A question about the actions of Large Players

[mklein9]

Pascal,

Thank you for the detailed answer to Nickola's question. I have similar questions but not having a strong trading background don't have as good an idea of where to start.

I would certainly agree that "smart" players would carefully hide their transactions. Perhaps my primary question about EV methodology is why the large players (who we assume have all means at their disposal to hide their intentions) would cause a large change in price from minute to minute (compared to the high-low difference during that minute), which is what LEV/SEV separation is based on. Wouldn't they want to structure their transactions to produce a small price change at a high volume?

I think I am asking why you chose the Williams method as the basis for EV, as opposed to, for example, an OBV of some form, or even something like looking for the smallest price change at high volume as potential evidence for "big smart" transactions. Is there prior work that shows some basis for this model? I would certainly be interested in learning about the issues. Did you try other methods of detecting EV before writing your book?

Anyway, it may very well be that the details of the low level calculations are not as important as the averaging effect of 1000+ stocks.

[adam ali]

The comment below from the previous posting by a community member:

Perhaps my primary question about EV methodology is why the large players (who we assume have all means at their disposal to hide their intentions) would cause a large change in price from minute to minute (compared to the high-low difference during that minute), which is what LEV/SEV separation is based on.

Is this an accurate portrayal of the methodology? I thought EV calculates effective volume based on as small as a penny a share change from one minute to the next.

[Pascal]

Pascal,

Thank you for the detailed answer to Nickola's question. I have similar questions but not having a strong trading background don't have as good an idea of where to start.

I would certainly agree that "smart" players would carefully hide their transactions. Perhaps my primary question about EV methodology is why the large players (who we assume have all means at their disposal to hide their intentions) would cause a large change in price from minute to minute (compared to the high-low difference during that minute), which is what LEV/SEV separation is based on. Wouldn't they want to structure their transactions to produce a small price change at a high volume?

I think I am asking why you chose the Williams method as the basis for EV, as opposed to, for example, an OBV of some form, or even something like looking for the smallest price change at high volume as potential evidence for "big smart" transactions. Is there prior work that shows some basis for this model? I would certainly be interested in learning about the issues. Did you try other methods of detecting EV before writing your book?

Anyway, it may very well be that the details of the low level calculations are not as important as the averaging effect of 1000+ stocks.

The selection of the Larry Williams' adapted method is what looked best as I did not have access to tick data at that time. What I however did was to use as effective volume the total volume traded during one minute, as far as the minute was showing a price inflection. This method (OBV) was also good at shwoing accumulation/distribution. Larry Williams seemed to be more precise though. Today, I'd use tick data for sure instead of LW.



Pascal

[Pascal]

Paul,


There is a large block filtration algo inside of the method. It is not explained in the VIT book, but since a large block that does not impact the price is probably an "arranged" trade (for example between the MM and his customer), you want to filter this out, otherwise this sort of transaction "pollutes" the EV pattern. The filtration algo is to filter out the minutes whose traded volume is higher than 5% of the daily volume, but which does not impact the price by more than 1%.