Today. I’m going to show you version 2 of the new volume indicator I showed you yesterday. I’m calling it volume splatter, because it looks like paint (or blood, if you are morbid) splatter.

The first example shows how often the small and medium-sized traders are on the wrong side of the market. Recall that the indicator plots three data series. From top to bottom, we have the small, medium, and large sized trades. Their position around their zero line tells you whether the volume pressure is to the up or the down side. The size of the dot tells you how much volume is in that particular bar, relative to the last 3 half-cycles. So, a large dot means greater than average volume is flowing into the bar for that type of trade. A tiny dot means not much volume.

It was important to split out the dot sizes, because… say you have a big push down from the large traders, and then the dots start drifting back towards the zero line. That drift up could be happening because they are buying, but it could also be happening because they aren’t doing anything. If no volume prints for their size, the dots will tend toward zero from wherever they are. I wanted to differentiate action from non-action. It’s working well to do so, today.

So, anyway, the first example… look at the action between the two vertical lines on this picture:

You can see that the medium (cyan) traders were pushing down during this consolidation, followed by a push from the small (yellow) traders. Meanwhile, the large (magenta) traders were steadily drifting up, with occasional spikes of volume. So, the right action is to buy the breakout up once the small and medium buyers figure out what’s going on and step in. I do think, so far, that you want to wait for the selling pressure from the small fries to stop… it doesn’t take long, as they are jumpy and scared all the time.

Here’s a second example, from my actual morning trading:

The blue horizontal trendlines outline a box play. I bought the breakout up at the first vertical line. You can see that during the previous consolidation there was a push from the large traders, and now at the buy point they seemed to have mostly stepped aside. But, their dots were staying above the 0 line (so net buyers over the last half-cycle). The breakout was fueled by the small and medium traders, which is not necessarily a problem.

But, I bailed for two ticks of profit (the maximum possible profit was three ticks, so I felt great). Why? I knew when I pressed the button that I wanted to see the large traders step in and move the markets up in my favor. But, look what happens over the next few bars after the breakout… tiny magenta dots drifting toward the zero line. In other words, the big guys were uninterested at best, and lightly fading the breakout in the worst case.

Now look what happens as we near the breakdown from the original box (marked by the second vertical line). All the small and medium traders freaked out that their breakout didn’t work, and sold it down to the breakdown point. The large traders are still mostly uninterested, but they are below their 0 line, so net sellers, and occasionally giving it a little push. But! Look after the breakdown at all those large magenta dots. They weren’t heading down in a big way yet, but they were net sellers and suddenly very active.

Note also that, just after the breakdown, the small and medium traders seemed to be actually buying here, as their dots were rising fast and punctuated by volume every few bars. The medium traders were even net buyers (above their zero line) by 8:50!

Look at the pullback at 8:57ish… the big traders have pushed back to their zero line, but not much above it. So, they are net neutral, taking profits probably. The small and medium traders are buying… do you think it’s a good idea to follow them? I don’t. Once they realize what’s up and panic, the big traders are also selling again… and when all three are selling in unison just before 9:00, you get a steep drop. Very nice.

Moral of the story: Small and Medium-sized traders appear to often be on the wrong side of the market… just like conventional market wisdom says they will. Don’t be one of them. Use them, instead!

I’ve been working to tie together all of eotpro moderator Bill’s entry criteria into a single indicator. And, I think I’ve done it, now. If further testing goes well, I think this will be the main indicator used in their live room soon. Pretty neat.

More interestingly, since I had it all in one indicator now, it was very easy to make a simple strategy out of it. I just threw it on a 1597 share bar chart, with the default settings. I gave it a fixed 2pt profit target and let the stops trail behind the plot cycles. So, this was about as brain-dead a money-management scheme as you could think of. Well, even so…

Running it like this on the last 3 days with 1 contract, it made 13 trades for 10 wins and 3 losses… pulling in $650. I have never had a strategy do so well when I first threw it up on a random chart (and with un-optimized settings). That’s really promising. Cool stuff…

I know 3 days isn’t a sufficient backtest to go automated, but that’s not the point! I don’t plan to go automated with it, and I would never go automated with a fixed profit target, anyway. It just goes to show how good an entry signal the Patty B is, in conjunction with the other Eotpro filter indicators (like Shelly’s Volume 4 and the market sync, among others).

So far, I am really impressed with this indicator, which I mentioned in my previous post. It uses estimated market cycle periods to derive a signal to noise ratio. I made a histogram out of it, which crosses the 0 line at +6dB, meaning the signal is twice as strong as the noise. Anything less, and it’s much more risky to trade.

I was looking at the action on BBY around 11:00 as a possible double bottom… but since SNR was dropping I stayed out, and I’m glad I did.

It lags the market by about 4 bars, but it moves pretty smoothly, so you can kind-of think a couple moves ahead. Like, if it’s dropping quickly, you might take into account that it might be red soon… and if it’s red soon that means it’s too noisy right now. Make sense?

I’ll be watching it for a few more days, to see if the performance holds up. When the noise level is high, you see a lot of listless chop, like at the tail end of the chart above. I’ve also found that, if you simply _must_ trade the stock, you can move up to a bigger timeframe and see if that’s less noisy. That will usually mean larger stops, which is exactly what a noisy market calls for.