Quote from Bearbelly:
I hope this is not off topic. I think it fits in with what we're doing here. This really puzzles me and Im hoping one of you guys can clear it up for me. At the bottom of this chart are pressure bars which show the volume at the bid (red) and volume at the ask (black) for those of you that are not familiar with them. As you can see in the circle at the left at the beginning of the down move you have a higher percentage going off at the bid which is what I would expect but in the circle at the right, when the down move really picked up steam, the ask volume is equal to or greater than the bid volume most of the time and this really blows my mind. Im wondering if my data is off or what.
This is a months down the line type of thing... The partial problem with the indicator is that it assumes that all volume is created equal. Although I am not going to dig into the topic right now, I will make some very clear points. Jack made his related points
here. Note how the post goes completely unnoticed and entirely escapes anyones capacity of how and what to make use of it. Most traders have no clue at what they should be looking for even when it is staring straight at them. Part of this is because traders only ever want answers and fail to ever start asking questions that lead to asking themselves the right question... This particular post of Jack's was a killer of how to dial in to the settings of that which you are attempting to rationalize and intuitively apply. In time, this will all be spelled out...
As we know or are finding out, Price has a context by which it operates (ie. channels). Volume has a dual context (ie. pace, continuation & change). Bid/Ask Volume analysis has several contexts all of which are evaluated on the T&S/DOM. The type of indicator you have circled is a Bid/Ask Volume Analysis indicator. Generally speaking, it is an attempt to quantify generic sentiment (ie. if BidVolume>50 then Sellers in control, if AskVolume>50 then Buyers in control). Although its intentions are notable, the indicator is yet another case of where the original developer missed the mark by not finishing their homework.
So when I mean by all volume is not created equal, it is strictly with regards to identifying whether buyers or sellers are in control of the market. Right here is where the tv commentators screw it up without fail day in and day out... The reason why the indicator is only showing half the picture is because it gives equal footing to each and every contract sold. This is
NOT the case. When dealing with buyers vs sellers, you have to analyze and/or indicate the COMPLETE picture. The other half of this picture is on the DOM. To be accurate, you have to give significance to each item that is transacted. On a transaction by transaction basis, the volume of a trade is given real meaning with respect to the size that is available from the DOM. There is a lengthy "here is the layout" discussion that will be posted at the appropriate time. It will show the clear picture of the DOM and T&S. I have snapshot below of my solution that partially fixes the indicator you posted. As usual, I had to write new code to generate the following real time stream as captured below.
<img src=http://www.elitetrader.com/vb/attachment.php?s=&postid=1060940>
This context is at Bid/Ask Pair resolution. The point the picture make is that control is a "NOW" thing. Within a 5M bar, control can shift several times. Ultimately, the control you are looking for is the net aggregate control of the 5M bar. In other words, the landscape is a bit different when you scale it out to a fractal resolution since you are using a much larger "NOW" window. Of course there is a reason why I choose a Bid/Ask Pair resolution and as usual, I like to keep my pictures extremely clean (ie. work without fail). To make an illustration, it was near impossible to get a PS3 for the Christmas holiday. You could bid up by going to ebay put it was extremely clear that there was more demand for the PS3 then there was availability of the consoles. Control is determined by what's available NOW. As new shipments of the console became available at various retailers, control was reevaluated. Control is not determined by what was available prior to now. Eventually, all that demanded a PS3 will get their PS3. Once that demand has dried up, then Control will shift to supplying demand at a lower price. The market is no different in that you are either buying or selling the product. We just like to time when to be buying and when to be selling ALL OF THE TIME. We will get to these things soon enough. But as the syllabus dictates, these are for later...
Regards,
MAK
