Category: Must Read

… And here are some testimonials as we finish the year 2011.

” It’s not what we say, it’s what you say about us that helps us to understand better”:

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Dear Shai

It has been an amazing journey with Vtrender through the last year as you have evolved using new techniques and absorbing new ideas while retaining your focus on volume based market profile and order flow analytics.Your range predictions with breakout levels has been very precise and a great help in profitable trading. The concept of volume based Power Pivots you have introduced has not only simplified part profit booking but also provides very good half-way entry points in a trade. It has been a wonderful (l)earning experience with constant guidance from you, Girish, Vinod, Manu & last but not the least Kris! Viren’s untiring efforts to guide us into profitable trades during the early period of Vtrender experience can never be forgotten.I am thankful to you for creating such a professional trading environment and I am proud to declare that I have become a Vtrender addict now. ūüôā
With best regards.
r m
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Dear Shai,

Vtrender is a very effective system and Shai with his clarity and experience of market is always there for guidance. Excellent market players like kris, girish, vinod, rm, sunita and all others make this room a place to learn a lot about the market. Shai, please continue improving your system – I wish to be a member here for a long time to come. Thank you very much.

Janak
janak@belphegorexecutivesearch.com
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Here is my testimonial:
“Trading is an art. You need apprenticeship to be successful here. Every one speaks about the superior Order Flow Trading system adopted at Vtrender. For me, the trading room, where some very successful traders share their knowledge and observations and almost make you walk through the market – is a life changing experience.”
Regards,

Kris.

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Dear Shai :

My association with V-trender began around March 2010 and it has been a great experience trading through the very innovative ideas exchanged and helping to understand the ground realities of trading.
 
The two most important edges of the many edges I gained with my association with V-trender has been:
 
1) Disciplined trading.
2) Ability to understand why a trade fails or trade wins.
 
I feel the  above-mentioned two points are required for having a successful trading career.
 
Regards and best wishes ūüôā
Vinod Kumar

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Dear Shai,

Always in dreams thought of a unbiased  friendly well wishing trading community with social responsibilities..
Got it because of Vtrender room ..dreams came true..
 

 

On MP-shifting to volume profile was the best decision-people hear about algo trading , we see them, track them , kill them
 
regards 

Manu

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Hi Shai,
Before subscribing toyour site, there was no edge in my trading. It was as predictable as a cointoss. Your trading system gave me the much required edge in terms of preciseentry and exit, discipline in terms of tight stop losses and money managementand your continuous support resulted in more profitable trades than loss makingones. This is the first year in which I ended in huge profits and this happenedwithin 4 months of following your system, which I could not achieve in 4 yearsof my trading experience. I really kicked the habit of losing money in themarkets.
Regards,

Surya

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Shai,

First off I want mention that what I can say in just few sentences can’t describe what’s the real value of Vtrender for me. But here’s an attempt:

I have been a member of Vtrender right from day one and its been an exciting journey of learning and earning in markets. What amazes me the fact that at Vtrender innovation just doesn’t stop. We had Amibroker charts first, then Quotetracker candlestick, Quotetracker PNF, Investor RT PNF, Order flow in a different pane and finally we have the OF charts which I can definitely say that are the best eyes through which one can look at any market instrument.

And the the other valuable benefit of the trading room is the interaction with fellow traders and benefiting from their knowledge. Kris, RM, Viond, Janak, Manu, CS, Jigs, SN, Moh and quite a few others whom I am very tankful in making trading a lively task that I can wake up and look forward to every morning.

Regards,
Girish

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Dear Shai,
Thanks for one of the best  trading system of the WORLD for trading in Indian stock market . Because of the Order Flow system I could
started recovering my past losses, which were there for few years. I am happy to join your order flow system for more than six months and wish that 
if , I would have joined earlier,  would have been in profits now. Once again Thank you very much for the Order flow system. 

Sharad Gupta

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Hi Shai, and Vtrender trading roomer friends ūüôā

I have found Shai as a down-to-earth, careful, objective but not obsessed analyst and trade coordinator with productive innovations up his sleeve.
It gets exponentially potent when added with Viren’s dynamism, Girish’s lookout levels, RM’s datacrunch, Manu’s balle balle spice, Janak’s quick crop decisions, and many other knowledgeable participants.
This traderoom holds people with knowledge of various streams, mixing to a profitable cocktail. Each participant holds stuff that others respect to listen. I would take part in this party when i get my time back during mkt hours. Time is my straight jacket constraint. Its an enjoyable atmo here.

with best regards,
mo h

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Testimonials

They say if you give a man a fish, he will eat it for a day,

but if you teach them how to fish, he will eat it for a lifetime.

Showing you how to fish, so  that you become an independent trader working with market generated information and with the ability to stay in the present and work on present information is what the Vtrender trading room is all about.

So the one reason you should NOT join the Vtrender Trading Room is if you are looking for tips and get rich quick schemes.

You should however think of joining, if you are looking for valid working strategies to trade the market , of the kind, which will last you a lifetime. 

We have a great performance record, thanks to the wonderful trading strategies we use, but the vast majority of people who choose the Vtrender trading room, choose it, because we are the only forum in the country today, which can walk you through a trade from concept to initiation to closing with the reasons explained. 

We are about live analysis and working with live information. We do not do post-mortems and elaborate weekly reports sent over nonworking hours which are of little use to anyone.

 

Trading is all about being in the moment and ready to act on the information which the market presents an opportunity. The Vtrender trading room is all about showing you how to respond to the opportunity which presents itself. We have unique strategies which respond to the major moves of the markets. We do not believe in putting the entire market in one strategy or fitting it into a box because the markets are too dynamic to be adapted to any one strategy or to be fit into a box.

No one can make money on the buying and selling of others.

But if you could position yourself with strategies which work, a lifetime of opportunity waits for you

If you believe in exploiting the full extent of the opportunity available we have a training library for you to train yourself and be ready for whatever the market throws at  you and we also have live analysis using the same strategies discussed in the training library that you can see for yourself how real traders trade every day.

Indeed, experience is the biggest teacher and the best learning happens when concepts meet execution, so that the learning becomes cemented for life and permanent.

Now you do this every day, over a period, you have created a new trader inside of you, one who is ready to take on whatever the market is throwing at it.

For that you would also need to give the Market TIME.

Most people overestimate what they can do in a month, and under-estinate what can be achieved over a period of one year with consistent efforts.

Infact, the markets would be around, a year from now, 10 years from now, 50 years too. 

 

Question is would you be around to trade them?

Give a man a fish…

As in Life so in Markets

I have always believed that the markets and nature are very close and  in fact the markets are nothing but the thoughts, views, actions  and perspectives of a lot of people across the world as they look at it through different angles.

 

In many ways, the market is like a sphere. It can take in all the available shapes and sizes and in the context of the market, it takes in all available views and actions.

 

Each one believes and looks at a sphere and thinks that they have the perfect view and are ready to act on it but very few  know that the view is not a complete one. And that there is another side to it.

 

In markets you have to act on the information available and those who do that at the right time are the ones who succeed.

 

‘Cos when the information is available to all , the¬† edge is lost.

 

So when people act on the information they have, there are different  dimensions to this reality so in this constant mix of thoughts and beliefs and perceptions and actions, we have a lot of money circulating which is what the markets are and  which is what makes the market what it is

The 4 stages in a Trader's Life

There are 4 stages all of us go through as we evolve and are a part of this process of thoughts, ideas and action. 

a) Survival

b) Experimentation

c) Integration

d) Transcendence 

Everything has steps. Everything has a process and everyone goes through the process. 

Survival

This is at the start of a Traders’s Journey and in many ways is similar to a Birth Phase/ Toddler Phase .

This is the time you are in survival mode, dependent on an environment around you to survive.

 

If you have a good support system around you then you move firmly to expressing your ideas, thoughts and actions.

 

This is the time you express to the process your views and beliefs and trade off them. 

 

Survival is an early phase in every trader’s life where he is solely expressing all that he has learn’t from his first support system at Initiation.¬†

Experimentation

This is the second phase of a trader’s journey and can be compared to a phase between age 5 to age 25 where he is exposed to outside learning and is now learning also through his mistakes .He gets to know himself better in this phase.

 

In many ways this is a trader, who now understands more of the market and has gone beyond the simple few things he learn’t earlier.

 

He is experimenting with new systems and understanding more concepts.

 

He is also failing but is also making a point to learn and is learning bigger and newer things.

 

At this stage, he has lived, breathed and experimented with all that he learn’t in the Survival mode and is now ready with changes to his strategy.

 

For real growth to happen in a trader’s Like he has to live through this Phase. There is no way he can escape this phase. The only escape is to the higher level of Integration.¬†

Integration

This is a Phase where our Trader is confident and can be compared to a phase in Life we call Reproduction where you have gone through Birth and Growth, learn’t lessons and now able to pass on those lessons to your offspring.¬†

Integration is a Time when you put everything together .

 

You understand now the purpose of everything. In many ways it is the opposite of Survival.

 

Survival goes outside and Integration comes Inside.

 

In the process of Integration, you are now fully organised. Once you have gone through this organisation of not just your beliefs and thoughts, but your entire process you are now ready to move to phase 4 which is Transcendence . 

Transcendence

This is the phase where you have moved to a higher level and now realize that you are independent of the process and control it to an extent that you are now in a new reality.

 

At this stage you are independent of the process and can control it anytime, anywhere.

 

Things just fall in place for you.

 

You can anticipate and see things clearer and better than ever before.

 

Transcendence is to understand the process so clearly that you now are in a new reality. 

These are the 4 phases in a Trader’s Life and if you complete then fully and cleanly you do not have to go to Phase 1 which is Survival again.¬†

 

There are many people in Phase 2. There are still more who fail at Phase 2 and have to go back to Phase 1 of Survival again. 

 

People who manage Phase 2 can go to Phase 3 where they will be challenged at a higher level.

A minuscule amount of people are at Phase 4Transcendence where Trading is Bliss.

 

The cycle has to be lived and has to be completed.

 

Which Phase are you in? 

The 4 stages of a Trader’s Life. Which one are you in?

How to trade Volume Spikes?

If you traded the market actively this past week, then 2 things would have stood out for you- 

a) the market was in a range ( easily found out by many)

b) the change at the extremes of this range was sudden and produced a large price swing. 

¬†I‚Äôm going to focus on the point b) ‚Äėcos not may would write to you about exploiting the opportunity seen here as point b forms¬† ( They don‚Äôt for they themselves do not know)

Point b) happens all the time.

A large volume suddenly enters and price swings away big. This catches traders off guard.

Those who are in the move end up losing more than half of the profits and those on the opposite side of the move walk always frustrated and angry.  

Point b) happened in the following way this week.

Volume Spikes – How to exploit them

After my last post on Market Profile in May, I received a lot of¬†email¬†on the different theories and concepts which all get aggregated in one common term called the ‚ÄúMarket¬†Profile‚ÄĚ.

Truth be told, there are 3 variations of the Market Profile and at Vtrender we follow all the 3 variations completely and we could be one of the very few markets in the world where all 3 variations work simultaneously as well as asynchronously. I’ll explain…

But first, what are these 3 variations?

Pete Steildlmayer, the founder of Market Profile as a study, has evolved the Market Profile from :

a) The Traditional Market Profile: Which was about 30-minute price and time ranges and the base concept was time x price= value.

into

b) Steidlmayer Distribution: It consists of the IPM ( Initial Price Move ) which is followed by the start of a Balance followed by short covering or long liquidation Imbalance ( sometimes both in the same bracket) and then another IPM again. ¬†We have written extensively on this ‚Äď

into

c) SteidlMayer Volume Strips: Instead of using only 30-minute price ranges, Pete recommends using a set profile of 12 of 30 minute time period periods and a range of 9 to 30 minute time period to catch the imbalance moves better.

Why did Pete have to do this?

When Pete started off on Market Profile his basic premise was to search for ‚Äúvalue‚ÄĚ on a price vertical and time horizontal axis. It made waves because not many people had thought about plotting markets like that. The equation was simple then :

Price x Time = Value.

Let’s understand here that the concept of volume as we see it today, was not prevalent then.

Pete argued that the market was an auction process and under normal circumstances, you would fade movement away from value and under exceptional circumstances, you would buy new highs and sell new lows. The market‚Äôs job was to facilitate trade and be efficient and the best expression of that efficiency was the bell curve. Jim Dalton expounded on this in detail in his book ‚ÄúMind over Markets‚ÄĚ which till date remains the best explanation of the traditional market profile concept.

As Markets evolved and more volumes came in and changes started taking place in the timings at the US and European Exchanges, Pete felt that the institutional volumes and the 24-hour electronic markets created a lot more imbalances than earlier seen and the Steidlmayer distribution and the Volume Strips were a response to this. The change to screen-based trading from floor-based information in which locals were more powerful, now gave new powers to the institutions who with their algorithms fundamentally changed the control and hence imbalances became as important a part, as the balance or movement to value.

Next, as exchanges started giving out volume information fully, Value now could be easily seen through the volume traded at that price. Previously time defined price in the past tense but now volume was current information defining price at every step of the way. Time x Price was then Volume and since Volume became so freely available why would anyone use a surrogate for it? Per the Original Market Profile theory, if the function of the market was trade facilitation, then it would seek levels where opportunities for trade would be maximized ( volume POC). This maximization would also be reflected in the volumes and range of the day.

So what does all this mean for us now?

Fortunately, for us, not much has changed. Let’s remember again that Pete did these changes to the market he was trading which moved to a 24-hour environment. This made the concept of value, day types and Initial Balance not as useful to them as they used to be. But as dwelled upon in the last post, the key to understanding everything is context. And because we have a market which opens at 9.15 and closes at 3.30 we get to use all the 3 methods which Pete has handed over to us. We can still use them separately and I make an mention of day type in all my posts made in the evening and also we can view the profile as a composite and see if we are in an IPM or a balance. We use only composite profiles in all our posts.

At Vtrender, we build on what has been passed on to us. The Market Principles remain the same but the application of these principles needs to change over time. It’s about modifying the traditional theory to incorporate new insights and substituting with modern applications some old tools. Volume information has changed everything today and at Vtrender we were quick to see the Opportunity for insightful trading when the OrderFlow information came through. Quite simply OrderFlow meant to us looking inside the candle and see what the market was doing and instead of making educated guesses about lack of demand or no supply or even test of old supply or old demand we could see it live, working right in front of our eyes and the Volume opened the curtains to what the institutions were doing. Yes, we are incorporating the best of OrderFlow practices to see the auction market theory work live right in front of our eyes. So if the principles of Auction Market Theory tell us that xyz point is rejection we look for OrderFlow to confirm that rejection. It’s this marriage of Market Profile and the OrderFlow which is our defining edge in this fast-changing sphere of trading. They can build faster algos and move from cable to laser, but we see them and track them.

Our approach to the market is to build 2 hypothesis every day on the expected behavior of the market. This is what Market Profile tells us about what the market ought to do next ( I say ‚Äúought‚ÄĚ not ‚Äúwill‚ÄĚ) .¬†Next, we interpret using the OrderFlow what the market is doing currently. The gap between the two is our trading opportunity. The closer the gap, the better is the trade.

I’ve often been asked why I pass on trading secrets and trading information to other traders. The truth is that there are no secrets out there. What we speak about in our trading room is common knowledge in every institution which works these markets. It’s a different matter that they don’t know that we know it too and that we see them and track them live and that’s our edge!

Trading is an extremely difficult profession but it’s difficult only for those people who do not understand how the system runs. Most people pay tuition to become a lawyer, doctor, engineer, accountant but ask how many traders read a book on Analyzing Markets or have made an effort to tuition themselves and the answers would tell you why this profession has a high fail rate. There is no literacy here.

I coined the subject of this post ‚Äď Evolution. Pete Steidlmayer has evolved the Market Profile and adapted it completely to a changed trading environment. ¬†I‚Äôve seen sharp traders unable to evolve losing out their edge eventually. Evolution is the only truth for us as traders. A pond refusing to allow fresh water to flow in will attract pests and eventually stink.¬†Winning traders constantly refresh and renew their knowledge and add to their expertise. Trading is a place where there is no place for resting on laurels. Keep evolving.

True Success is a journey, not a destination.

 

If you want to expand your understanding of the Market Profile then we have a place where we not just look at the various concepts of the Market Profile but also put them to practice in a Live moving market.

Pricing options are at ‚Ästhttps://vtrender.com/pricing/

Some more details at ‚Ästhttps://vtrender.com/trading-room/

A quick link to join the Vtrender Trading Room is at ‚Ästhttps://in.explara.com/e/vtrenderlive-trading-room

Market Profile The evolution

Last week a few tweets of mine on Twitter at @Am_ Shai created some interesting discussions and a chain of email conversations, so I thought I’ll blog on some of the points I raised and responded to and am open to your feedback and reactions on the same.

But first a clarification and a bit of background- I trade my belief system and have been fairly public on my views of the market in all time frames especially the shortest one. I do this blog up every day on Market Profile and my colleague RM helps to fill up information on OpenInterest and Holdings of participants at the end of the session which along with the MarketProfile graph helps us to understand the end of the day situation better. Also, I express my views on twitter as also am available with charts at our private Omnovia account where we discuss and trade setups whilst analyzing the information realtime. I am doing all 3 of the above Live in the Public eye for the sixth year now and am still passionate about it and don’t like to be away from the screens for even 30 minutes at a stretch.

My belief is in Market Profile though have differed from¬†TPO¬†only based traders from 2006 and use Volume analysis including vwap and OrderFlow from 2008, so would like to be categorized as an¬†auction¬†market theory based trader and not just a Market Profiler. So the hashtag #AMT on most of my tweets. I‚Äôm also not just a discretionary trader but consider myself to be a¬†DRB ‚Äď or a discretionary rules based¬†trader. So unlike a system trader who will follow all the signals of his system and take credit for it‚Äôs success (and blame the system for it‚Äôs failures), I like to follow an¬†Open¬†system of rules which are subject to a context for it‚Äôs implementation. A discretionary trader operating without a set of rules is a train without a motorman and we know what the dangers can be. Being a¬†DRB¬†I‚Äôm neither a system trader nor a discretionary trader so I feel I have more control over the interpretation of the market data that way.

Now with this background, allow me to explain. You see all of Market Profile rather¬†Auction¬†Market Theory can be explained through behavioral parameters which we like to fondly call Setups in our Trading Room. These behavioral parameters are the same across all instruments and markets subject to the context being the same. An example of a behavioral pattern would be buying at a¬†Buying tail¬†in a profile and movement to the POC (which is the largest) above or the start of selling at a¬†selling tail¬†which targets the POC below. Again when Pete says trend days show little continuation the next day, it is a behavioral parameter and we look for trade opportunities around it. The same goes for a Neutral Extreme day which generally does not show a follow up the next day. Alos we have the 80% rule which would tell us that if the markets enter the VAH then 80% of the time it will go to VAL and vice -versa. This is a¬†behavior of the¬†auction. A similar behavior is a¬†failed auction¬†which after being completed ‚Äď (I trade the FA based on only the¬†IB¬†or¬†initial balance) ‚Äď tends to go 2ATR‚Äôs away from the FA point and has been known to be back to the FA point in 5 sessions or lesser. This is again a ¬†behavior. Like wise an¬†auction¬†in a trading range tends to find selling at the top of the range and buying at the bottom. This is again a behavioral parameter.At a POC of a composite price tends to stagnate and float around that POC. Again another example of behavior.

The truth is that these patterns are recurring and the market knows that and we who trade the market everyday know about it too. In fact, I keep saying that there are no failed traders only inexperienced ones and the Vtrender Trading Room is an effort to utilise our experience to help your decision making in the process moulding you into a better trader. I’ll touch a bit more on that later. But allow me to add here that just recognising the behavior of the auction is not enough. You have to know the context too. For me, the context in which a pattern shows up is more important than the pattern itself. This is the single biggest advantage of a DRB trader against a system trader  and even a data- mining algorithm, allowing us a lot more freedom in choosing our trades and especially the entries and the exits.So to give you an example an 80% rule trade will not work to VAL when the previous day was a trend day but will give you an over 95 % success rate when the context was a Normal day. Like wise a Failed Auction at the extremes of a trading range has no technical value as the range gives us that information anyway but put that failed auction in the middle of an auction and the new information is enough to give your account a big trading edge. When you put context and the behavior together, you arrive at an almost perfect destination trade which simply is our target and the exit for the setup you took. So If you have used the FA in the correct setup your initial target of the move is 2 ATR’s of the instrument with stops at the FA point and then you can also reverse the trade at the ATR objective with SL below the lows for a target of FA . Likewise, a smaller setup is an entry into the value area (VA)  and the profile gives us a target which is the other extreme of the VA. A Buy from a buying excess has a Stop loss below the Buying excess and the target is the POC. We also have what we call the IB setup with a fixed stop loss and a target. There are many more and I can elaborate at length. We know cos we trade them live. And we have been doing it live for many years with traders who understand the process and know the edge that Market Profile can provide.

I credit Pete for turning my trading around and for bringing me to an understanding of what Market Profile is. I also value Jim for the fantastic insight he provided through his books. But the market profile community has moved beyond the basic TPO structures years back and even I have been using vwaps and OrderFlow for almost 10 years now, both not considered to be an integral part of MarketProfile. I remember a conversation with a fellow trader who shunned my blog cos I used vwap and said I was not a Profiler. That trader now is using vwaps in all his charts. When Pete moved to Volume in 2012 I was the happiest, as it meant to me an acceptance of a view I held many years earlier. Apart from these 2 legends, there are many more torch bearers today in Market Profile and the worst thing a trader can do is discredit someone else’s work only cos he understands a part of the whole. Ignorance, in my opinion, is about rejecting something you know nothing about!

Back at Vtrender, I told my community that we will work all the setups we know. We don’t need to fix anything till it is broken. And when it breaks and stops working, we surely will have something better to do even use the broken setups to fix ourselves a counter trade. We live at the edge of this growing field constantly probing the market for behaviors and context and with an open mind to new concepts we intend to keep that edge.

Our work at Vtrender starts with the previous session. On the daily blog, you would find a profile along with the day type and the day range and day volumes along with the vwaps of the session. The day type is important to understand the continuity or the lack of it and different¬†day types¬†will give us different plans or hypos for the next session. Next, we understand from volume and range whether new money has come into the market or not. An expansion in range and volumes can confirm this. We also get a double confirmation from RM who posts the data for us every session. We try to see from this data who is holding positions- whether the institutions are heavily biased or not. Again as we know from Market Profile, not every session is connected to the next and there will be days when the movements will be random and data would show the same about larger time frame biding away their time in the market. We categorize this information as old business versus new business, again a key component of Market Profile. This activity resembles the LDB ‚Äď or liquidity data band which Pete and Jim talk about in their books. This is our homework and is posted as free content on our blog every evening for you to plan your day ahead.

Besides this ‚Äď I also host a live community at our Omnovia Trading Room which is a daily seminar on the markets. There are live charts to understand the context and entries/exits. We use OrderFlow for the edge and the context for the trade is provided by the information from Market Profile. Again to emphasize, Market profiles gives us the rules to trade or not, OrderFlow is our trigger to enter or not. This is a closed group and private and we intend to remain that way. We stick to the index and have followed all the regulations including the discharge of service tax etc.¬†I do understand that there is a growing intolerance on paid services of the market. But a closed group allows us to regulate entries of individuals as also ensure a healthy environment where all traders can stick to the job at hand ‚Äď which is to trade. I learnt all of my Market Profile in a trading room based in the US back in 2005- 2007 and hence feel that this is the proper way to understand this method of the market. I also paid USD 3000/- for my first Market Profile conference and have long understood that if you want to get some serious education on the markets, it ain‚Äôt free. There are lots of individuals who provide free content on their time. I‚Äôve also seen some of these individuals disappear from the ‚Äúlearning‚ÄĚ they provide for long periods of time, leaving your schooling interrupted.In our live seminars, we talk about the market and the developing profile with the Orderflow. I trade every day and have been Live with my Room every session except when on a break. I share my charts and views and the platform allows us to talk with each other real time.

 

It’s been a long post and hopefully, I have been able to articulate a few things I wanted to. Our beliefs come from the knowledge we own based on the experience gained seeing these setups work in the past. Would they work in the Future? About that, I don’t know. Market Profile is not about knowing the future. It’s just about a better understanding of the present. Once that understanding is clear the rest is simply trading.

Random Musings on Market Profile

The term “Order Flow” throws up mixed expressions when used by different kind of traders. For us at Vtrender and the small community of traders we work with on the Nifty and the Bank Nifty futures, for every session, Order Flow trading is a way of life!

 

For many of us we cannot think about placing a trade today without looking at what the Order Flow information is telling us.

 

For today I want to take a step back and delve into what we look at when we are wanting to see these Order Flow charts. But for that, we need to have a realistic look at the marketplace of today and by that, I mean the shortest time frame used by derivatives¬†traders like me every day. If you are into derivatives trading, you may like to read on. For the investors working only on the concept of “time will make everything right” and the oft-repeated¬†” mutual fund sahi hai” this is not for you.

 

The derivative world of the kind I knew, changed forever in 2007 when the word “HFT” or high-frequency trading became common lingo. The media got into it with that “all I know is that I know everything‚Äô¬†kind of attitude and HFT was equated with speed and proximity and “risk-free” trading etc. etc. It hardly is and they make as many losses as us, though some are engineered for a ‚Äúgetting to know you‚ÄĚ or a future strategy. ¬†The media went on to say that HFT’s won all the time ignoring the few dozen¬†(maybe more) firms which went belly up every time the market moved away from the normal. Even today anytime any instrument does a 2 sigma move, I scan the papers to see if any HFT went under!

 

Back in 2008 a lot of us were told that with the advent of HFT most of retail would be out!! Such statements made even today show that people have a very little understanding¬†on how the markets run or work. Markets have always been about an auction process between a Buyer and a Seller and an aggressive player/players¬†drive the market up or down in their pursuit of value. This value is a perception, a landscape and a clean understanding of this principle fuels a price move. If there is a landscape (read markets) and players in the landscape with differing views the markets will function depending on who has the bigger edge in understanding the changing landscape in every time¬†frame. This has been true, whether¬†you traded the markets in the past decade the past 20 years or the last 50. And it’s also the reason that retail who can see or have a bigger edge can easily beat sophisticated programs who often come to the market with an established¬†bias.

 

In the Trading word of today a distinction need to be made between algorithmic trading and HFT and the newest kid on the block AI (Artificial intelligence) which is poised to make quite a few HFT techniques redundant.

 

Algorithmic trading is machine generated orders without human intervention

HFT would be the same on a bigger scale. There is an important difference between the 2 and all algorithmic trading is not HFT.

Artificial Intelligence or AI is the newest kid on the block and would one day take down HFT

 

So, what are the kind of strategies these machine executed orders look at?  to secure an edge however small that may be

 

  • Index Arbitrage – This is by far the most common algorithmic execution method used and it may not be all HFT. It involves selling the index futures and buying the underlying cash stocks. When done with big quantities it can generate lots of returns. It is very popular for an instrument such as the Bank Nifty which starts a series with a premium of 150- 180 points and closes at zero. Terms associated with it are “basket buying” as also “program trading‚ÄĚ. The term program trading is generally also used for buying a basket of stocks maybe more that 15 or 20 at a time with an execution focus on time rather than price.

 

  • Latency Arbitrage – Latency arbitrage is all about speed differentials and involves having a different view of the orderbook at the same period. This is used by proprietary firms who have broken the 1 second barrier and gone to micro seconds to have a view of what the order book is. The predator in this case mostly a proprietary trading firm uses processes to scan the order book looking for big institutions and funds who are about to enter a big order in the market.¬†Data about price changes must literally travel the distance between participants, and that trip can be faster or slower depending on the technology a firm is using and how far a participant is from the source of the data. Speed is the key here and put to max use by a proprietary firm who can single out an ETF or a fund still dependent on a legacy execution method due to regulatory obligations etc. These prop firms base their trades on what price will do next sensing the big orders coming in the next few micro seconds and are almost instantly profitable

 

  • Market Making – Buying the bids and selling the offers 1 or 2 mini steps at a time. This is extremely small sized trading not more than 10 lots at a time and designed to keep the liquidity of the market unaltered. Works extremely well in low volatility environments where price movement is not much. HFT’s use the almost stationary prices to make fractions based on a probability law. Not all trades are profitable, and some are also scratched at cost. But it improves the liquidity of the market immensely. Focus is kept only on the top of the orderbook and is extremely rewarding for all liquid stocks and indices. Won’t work as well with illiquid instruments

 

  • Sentiment/ news based HFT – These are different and often contradictory HFT’s competing often in times of news flow or a sudden aggressive change in the market sentiment. This is seen around news events such as the RBI meet or the FM Live during market hours or some other CMD of a company appearing on Live TV in market hours. Algorithms are tied to keywords in the information newly flowing in and can tell the prop firm in milli seconds whether the information is positive or negative and positions are built accordingly. This works extremely quickly, and the move is often over before someone at a retail desk can hear it, let alone process it. Often the biggest explanation for why price moves quickly as a certain news break. The predatory HFT can move an instrument like the Bank Nifty up or down 200 points in microseconds even as something like an RBI news is just breaking

 

  • Spoofing/ layering – Almost extinct today and declared illegal in the US. This involves placing limit orders in the order book for executing at a higher or lower price than the LTP but removing them before they are executed. The spoofer hopes to see the actual demand and supply in the market by such an activity. Layering involves placing the same kind of orders evenly across different prices. The most famous case of spoofing was that of Navinder Singh Sarao who was held responsible for the flash crash back in 2010

 

  • Exploratory Trading – This involves an HFT creating orders and executing them to test demand or supply beyond a known level of reference and booking out when the momentum is establishing. This strategy is also popular as a momentum ignition strategy. The HFT instigates other traders to take positions by building smaller orders and causing other market participants to trade aggressively creating a price move. He then trades out. The HFT uses this strategy to identify the zone for a future order and is gauging the liquidity and the demand-supply at that place. The HFT generally loses on the first few trades whilst assessing the demand/supply but covers up once the momentum ignition has happened. Also, information flowing in the form of the actual demand or supply at that point is marked for later

 

  • Artificial Intelligence– This is the big Daddy of them all and would eventually replace the HFT which has dominated the landscape this decade. The difference between an HFT and deep learning strategies if that they do not approach the market or the trade with a pre-conceived bias but examine the data for any useful information it might contain. Deep learning does this by using layers to summarize the content of previous layers and the deeper it goes the more intelligent it gets. These are immensely complex relational strategies¬†and engineered by the smartest brains on the planet today. Constant tweaking and redevelopment¬†as also substantial investments¬†is required to get to the final objective but the absence of a bias to begin the process, marks AI as the one to watch for the future

 

So, to sum up, this is the complex world we are trading with as derivative traders now especially those of us who are in the shortest time frame.

 

This is how our competition today has evolved and to match it we have to begin with a knowledge of what it is.

 

At Vtrender we make efforts to understand the who, what, where, why and how, first before forming our own strategies and tweaking it to ensure that we stay with an edge This is the situation today and it may be different tomorrow. In fact there never has been a time in history when the markets haven’t changed. We are the market- you and me.

 

For that, I must know my ‚Äúme‚ÄĚ – and that is my strategy well

And I must also know the ‚Äúyou‚ÄĚ – the people and the institutions who are trading¬†on¬†my side or the other side.

Order Flow can show me who is on my side or the other.

 

Thankfully I have invested in the knowledge of Order Flow to know this. Have you?

 

To read more about how an Order Flow chart will benefit you go here – Order flow chart

 

To know more about how to implement best practices in Order Flow reading visit the Vtrender Trading Room at – https://vtrender.com/trading-room/

 

Order Flow Analysis – Strategies used to trade