, there is a danger in overly generalising. Each market has itâs own characteristics and should be studied without preconceived notions.
One last point here. It is worthwhile to bear in mind that the market is comprised of many traders with different timeframes and objectives. An order to sell going across the tape is not necessarily an indication that that trader is anticipating the market heading lower in the 5 minutes, 5 hours, 5 days, whatever. This is especially true the larger the order is. A 1000 lot sell order in the future may be from a mutual fund who wishes to hedge the $50 million they have ploughed into the cash market this morning.
So how do you profit from all this wonderful data. Let me show you one example from today. Iâll post others examples going forward.
First some background. Iâve found that the cumulative delta (with the small guys filtered out) is a great measure for the âhealthâ of a move, and that any divergences from price should get your attention. If you remember this is the blue connected line beneath my volume chart.
In the Nikkei on Monday we had a decent rally just after the open. It then made two legs higher during the course of the day but the big guys were not participating. This morning the market gapped open and continued to rally for the first hour, again without any interest from the big guys. Hereâs the chart:
The divergence is obvious to a blind man what? Clearly you need to keep your longs fairly tight and look for an opportunity to get short and then hang on. Not surprisingly, without participation from the big guys, the market ran out of steam and headed south. Not a huge move to be sure, but the divergence has not fully resolved itself. So I would suggest in the next day or two we will see more downside or the big guys will be big net buyers to create a convergence.
This is not merely a well chosen example, when I see these divergences it gets my attention. So, I find it certainly pays to keep tabs on who's doing what.
As an afterthought:
On the nikkei my filter is set to >10. Don't just pick a number out of the air. Study a long term chart to find a filter setting that creates a good proxy for price. I exported the data and ran correls in excel. You should get better than 0.50.
Happy hunting.
bolter
