The EEdge-HeatMap Indicator
The EEdge-HeatMap indicator focuses on the average trade size in an attempt to identify large traders (hot) and small trader (not) presence. Knowing they are there is half the battle. By identifying the "where" in combination with the "context" of price action we can start to assume the intent, meaning are they buying or selling in this specific location which is the power of the map! This, in combination with the other EEdge non-correlated indicators, assist in obtaining or confirming the trade bias and specific entry or exit location.
"Why is this useful?" you might ask. Let's assume large size traders are professionals and small size traders are amateurs and they are competing to buy and sell contracts at a given price level. Even if this isn't completely true lets go with this analogy for consistency sake and recognize that there is a struggle between large size and small size traders in the context of the market and getting their orders filled...
Oxford Dictionary defines this representation in the following way:
- Heat Map, noun "A representation of data in the form of a map or diagram in which data values are represented as colours."
First known use: 1991, depicting financial market information
So here's Why it works... As the market moves, there are areas where the price action seems to draw different groups of traders in to trade, or "compete" if you will. It is where these traders accumulate and why that makes the difference for us. Large size traders (most likely professional traders) await price rising or falling until the value of price entices them to either buy or sell at value. If the market is rising, professionals sell into it near tops or buy into it near bottoms. Collectively they have large positions to liquidate or enter and this can't happen in an instant. Their size then forces them to gradually offer their positions in "chunks" as the market pops higher so they must anticipate an entry or exit, not react to market movement. The top of an uptrend then is where the professionals will need to sell and the bottom of a downtrend is where they will buy. Hmm. Makes sense right? Buy low and sell high? Well, in contrast, the amateurs trade with emotion rather than logic. As the market rises, the excitement builds and the anxiety of not being in on the move escalates until the amateur can no longer stand it and simply "jumps in." This extra volume in an already "stretched" area gives the pros the opposite side of the trade they need to enter or exit their positions, so it is a marriage made in heaven. Of course, this doesn't end well for the amateurs, as just as they start entering, the pros step in and take it the other way. Now, the amateurs are under water, backwards if you will, and start to get their tight stops hit. If they are long at the top, they start selling in a flurry to cover, forcing the market down even further and quicker. Have you ever been filled at that exact top or bottom tick and then the market goes the other direction?
So Here's How it Works... The EEdge-HeatMap analyzes the average trade size real time and uses paint bars to identify the different groups within the price action. The reason this is important is that the professional trader typically trades with multiple contracts per lot, ie. Trade Size, whereas the amateur typically trades in one lots, or one contract per trade. There have been a few studies done recently that highlight this phenomena but for now just know that we make the assumption of what type of trader is placing their trades based on this. So to extract this, EminiEdge created the "HeatMap" Indicatortm which analyzes the market and separates the trader types, per bar, real time, then plots them on the chart via a "paint bar" study. RED is high intensity map and signifies the professionals are active. The GREEN is low intensity and signifies the amateurs are active. The CYAN is the lowest of the heat map indicating no overall professional or amateur activity (of course, colors can be adjusted if you so desire). Since we've established that the large size traders sell at tops and buy at bottoms, and the small traders do just the opposite, namely buying at the top and selling at the bottom, when we see price action either up or down, and a significant presence of either group shows up, we can act accordingly by fading the small traders and trading with the pros. This is the power of EEdge-HeatMap!
...part of the EminiEdge 5 Step Plan to Trade the Emini S&P...