TPO vs Volume based VA and POC

I know that when Steidlemeyer (sp?) first wrote about MP, volume info was not readily available on futures contracts, so he he came up with the TPO concept as a way to understand value.

Now that volume data is more available I wonder if I should be using it instaed of TPOs for my VA and POC. Lately, I've been watching both and have taken trades using both.

I've read both of Dalton's books. In his second book on page 29, he states,

"Auctions are made up of three fundamental elements: price, time, and volume. Price is simply the auction's means of advertsing opportunity. time regulates each opportunity, and volume measures the degree of success of each auction"

Unfortuantely, Dalton doesn't expand his thinking much more on volume.

I would like to hear from other MP traders how you deal with situations when there are large differences between TPO versus volume based VA and POC. When the difference between TPO and volume based VA and POC is small I will use one as the wiggle room for the other. But with large differences I'm not sure what to make of it.

That's a good question. My MP software displays both the TPO's and "volime at price". I use the TPO value areas as the "real" VA because I believe they have been useful in the past, and frankly a lot of technical analysis tends to be a self fulfilling prophecy, if a lot of people are watching the number, the number becomes important. So, the more commonly used number is going to have to be respected. It is important though to know where the real volume was or lack there of, as these may give you signals as well. Often these numbers are very similiar and it is pointless to split hairs over a tick...............however a TPO generated VA with a high volume area above it does raise an issue, and you need to learn from experience how to deal with this. Any of this stuff though is just an attempt to find an edge, not perfection. That's my 2 cents.

Excellent topic!

The answer is of course to back test your trading rules through both methods of VA/POC calculation and see which one wins out. The problem is finding software that sophisticated (and also getting the tick data) to use. I don't know of any. You would also need to use tick data to calculate the volume at each price although I'm sure that if you have 1 minute data and averaged it over all the prices traded during that minute you'd be as close as having tick data.

When analyzing chart types, one of the things I noticed when comparing time, tick and volume based charts was that volume and tick based charts could proxy each other and neither had an apparent advantage over the other. As a purist I'm a fan of the volume based chart, however, some markets don't have volume so you have to use ticks in place.

There is another way of building a TPO chart that you didn't touch on and that is using the range built from volume bars.

In MP, each bracket represents half an hour (with one exception that I know of). There's no reason why each bracket can't represent 50,000 contracts for example. This way you're combing the TPO graphic structure with volume and moving onto a new bracket based on market activity and not time.

So on a high volume day you may already be into the third or fourth bracket by 10:30 EST and on a slow day you might still be building the first bracket at that time.

I've done a little bit of investigation in this area but do not have any conclusive results yet.

One of the puzzles about this that I have not yet worked out is how to adjust the contract count for a naturally growing market. One would have to, for example, use a base number of contracts (50,000 in this example) and then adjust that every now and then (or daily) based on a trailing daily average volume of some sort, say a 200 day SMA or EMA of the daily volume.

All studies done by either Don Jones or myself suggest that the TPOs are highly correlated to actual volume. He says 95+% and I say 97%

The reality is that the patterns are still the same today as they were in the 1980s and 1990s both which periods saw dramatic changes in style of trading and volmes

It matters little that volumes continue to climb and imho will double in the next 3 years but it is important to understand that not all uptics represent a buyer and not all downtics represent a seller. Difficult to understand? Take the role of a spreader for example or two option traders who both have a delta to trade. Do I need to spell it out why therefore not all buys are in actual fact a buyer?