Market Profile, Volume Analysis, and Volume Profile AMA (Ask Me Anything)

[autobahn]

In your example candle, the following is noted:

1. It is an almost perfect bell-shaped distribution of volume.
2. There is a finished auction at each end.

This indicates there are no shenanigans and price hasn’t stalled due to a large L2 order or iceberg. So a simple strategy would be to trade whichever side breaks. In this case price breaks bear, so as soon as that happens, place limit orders between the break point and the previous range high, last rotation high, 50%, or VPOC - whichever is most appropriate.

However, if this candle ended its high with a large buy imbalance rather than a bell-shaped curve, that would indicate price has stalled because of a large passive order or iceberg. This is important to note because once the order is filled, price will tend to surge or pop to the other side due to algos and traders that were treating the large order as protection and front-running it. All of those trades will exit simultaneously when the level breaks.

So this would invoke a different strategy:

1. Rather than waiting for price to break above/below the previous rotation/auction to determine direction, we already know which direction to take - away from the blockage, using the blockage as protection.
2. Time is of the essence and there is usually competition for this trade; consider a marketable limit order rather than wait for a passive limit order to be filled.
3. The opportunity generally doesn’t last long, and this may setup a subsequent strategy that fades the pullback with the expectation of then breaking through the blockage.

If this candle ended with a high distribution of volume at the top (not bell shaped), and that volume showed a strong sell imbalance, that would be unusual and would indicate somebody is looking to enter long wherever they can get liquidity (even at an unfavourable location), or prevent price falling. This can be indicative of a breakout initiation.

In this case, a third strategy may be invoked, which would be to enter for a breakout with an absolute stop just below the point of initiation, or 50%, or VPOC, depending on which is most suitable.

So in summary, imbalances should influence the strategy selected by the algo.

Regarding the code I write, if statistical analysis is involved I will use Python. For realtime execution and strategy I use c++.

[autobahn]

In my observation, the micro price is ‘synthetic’ and probably set by the Exchange rather than being the result of genuine order flow. If you look at the L2 and order flow on micros, it doesn’t make any sense. Peter Davies from Jigsaw has a blog post about this somewhere (Google should find it). If somebody is learning order flow, I would certainly advise them to watch the minis and not the micros, regardless of what they are trading.

The problem with the micros is the cost. ES requires 1 tick to avoid a loss, MES requires 2 ticks. So on that basis, MES are double the cost and not suitable for short scalps.

However, for strategies that favour scaling in rather than a single precision entry, having 10x the number of contracts to average in is a significant advantage.

[Trader]

It’s likely that the micro contracts are arbitraged to follow the minis. Due to this, I’ve always just traded using ES charts and order flow information even when trading MES.

In terms of costs, most brokers have it structured so that a round turn is within the value of a single tick. However the commission is a greater percentage of the tick size when trading the micros and the more volume that is traded the more expensive it becomes. For example, if the MES RT cost is ~$1 and the ES RT cost is ~$4, then trading 4 MES contracts is about as expensive as trading 1 ES contract even though MES is 1/10 of the value per tick. So the flexibility and better ability to manage risk does come with an increased cost which is reasonable.

As for the great observations you’ve made from the order flow we seem to be looking at and doing similar things when trading the flow. How often do you wind up needing to change your algorithms to fit changes in market conditions? I’ve been thinking about potentially learning to code but it will likely be a multi-year process to become competent enough to build robust systems.

[kminot]

Thanks for your information on the Bell/Break Away information. Much Appreciated!

[Mod-MattZ]

Just a little bit of historical perspective: When the ES was launched on the CME, the S&P was nearly half of what it is today. Also, the world had fewer HFT, algos, etc. which causes more noise.
1% move today is not 1% on half the value 20 years ago.

I do not disagree about the efficiency of the ES contract mentioned above, but it pales in comparison to notional risk is posses for the smaller trader who wishes to learn. The success of the contract speaks for itself, and I believe the volume for contracts like MNQ exceeds the regulars mini contract.

Some of our ES guys also moved to MES because it gives them a better ability to scale and exit multiple contracts while sticking to the same notional value.

As a side note, Eurex will also launch Micro contracts, and I should probably make a post about it.

Thanks,
Matt Z
Optimus Futures

[Ben_M]

@Mod-MattZ thanks for the review on this. I do like the idea of being able to scale in and out as well as getting used to trading multiple contracts.

@Trader I have also heard that if you trade the micro es you should be using the es charts and also order flow to develop trades.

Matt mentioned the difference between 1% now and 20 years ago. The thickness of the book on both the es and nq minis was way more.

The bid and offer always had at least 2000 contracts on them at all times. It was extremely difficult to read short term order flow for taking 1 or 2 ticks. Watching order flow now is much more intuitive in terms of seeing what the majority of traders are doing and following the flow.

[Ben_M]

Can we see when the trade is choppy on the Footprint chart?

Today, 3/22/21, was a very “choppy” trade in the S&P mini contracts. What I mean by choppy is that there lacked a general flow of trading back and forth.

Whole prices would go with size, then the bid or offer would get reloaded. When this happens it is hard to tell what people are doing.

Here’s the 2000 tick chart from today:

This was trading in a very small range, and with volume being higher than normal it created clunkiness in the order flow.

Here is the 2000 tick chart from Friday:

Not only was the price range much higher, but the volume was also less so it didn’t require as much volume to move the market with more volatility.

It would be easy to just say that volatility is lower, which is true. But what magnified that feeling when trading order flow was the volume on each price.

Not only did we see much more reloading, but we also saw thick prices to begin with.

I had to step away from trading and look at bigger, longer moves. I don’t like trading in that type of market and didn’t trade much, but did trade effectively.

[Video coming].

There is a substantial risk of loss in futures trading. Past performance is not indicative of future results. The figures here represent an opinion. The placement of contingent orders by you or broker, or trading advisor, such as a “stop-loss” or “stop-limit” order, will not necessarily limit your losses to the intended amounts, since market conditions may make it impossible to execute such orders. Please conduct your own due diligence if Futures are an appropriate instrument for you.

[Ben_M]

How I’m using the DOM Surface to validate trade ideas and levels.

I recently started focusing on the DOM Surface more when looking at my levels to help formulate my entries and exits.

As mentioned on the webinar last week, my Footprint chart only shows the “Market Orders” that print on the market. This doesn’t show the amount of excess contracts (if there are any) on the bids and offers.

This is a big piece of order flow trading and it needs to be addressed accordingly. The way I address this is by just looking at the DOM and the orders coming in and out of the market.

The Footprint chart, the way I have it setup, shows the market orders coming in:

What this doesn’t show is how many contracts may be added to the bid or removed, which occurs all the time especially with algo trading.

Why would knowing this information be important? Well first it gives us an idea of what the “Passive Buyers” are doing and where their sentiment is.

If we saw a 13 lot sell at market then someone reload on the bid for another 400 contracts, I would want to know that. Alternatively, it would be telling us important information if people started removing their bids.

This chart can be edited to your liking, with the ability to change the size of the circles and also change the minimum trade required to trigger one.

It is easy to think we can use this chart as something to lean on in terms of support and resistance, however, it’s very important to not get caught up with this on it’s own. Just like trading with blinders on, it’s easy to get sucked in.

We have to use this together with our overall strategy and plan while utilizing the Footprint chart to validate our ideas.

Let’s take this example from today, price came down to 3920.50 area and bounced right off, here’s the Footprint chart first:

We can see lower lows with aggressive selling, the sellers are obviously in charge here.

In order for this market to turn, at a minimum it would need for the buyers to take over.

Now, let’s look at the DOM Surface that showed resting orders in this area:

Note: the below chart is actually of the MES (micro es mini) but it does correspond with the es mini dom surface.

The orange line on the bottom shows that there was resting liquidity before the market reached that area. As this chart moves it records where large orders were in the book. As you can see this is an easy to read visualization of where potential buyers and sellers are wanting to enter the market.

In this case, that area matched up with my charts and ALSO trading plan for the day. I did make this trade but my execution was very very sloppy.

Price immediately bounced off that area and went to 3,926.50.

The bonus here is that on a trade like this, we can see the passive buyers soaking up the selling and lean on them a bit.

There is a substantial risk of loss in futures trading. Past performance is not indicative of future results. The figures here represent an opinion. The placement of contingent orders by you or broker, or trading advisor, such as a “stop-loss” or “stop-limit” order, will not necessarily limit your losses to the intended amounts, since market conditions may make it impossible to execute such orders. Please conduct your own due diligence if Futures are an appropriate instrument for you.

[Ben_M]

Looking at liquidity and order flow changed my trading plan today.

3/25/21

I want into the session today with a clear plan and hypothesis of what I thought would happen. I started trading my plan but saw some liquidity around 3851.00

The trends, support, and resistance levels played a big part in shifting my bias, albeit I did enter the trade too early again.

Here’s what I saw:

This is a longer term view that I did not use for my plan, but referred to when I wanted to be buying after the sell-off.

Here’s the chart from my morning prep:

The major factor that got me thinking buy side was the liquidity at 3851.00. The chart below shows the resting liquidity and it increases (gets darker red) as price comes closer to that level.

Price moved further down than I expected but I still was watching the DOM Surface and Footprint chart to get an idea of the direction:

Now a look at the Footprint chart at that same time:

This is a common pattern, price retests the lows (or highs) accompanied with less aggressive sellers (on down move) and less volume. It tells me that there is generally less interest in those lower prices and sellers may be losing interest.

When we combine that with the resting liquidity that is significant, we can get more comfortable with a long trade, looking to be backed up by big passive buyers.

There is a substantial risk of loss in futures trading. Past performance is not indicative of future results. The figures here represent an opinion. The placement of contingent orders by you or broker, or trading advisor, such as a “stop-loss” or “stop-limit” order, will not necessarily limit your losses to the intended amounts, since market conditions may make it impossible to execute such orders. Please conduct your own due diligence if Futures are an appropriate instrument for you.

[Ben_M]

@autobahn, if I were to add a few things to my current Footprint chart, what would you recommend? In terms of analyzing price action and order flow.

I tend to lean toward simplicity but also know that things like VPOC, overnight high and low, etc, are beneficial to look at.

I’d love to see an example of your charts within Optimus if you’d be open to sharing!

[Ben_M]

How to identify areas of potential absorption in the market using DOM Surface.

When we look at order flow on the Footprint chart, we can see where active buying and selling is happening.

Today, 3/26/21, at roughly 7:35 AM, there was aggressive selling at the 3924.00 to 3925.00 level. We can see this by looking at the dark red bars accompanied by large sell quantities that hit the bid (indicated by arrows).

When we are watching order flow we can see where the bids or offers are reloading. This just means that if someone is bidding for 100 contracts and they get filled (sellers hitting the bid), the buyer will add more contracts at the same price absorbing all the sell orders.

Here’s a quick 2 minute video from today showing this exact spot:

- YouTube

While we cannot predict when or where this will happen, the DOM Surface can give us an idea where resting liquidity is in the market (big bids or offers off the market).

#1 - We start to see buyers adding bids indicated by the bar turning darker.
#2 - As price gets closer to the 3924.00 level, the bar turns even darker showing additional interest in buying that price from participants.
Between #2 and #3 - The big red circles between these two points show aggressive sellers hitting the bid in the 3924.00 area.
#3 - Sellers took up all the liquidity there leaving that area with “normal” size liquidity.

What happened here is that price started coming down to the 3924.00 level. When that happened, buyers started bidding at 3924.00, potentially indicating support from buyers.

Price came down and sellers aggressively sold that level.

Because there were more contracts willing to be bought than sold at that level, sellers gave up and price retraced 2-3 points.

Although that level ended up not holding up (sellers eventually brought price below this area), leading up to it the evidence of big liquidity allowed for a spot to lean on if a long trade was in order.

Furthermore, if we see liquidity like this followed up by heavy volume, it can be logical to assume that there may potentially be a significant move in either direction.

Price could rally if sellers give up and puke their position.

Price could sell off if the buyers are overwhelmed and cannot fend off the sellers, leaving the buyers to puke their position if price goes too low.

This information can be extremely useful when combined with your trading plan and overall outlook on the market. It provides insight on where the buyers and sellers are and also where they may have taken a big position.

There is a substantial risk of loss in futures trading. Past performance is not indicative of future results. The figures here represent an opinion. The placement of contingent orders by you or broker, or trading advisor, such as a “stop-loss” or “stop-limit” order, will not necessarily limit your losses to the intended amounts, since market conditions may make it impossible to execute such orders. Please conduct your own due diligence if Futures are an appropriate instrument for you.

[autobahn]

Trying to make the move from computer trader to human trader, I agree that the fewer things to watch, the better. I like to use a volume heat map - this makes it easy to identify the exact nodes where there is high volume within a given region.

Consider a consolidation range breakout:

The first step is to identify a consolidation range with the required bar range (in ticks) and volume. The best consolidation ranges tend to form a bell shaped volume distribution with positive delta at the top and negative delta at the bottom:

This is volume shown as a heatmap; darker colours being more volume traded and orange being the highest volume traded. I’m showing the heatmap progress over time, so imagine that the chart ends where the heatmap ends and you can’t see what is coming. At some point price will break from the consolidation range, but there is nothing in the heatmap to indicate this is happening yet:

The heatmap is relative to the region selected so will change over time. You can see the high amount of volume required for the bull break.

As the bull break stalls and price moves back below the high volume node, stops were trigged and price fell rapidly back to VPOC:

As time progresses, another high volume node appears and price moves away in the opposite direction. If this were a retest of the bull break, price would be expected to move higher from the high volume node, not lower:

Following the breakout, the highest volume node indicates a potential take profit area:

Here is how the failed bull break looks on a footprint chart. The push into resistance was very aggressive and happened almost instantly. Note how there was nothing traded at the bid for 4 consecutive ticks. Due to speed, this is likely algo action. At resistance, 136 contracts were traded to break through resistance and 87 contracts were absorbed to keep price from falling back. The 136 contracts traded at the offer is likely to be active buying and not stops - if it were stops they would have triggered at the previous bar.

When price retraces 2 ticks below the high volume node, stops are triggered downward; you can tell they are stops (or an algo) because they happen so quickly there is no time for any trades at the offer. It is only when price falls back to the VPOC that price is held and active buying resumes:

The gold bars above and blue bars below indicate L2 depth. Red/Green numbers on top of each bar represent +/- delta. White number above represents volume traded. Diagonal imbalance is highlighted within the footprint.

[Ben_M]

This is great! I’m heading back to my computer now to dig in. Thanks for the detail!

[Ben_M]

A quick look at the POC & VPOC.

POC (Point of Control) is defined as “the price level at which the heaviest volumes were traded.” By placing volume on a price axis, we can see where the most contracts traded during a specified time frame.

In the below chart, we are looking at 5-minute candles with a daily POC.

The daily range is highlighted here:

The horizontal volume bars are a measure of how many contracts traded at that price during that time-frame.

Normally, we are custom to seeing volume on a time-scale rather than a price-scale. What we can do with this information is see what prices had the most liquidity.

By identifying this we can then look at our Footprint chart to see if there was a bias towards sellers or buyers.

I’m particularly interested in the POC for today. Since volume is recorded on a price-scale, we can determine where the majority of the contracts traded during the day based on price.

The market opened and traded to the lows, then after 9:40 AM, moved up toward the POC. I’ve highlighted the price range I’m interested in.

This means that there were no volume bars printed in this area as price hadn’t traded there yet. Therefore, the majority of the volume today traded at 3961.25.

Now that we have where the majority of the volume traded in reference to price, we want to look at the imbalance between buyers and sellers in that area.

Let’s find this data on the same chart to quickly find if there was an imbalance there.

Click on “Custom Profile” on the volume analysis toolbar:

Click and drag over the area you want to analyze:

Click where it says “Volume” then change the selection to “Delta”.

Click on “VA”.

Change to 5 ticks.

If you have the Step Profile volume enabled, you will have to disable that briefly to fully see the delta volume profile we just created.

Now we can see that there is a delta number assigned to the horizontal bars. This means that for the time range in our area (roughly 9:50 am to 10:00 pm), there were 7,320 more aggressive sellers than aggressive buyers. Specifically between the prices of 3959.50 and 3960.50.

To circle back, the reason I want to narrow down my data is that I know this is the area that traded the most contracts for that trading day. We got this from finding the POC above.

This is important to know as it provides us with a look into the bias of the majority of traders.

We can add this to our candlestick charts as well. I’m going to use my 15 min chart for this.

Click on “Step Profile” on the volume analytics toolbar.

Then click on the gear icon and refer to these settings to adjust accordingly:

Now we can see the chart with price, delta, and volume. Sorted by time (intra-day) as well as price.

Look at the totals of the delta for each day, these have been negative the last 3 sessions for the ES mini futures. This is relevant information because it tells us what the overall sentiment is.

There is a substantial risk of loss in futures trading. Past performance is not indicative of future results. The figures here represent an opinion. The placement of contingent orders by you or broker, or trading advisor, such as a “stop-loss” or “stop-limit” order, will not necessarily limit your losses to the intended amounts, since market conditions may make it impossible to execute such orders. Please conduct your own due diligence if Futures are an appropriate instrument for you.

[Ben_M]

Yesterday we were able to take a look at the intra-day POC and overlay the delta based on price rather than time.

This showed us that the majority of the volume around the POC was heavily weighted toward aggressive selling.

Today, the market opened and was trading on lighter volume until price rose above 3962.50.

At this point we saw more volume come into the market and it was biased toward aggressive buying. Here’s the chart:

Price has retraced from the high of today at 3983.75 and is sitting above support at 3979.00.

We will watch how the imbalance of buying and selling plays out near these levels to find the direction.

Post session update:

Price eventually sold off from the 3978.50 levels and closed at 3964.00. I’m referencing technical analysis to then integrate order flow data. Then we will be able to develop a plan for tomorrow.

Let’s look at a longer time frame with volume and delta profiles.

Here is the hourly chart with the past 4 days. It shows the volume and delta based on price. The last 4 days have all had a negative delta despite price moving up to resistance. Today, 3/31, we saw more buying than selling in the morning. The aggressive sellers came into the market near the closing bell which returned price to the 3964.00 level.

There’s a few things I’m going to be watching before the open tomorrow:

1. If price opens below the POC from today, I would expect the market to continue it’s uptrend and fill the VPOC (virgin point of control), at which point I’ll be watching resistance levels to attract sellers.

2. If price opens above the POC, the VPOC would have to be filled as the market comes down (if it doesn’t keep it open through tomorrow) and significantly test support near the 3970.75 area. This level also conincides with the lower trendline.

If the latter scenario plays out, I’ll be watching for aggressive sellers to come in and drive price below that area, which would make the target 3957.00, 3930.00 and 3904.00.

Here are the two scenarios I’ll be looking for tomorrow:

The other thing to note on this chart is the huge negative delta candlesticks that traded at 12:45 PM on 3/31. This showed lots of aggressive selling within 15-30 minutes, more than we’ve seen in the last 5 days at least.

Based on the price movement of the market I am inclined to think that these were buyers that predicted an upside breakout as price was moving up this morning. As price came back down near the close many positions most likely got stopped out.

Where does this leave us for tomorrow? Well potentially, as those positions exited there was a new wave of buyers that saw value with price coming back to support, hoping it will continue the uptrend and move higher.

These also could have been momentum sellers to the short side, speculating the new highs were a false breakout and price will break the lower trendline and sell-off. This narrative plays out well with the negative delta we’ve seen over the last 4 days. The idea that the majority of players are aggressive sellers and more inclined to hit the bid on a selloff rather than lift the offer.

There is a substantial risk of loss in futures trading. Past performance is not indicative of future results. The figures here represent an opinion. The placement of contingent orders by you or broker, or trading advisor, such as a “stop-loss” or “stop-limit” order, will not necessarily limit your losses to the intended amounts, since market conditions may make it impossible to execute such orders. Please conduct your own due diligence if Futures are an appropriate instrument for you.

[Ben_M]

Delta Rotation

I’d like to hear your outlook on the Delta Rotation indicator in Optimus Flow. I was watching some videos on charts and order flow when I came across this. As mentioned before, I started trading by just watching the DOM and a chart. We didn’t have indicators like this back then and I want to learn about the most relevant/helpful tools regarding order flow so your feedback is welcomed!

So, back to Delta Rotation.

Yesterday I was looking at how this indicator works with certain patterns over time. I noticed on the 5-minute chart there were two instances on 3/29 that stood out to me. Here’s the chart:

I’ve added the VWAP and kept the Delta Rotation settings standard, except for removing the box.

On #1, we see the Delta Rotation down for 4 bars in a row. During that time price was bottoming and did not make lower lows on the 5-minute candlestick.

Here is the Footprint Chart of that exact time-frame:

My analysis of this, and I actually saw this in real-time, was sellers were aggressive at the lows and couldn’t push price lower. This was setting up to potentially trap the sellers if price moved against them and fuel a rally.

Each time price came down near the lows, we saw consistent aggressive selling, but they couldn’t even make new lows by 1-2 ticks. It was actually higher lows by 1 tick on each push-down.

This analysis is still very speculative and open to interpretation. That’s fine and still very helpful to know what the sellers and buyers are doing.

The Delta Rotation however is down 4 bars in a row and going lower on each one.

This happens again at #2 on the first chart.

I’ve looked online to get an explanation and haven’t found anything with substance, so thought it would be a good topic here on the Market Profile thread.

What is Delta Rotation? How can we use it with our Footprint chart to improve our decision-making and execution? @Mod-JakeM @Mod-MattZ @autobahn

Thank you!

There is a substantial risk of loss in futures trading. Past performance is not indicative of future results. The figures here represent an opinion. The placement of contingent orders by you or broker, or trading advisor, such as a “stop-loss” or “stop-limit” order, will not necessarily limit your losses to the intended amounts, since market conditions may make it impossible to execute such orders. Please conduct your own due diligence if Futures are an appropriate instrument for you.

[Ben_M]

I think I found the partial answer, but still not adding up.

I pulled up the Delta Rotation and also the Delta, I noticed that the Delta Rotation is adding up consecutive Delta bars then creating a new sequence when the Delta is in the opposite direction.

However, there are times where it doesn’t appear to be adding to the last bar even if the Delta is in the same direction as the previous one.

What do you think?

There is a substantial risk of loss in futures trading. Past performance is not indicative of future results. The figures here represent an opinion. The placement of contingent orders by you or broker, or trading advisor, such as a “stop-loss” or “stop-limit” order, will not necessarily limit your losses to the intended amounts, since market conditions may make it impossible to execute such orders. Please conduct your own due diligence if Futures are an appropriate instrument for you.

[autobahn]

Looks like delta rotation is cumulative delta that resets on each new rotation.

A ‘rotation’ appears to be determined by price and not delta.

If price is choppily moving sideways, delta rotation won’t show much. But in a traditional trending market where there are clear pullbacks, it should make more sense what it is doing.

I don’t know the exact formula Optimus Flow uses to calculate a rotation. It may be simple ‘is the candle green’ or it may be based on a more complex formula that determines swing high/swing low points.

I have my own indicator that shows delta over a region, but I’m responsible for drawing the region(s) I’m interested in.

PS I sent you a connection on LinkedIn so we can discuss ideas for algos and automation. I can’t see how to send a personal message on this forum.

[Mod-MattZ]

@autobahn

I don’t know the exact formula Optimus Flow uses to calculate a rotation. It may be simple ‘is the candle green’ or it may be based on a more complex formula that determines swing high/swing low points.

I can ask the developers which formula they used.

Matt

[Mod-MattZ]

@autobahn

PS I sent you a connection on LinkedIn so we can discuss ideas for algos and automation. I can’t see how to send a personal message on this forum.

We have disabled that feature to protect the privacy of our users, and avoid solicitations by third party vendors.

Matt