More on TradeFlow and Aggregation
I have discussed TradeFlow in the past, but this article is the basis for a series of future articles built upon TradeFlow charting. A quick review is in order.
TradeFlow charts and studies bring to traders key market details. Primarily, whether traders are hitting bids or lifting offers to generate the last price. This information is the basis for the TradeFlow bar. The high is the best asking price and the low is the best bid price (the inside market). The width and color-coding of the TradeFlow bar is determined by the actual volume of trades at the ask or bid price. A portion of the TradeFlow bar is colored green based on the percentage of volume at the ask price and red based on the percentage of volume of trades at the bid price. The width and brightness of the TradeFlow bar is determined from the current bar’s volume relative to the historical look back period.
This chart is the basic TradeFlow chart along with the TFlow Volume study (the total amount of trades made at the ask price and the bid price are plotted as histogram bars) and the TradeFlow On Balance volume line. The TFOBV is the running sum of volume of trades at the ask minus trades at the bid price.
One issue with individual TradeFlow bars is the inside market can move very quickly. Consequently, for some markets, such as the e-min S&P 500 futures contract, the TradeFlow bars are plotted at a very fast rate. The high level of velocity of price information can be hard for a trader to absorb. To reduce the velocity, and still get the key information, CQG offers aggregated versions of the TradeFlow bars.
There are three types of aggregation: bars, range, and smoothed. Right-click on the TradeFlow bar to bring up the menu for aggregating TradeFlow bars.
Aggregated TradeFlow bars means less screen real estate is used; key support and resistance levels are highlighted, as well as trending action is emphasized. The first example is bar aggregation.
Bar aggregation combines individual TradeFlow bars into one TradeFlow bar. If the setting is for 3 bar aggregation, then each time three individual TradeFlow bars are complete, one 3 bar aggregated TradeFlow bar is plotted. Between one to 20 individual TradeFlow bars can be the basis for bar aggregation.
Range aggregation uses a price range. Between one and 20 ticks can be used for the range. For example, if you select range, and change the TradeFlow chart to range aggregation and then type in 3, the TradeFlow chart will be a 3 tick range aggregation chart. Here, tick is used as the minimum price increment for the high-low range of the TradeFlow bar. For example, an e-mini S&P 500 3-tick range aggregation chart would be 1486.25 to 1487.00. All TradeFlow Charts are three ticks in range unless the market is swept, which we will discuss tomorrow.
The final version is smoothed TradeFlow. Here, a proprietary algorithm is applied to the TradeFlow price data. Up to 20 bars for smoothing is available. The example presented is using a three bar smoothing. The TradeFlow price action now has a better defined appearance regarding the trend and points where the market changes direction.
Each aggregated version detailed here included the standard TradeFlow studies. Other studies can be used with aggregated TradeFlow bars, and the elements of TradeFlow can be the basis of custom studies, as well. All of these will be discussed in future posting here.