Update to PositionBook Chart - Revised Optimisation Method

Just over a year ago I previewed a new chart type which I called a "PositionBook Chart" and gave examples in this post and this one. These first examples were based on an optimisation routine over 6 variables using Octave's fminunc function, an unconstrained minimisation routine. However, I was not 100% convinced that the model I was using for the loss/cost function was realistic, and so since the above posts I have been further testing different models to see if I could come up with a more satisfactory model and optimisation routine. The comparison between the original model and the better, newer model I have selected is indicated in the following animated GIF, which shows the last few day's action in the GBPUSD forex pair. 

The old model is figure(200), with the darker blue "blob" of positions accumulated at the lower, beginning of the chart, and the newer model, figure(900), shows accumulation throughout the uptrend. The reasons I prefer this newer model are:

• 4 of the 6 variables mentioned above (longs above and below price bar range, and shorts above and below price bar range) are theoretically linked to each other to preserve their mutual relationships and jointly minimised over a single input to the loss/cost function, which has a bounded upper and lower limit. This means I can use Octave's fminbnd function instead of fminunc. The minimisation objective is the minimum absolute change in positions outside the price bar range, which has a real world relevance as compared to the mean squared error of the fminunc cost function.
• because fminunc is "unconstrained" occasionally it would converge to unrealistic solutions with respect to position changes outside the price bar range. This does not happen with the new routine.
• once the results of fminbnd are obtained, it is possible to mathematically calculate the position changes within the price bar range exactly, without needing to resort to any optimisation routine. This gives a zero error for the change which is arguably the most important.
• the results from the new routine seem to be more stable in that indicators I am trying to create from them are noticeably less erratic and confusing than those created from fminunc results.
• finally, fminbnd over 1 variable is much quicker to converge than fminunc over 6 variables.
  

The second last mentioned point, derived indicators, will be the subject of my next post.

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PositionBook Chart Example Trade

As a quick follow up to my previous post I thought I'd show an example of how one could possibly use my new PositionBook chart as a trade set-up. Below is the USD_CHF forex pair for the last two days

showing the nice run-up yesterday and then the narrow range of Friday's Asian session.

The tentative set-up idea is to look for such a narrow range and use the colour of the PositionBook chart in this range (blue for a long) to catch or anticipate a breakout. The take profit target would be the resistance suggested by the horizontal yellow bar in the open orders chart (overhead sell orders) more or less at Thursday's high.

I decided to take a really small punt on this idea but took a small loss of 0.0046 GBP

as indicated in the above Oanda trade app. I entered too soon and perhaps should have waited for confirmation (I can see a doji bar on the 5 minute chart just after my stop out) or had the conviction to re-enter the trade after this doji bar. The initial trade idea seems to have been sound as the profit target was eventually hit. This could have been a nice 4/5/6 R-multiple profitable trade.😞

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A New PositionBook Chart Type

It has been almost 6 months since I last posted, due to working on a house renovation. However, I have still been thinking about/working on stuff, particularly on analysis of open position ratios. I had tried using this data as features for machine learning, but my thinking has evolved somewhat and I have reduced my ambition/expectation for this type of data.

Before I get into this I'd like to mention Trader Dale (I have no affiliation with him) as I have recently been following his volume profile set-ups, a screenshot of one being shown below.

This shows recent Wednesday action in the EUR_GBP pair on a 30 minute chart. The flexible volume profile set-up Trader Dale describes is called a Volume Accumulation Set-up which occurs immediately prior to a big break (in this case up). The whole premise of this particular set-up is that the volume accumulation area will be future support, off of which price will bounce, as shown by the "hand drawn" lines. Below is shown my version of the above chart

with a bit of extra price action included. The horizontal yellow lines show the support area.

Now here is the same data, but in what I'm calling a PositionBook chart, which uses Oanda's Position Level data downloaded via their API.

The blue (red) horizontal lines show the levels at which traders are net long (short) in terms of positions actually entered/held. The brighter the colours the greater the difference between the longs/shorts. It is obvious that the volume accumulation set-up area is showing a net accumulation of long positions and this is an indication of the direction of the anticipated breakout long before it happens. The Trader Dale set-up presumes an accumulation of longs because of the resultant breakout direction and doesn't seem to provide an opportunity to participate in the breakout itself!

The next chart shows the action of the following day and a bit where the price does indeed come back down to the "support" area but doesn't result in an immediate bounce off the support level. The following order level chart perhaps shows why there was no bounce - the relative absence of open orders at that level.

The equivalent PositionBook chart, including a bit more price action,

shows that after price fails to bounce off the support level it does recover back into it and then even more long positions are accumulated (the darker blue shade) at the support level during the London open, again allowing one to position oneself for the ensuing rise during the London morning session, followed by another long accumulation during the New York opening session for a following leg up into the London close (the last vertical red line).

This purpose of this post is not to criticise the Trader Dale set-up but rather to highlight the potential value-add of these new PositionBook charts. They seem to hold promise for indicating price direction and I intend to continue investigating/improving them in the coming weeks.

More in due course.

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