Recently in Transaction Level Analysis Category

How do you actually begin building Trading Systems in The Cloud?

The cloud and understanding how to benefit from it can be confusing. 

The following graphic demonstrates the rotation to Buy Programs in the Hole at year end, as measured by the Program Trading Algorithm, MacDaddy.


Happy Trading in '09.

Today shows a fairly textbook example in the electronic S&P 500 market of how and when Program Trades drive the market.

One thing to remember with TLA (Transaction Level Analysis), is that it works best when the markets are active.  In a hum-drum market The Tape is also hum-drum.

Luckily, as traders, we frequently make most of our profits when the markets are active.

The graphic below shows just how prescient these 'machines' (which is what we refer to as the substantial Program Trades) are.



Hope that you think this is as neat as we do.

Have a great w/e.

Here's a little tiddy about how the price if Crude actually changes.

Once you read and digest this post I hope you walk away thinking two things:

1.    Yeah, that makes sense.
2.    There are a lot of benefits to be had by monitoring Program Trades.

It has been our observation that much of the assent of the price of Crude occurs in the pre-market.

We define the 'pre-market' using an EST (Eastern Standard Time) clock from 8:00 a.m. to 10:00 a.m. when the NYMEX pits open for business.

This is a loose definition as what we are about to illustrate can happen almost anytime but seems to re-occur in around this time period.

A Little Background

Consider this, if Buy Programs usurp the supply of futures contracts, thereby increasing price, would a series of Buy Programs that were initiated in a period when there was dramatically lower liquidity (the pre-market) have the same effect on price if they were fired off in a period of high liquidity (when the NYMEX pits were open)?

If you are a subscriber to the Law of Supply & Demand then no.  If the increase in demand is constant but Supply is less, then price will have to move more sharply to accomodate demand.

Thus, if one were so inclined and had the capital they could Buy, Buy, Buy in the pre-market and push the price of Crude up $3-4 with significantly less effort if they tried this antic when the pits are open.

Crude moves to a record $139

On Friday, June 06, 2008, the forward Light Sweet Crude contract ran up to $139.

What is interesting is that the move up occurred in 2 distinct $4.50 moves. 

One in the pre-market and one into the close.

Wouldn't it have been nice if you had participated in the pre-market move as opposed to the move later in the day and been able to turn off your computer and go to the beach with your kids as opposed to watching the market all day wondering?

What does the effect of Buy Programs in the Crude Market looks like using TLA Software?

You will notice in this chart that there are two primary moves in Crude this past Friday, both for an upward move of around $4.50.  One occurred in the pre-market and one occurred after lunch:

Remember Black Monday?  What caused it?

The most popular explanation was Program Trading. 

(see - http://en.wikipedia.org/wiki/Black_Monday_(1987)#Causes).

Back then, software had yet be created that could track and either prove or disprove this theorem.

Today, this type of Program Trading monitoring software exists and is referred to as TLA (Transaction Level Analysis).

Below is a view of yesterday's 400 point drop in the Dow and what the corresponding S&P 500 Futures Sell Programs looked like.

You will note that the price of the Dow 30 does not begin computing until the 9:30 a.m. EST open.  To show more interesting data the S&P Futures market is also plotted in the pre-market because that is when The Machines (our vernacular for the computers that initiate the buy and sell programs) kicked on when the NFP (Unemployment Number) came across the wire.

A couple of things to note are:

1.    The Buy Programs never really lit as can be seen by only tiny spurts of Green
2.    The huge amount of selling that poured into the close...Margin calls show no mercy.

Keep in mind how the Law of Supply & Demand pertains to how Program Trades effect changes in price:

1.   Buy Programs usurp Supply thereby pushing up Price.
2.   Sell Programs create (increase) Supply thereby pushing Price down.



Hope that you found this interesting.

Wouldn't it be cool if you had an electron microscope that you could focus on the markets and view in real-time, or historically, what a reversal looked like at the atomic or sub-atomic level?

We all see these reversals and wonder...."What happened in there?".

Gosh, we put 'em up on a 1 minute chart (or 1 second or 1 tick...choose your fancy), stare at the market turn and say either, "Where did I go wrong?" or if you caught it correctly, "Aren't I so smart?".
 
With this extended post we are going to attempt to document our understanding of how a 'run-of-the-mill', pedantic, everyday, healthy, easy to trade, profitable reversal looks like under a custom-crafted electron microscope built for the electronic markets....basically, the heart and soul and guts of TLA (Transaction Level Analysis).

(For a feel of how much data gets processed with these tool sets check out -  http://www.transactionlevelanalysis.com/2008/04/why-tape-reading-matters.html )

Some have asked, "Under what conditions does TLA (Transaction Level Analysis) work best?".

The simple answer is 3-fold.

TLA works best:

1.    For futures contracts over equities/options/forex
2.    Certain markets such as S&P 500 and Crude Oil
3.    When the market are busy

Hope this helps.

The  most  basic premise of TLA  (Transaction Level Analysis) is three-fold:

1.    Changes in price are predicated on a change in Supply and/or Demand.
2.    Buy Programs usurp Supply while Sell Programs create supply.
3.    Since program trades are executed in an electronic marketplace, software can be        developed to monitor this action in real-time.

Does this make sense?

A classic application of this is activity when a market is close to stops.  Ever see a market inch up and up and up and then, bammo!  All of a sudden it shoots up an oodle of ticks in seconds?

Why is this?

Most likely, some Buy Programs came on because price was getting close to an area in the market that was easy for the Black Box Trading Shops to program trading strategies around.

There entry into the market, usurped up the local inventory....once these contracts (or shares) were chewed through, price could do nothing but run up to satiate the new demand.

Back to basics...Supply & Demand...an inescapable law.

Happy Trading

A technician  mapping the S&P 500 market would probably conclude that we have begun a new down leg.

The best way to profit from this would be to find entries to go short.  Your choices are to either sell into the down-drafts or to sell new highs.   Both approaches can be very profitable and also quite risky.

How to Use TLA to Minimize Risk

Selling into the down-draft

In the example below, using a TLA algorithm, such as MacDaddy, when price is approaching a recent low, as long as MacDaddy, which is measuring the strength of the Program Buying and the Program Selling, is strong to the downside, a trader can enter into the direction of the  market. 

Depending on the makeup of the trader, their time horizon, internal Technical Analysis, Risk Tolerance and Money Management rules, they can exit before, at or after the identified low.

Selling the High

For longer trades, a trader will need to sell a high and then ride the down-draft.

Here, MacDaddy, is also handy.  The easiest way to apply MacDaddy, is track new highs and when MacDaddy diminishes in strength with the new highs, or is negative at a new high, a trader is safe to enter short with a stop just above the recent high.

Happy Trading.