Pair Trading How Can It Be Done ..

[fowkesp]

Overview of practical vwap trading please

Grey1,

Thanks for bringing vwap trading to my attention - I've followed the various threads with interest for a while. I am now in a position to try it out for real and have TS2000i running with vwap charting and alerts for vwap bands at (h-l)/2.

I understand I must wait for the price to fall outside the band before considering a trade, and you have mentioned that you use L2 to ensure that you don't enter prematurely (price sliding along the ege of the vwap band).

Is there anything else that you would recommmend that increases the odds of a successful trade, such as waiting for the market (or sector) as a whole to move in the same direction as the anticipated trade? Also what sort of stop strategy are people using?

How many stocks does one need to monitor to get a decent number of signals during a session?

Regards,
Paul

 

[Grey1]

fow,

I will post the complete strategy rules of trading during the week end.. VWAP strategy is more than the two bands..

Monday will be a good start to give the strategy a real time test drive.. You should win most of your trades.. If you did not then the strategy is not any better than a coin tossing system ..
You should become a better and more confident trader in 3- 5 days..



PAUL ,

As you know when market is strong we buy into weakness ( VWAP strategy ) . When a particular MM ( lets say GSCO ) needs to fill an 100K order @ vwap for his institution customers he has no choice to stamp the stock down.. we really don’t know how far down the line he will be going because we don’t know his order size.. only he knows that .. So to shadow his trade on the way down wont be a good strategy .. .. There will be a point (near the Lower VWAP band ) that you often see other smaller firms joining to trade the upward momentum .. This is the time to shadow the AX along side the rest of the smaller MM’s So on the way up we be having the previous AX + other MMs ( CONSENSUS) all trading the momentum ..

This is the concept behind buying into weakness…Sorry about explaining some thing you already know but just thought to explain it again in case other members don’t not use L2 or understand it

 

[Trader333]

Grey1,

Yes thanks for your reply. I did think that is what you meant and you have confirmed it. I assume that this applies to directional trades as, in my view, it is very difficult to watch 2 Level II screens for the movement of the Ax on each.


Paul

 

[Grey1]

Paul,,

I only use L2 to fine tune my entry.. I am not bothered who the AX is , was or gonne be later on through the day ..

All I am concerned is to make sure there is not a large buyer below my entry .. That is as far as L2 go, not any further..

My bigger picture comes from the VWAP ..

 

[Trader333]

Grey1,

I see your point on entry and that is pretty much what I have done.

Your quote:

All I am concerned is to make sure there is not a large buyer below my entry

Is this for a Long or Short trade ? or either ? and what is your reasoning ?


Paul

 

[Grey1]

Paul,

Buyer for going long ( demand ) // Vice versa for short. ( Supply )

It is simply wrong to take notice of vwap signal when for example GSCO is sitting there with 5000 bid 10C below the signal issued by the VWAP strategy , this is the heuristic part of the strategy ..

 

[Trader333]

Grey1,

I must admit my views differ to yours a little for the following reasons:

GSCO likes to fake and I have never seen GSCO display a size much larger than 1 except when he is trying to give the impression of something other than his true intentions. So sitting with a size of 5000 then it is highly likely he is faking because if he really had that amount he wanted to buy he would show a size of 1. This actually confirms your view but for different reasons to mine.

The fact that GSCO wants to buy would to me be seen as a sign of buying support. I would be far more concerned to see GSCO sat at or near the inside Ask. This would say that he is wanting to sell and there would be a good chance that his presence would cause resistance to the price rising and most likely cause the stock price to fall.

Having said all of that what I would likely do is just watch GSCO for a few seconds. In many cases he is sat near the inside bid at maybe 3 or 4 levels below it and if he doesnt drop his bid then I have seen this as a sign of support for moving the stock upwards.

Of course the Island Book does give a true representation of order size at each price level and I have the Island book as a separate screen which I also quickly check for support and resistance prior to entry.


Paul

 

[LevII]

Grey1,

When GSCO is at the inside on large size with T&S showing GSCO, on the face of it, making transactions, then watch out if INCA is on the inside on the other side of the screen. There is a real possibility that GSCO is dealing at minimal cost with itself via INCA to fool the other players as to his real intentions.

He will churn stock in this way until he has driven the price to where he wants it then pull his quote and switch sides to carry out his real trades.

LII

 

[Grey1]

Paul

Quote " The fact that GSCO wants to buy would to me be seen as a sign of buying support. I would be far more concerned to see GSCO sat at or near the inside Ask. This would say that he is wanting to sell and there would be a good chance that his presence would cause resistance to the price rising and most likely cause the stock price to fall. ",



Perhaps I explain my reasoning .. GSCO appears with a large order 3 levels below inside bid.. Other players see this as a good support. He then reduces his size and trades on the inside bid.. This will push the price UP and traders will trade the momentum while he is short selling stocks on INCA.. Once he has done that he moves to the ask ( as you said ) to create a
mini panic and stock falls .. He then comes back and buys his 5000 shares to panicking traders at a much lower price LOL .. So why did he show the 5000 shares to start with .. To show a strong support to have other traders who only use L2 as a support and resistance tool open a long position to generate momentum .

Now watch this scenario near the VWAP.. This faking happens a lot near the VWAP so traders all get cought..This is why VWAP is such an important bench market for all players... However when it comes near or near enough to lower VWAP he will think twice before playing the fake game, but there is no guarantee it will stop him because his customer order has been pre -Sold @ an average of around VWAP price before the market even opened ..

 

[Trader333]

Grey1,

Ah yes, I now see your point about the games being played at or around the lower vwap band and that they may well be different from what happens the rest of the time. I may just observe this on a few stocks on Monday and see what is going on.


Paul

 

[Grey1]

You be amazed to see how many hard core L2 Players have now moved ( after decimalisation) to Chart analysis as their main and I mean main part of their trading strategy.. To read MM's true intention using L2 is like sending inspector clouseau to solve the JFK murder case..

regards

 

[LevII]

Grey1

I see the point too and it seems a good one. I'll be looking closely on monday as well.

But what about him trading his own account rather than institutional orders? Is he not going to want to buy well below VWAP and sell well above?

 

[Grey1]

levII

yes ..A MM is not allowed to trade on behalf of a customer any further than filling his order @VWAP .. His own account is different and he might let it run well above VWAP.

if you read the terms and conditions of some of the third party VWAP executers ( even IB ) then you will see why VWAP strategy is so meaningful.. VWAP order on NYSE is treated slightly different but with the elimination of the "two dollar brokers " and the OPENBOOK rule the market is heading on the same way as NASDAQ..

regards

 

[Grey1]

Fow,

Quote "How many stocks does one need to monitor to get a decent number of signals during a session? ",

One of my sanner used to shortlist 1000's of stock but my previlage was removed as a result of too much pressure on the server..

I would say 100-200 stocks will give you a reasonable signals for pair trading .

ragards

 

[Trader333]

I was monitoring 160 and have recently reduced it to 130.


Paul

 

[rajibde]

Ian,

I should have maybe clarified what I posted. Because I have automated my alert system, I do not get alerted to potential trades unless they go outside of the outer vwap bands as well as a number of other things that I have factored in including Level II and MACCI. I have done this to cut down on the number of alerts I was getting.


Paul

Hi Paul,

I have tried to make an indicator for RS by including price close above/below VWAP bands, RR ratio and volatility (using 'and' statements)- although it passes the verification but it never gives a signal- has this kind of thing ever happened to you with any indicator you've made?

Raj

 

[Trader333]

Raj,

This post I made was made over two and a half years ago and things have progressed since that time. I am not sure why your code may not be working but I suggest that you try removing parts of it and see if you get any alerts. So as a start remove the RR part of your code by putting brackets around it like this { }

This will ignore what is written between it.


Paul

 

[LevII]

Hi Paul,

I have tried to make an indicator for RS by including price close above/below VWAP bands, RR ratio and volatility (using 'and' statements)- although it passes the verification but it never gives a signal- has this kind of thing ever happened to you with any indicator you've made?

Raj

Raj,

You may just be making the indicator so restrictive it will give signals only rarely if ever.
Alternatively your code, although verifying, could be illogical or otherwise absurd. Verification means only that the syntax is ok.

 

[rajibde]

Raj,

You may just be making the indicator so restrictive it will give signals only rarely if ever.
Alternatively your code, although verifying, could be illogical or otherwise absurd. Verification means only that the syntax is ok.

Thanks Paul and Levll for your replies,

It is quite likely that the string of conditions have become too long causing it to be illogical for the calculations; all I am trying to do is add conditions before it gives an alert (as one would do on an excel sheet for complex calculations but in this case in 'easylanguage') ; I have now bracketed a section of the conditions, as Paul has suggested, and will check it out tomorrow.

Cheers!

Raj.