July 2007

Study Tip:

Calculating Delta
by Richard Green

Introduction:

The purpose of this memorandum to the trading group is to describe some issues with the "Delta" indicator(s) that I feel are important.  I'll use the term "Delta" to refer generically to any of the indicators or other presentations that are calculated from the Ask Volume and Bid Volume.  There are any number of potential combinations and ways of presenting that information, depending in the particular charting software that one uses.  All the implementations of Delta share some common issues.

Some time back I realized I was using an indicator I did not really understand.  I saw anomalies with some of the charts for which I could only speculate possible causes.  I contacted Howard Arrington of Ensign Software.  From his illuminating comments it became clear Delta needs to be treated differently than other indicators.

I use Ensign Windows software for trading and will confine my comments to Ensign’s implementation of the Ask volume and Bid volume information.  I will confine my comments to the ESignal and IB data feeds because those are the two I have used for charting.  There are several other software packages and data feeds used in our group, and all share the same potential issues.  Since I cannot speak first hand of others’ implementation of Delta, I will discuss Ensign Windows only.

Root Cause:

Delta calculations can only be made with tick-by-tick data and the data providers supply a limited amount of refresh, or historical tick data.

Most of the information used in charting comes directly from the exchanges through the data providers. Historical data is available for most of that information.  Delta is different in that it is a calculated number, not supplied by the exchanges.  Charting packages must continuously calculate Delta tick-by-tick from volume and price information.  This is a key issue.  Delta cannot be accurately back-calculated except from scrupulously maintained tick-by-tick data.  Charts displaying accurate Delta information can only be refreshed to the limit of tick-by-tick data supplied by the data providers.

Discussion:

The differences between "real time" data providers, their formats and the depth of their tick-by-tick data history are critical to the presentation of "Delta" on a chart.  Each charting software programmer must make certain assumptions in order to work with the data providers.  The assumptions for calculations, and the work-around for the relatively small amount of tick refresh data are different for each software package.  It is important for me to fully understand Ensign’s implementation of Delta so that I am confident of my charts and have a plan in place to cover the inevitable hiccups that occur.

To start we should compare data providers.  I will make some statements here that I am confident of because the information came from reliable sources.  I do not myself write software at a level where I could independently verify the information.  ESignal and IB both combine or "group" tick information to reduce bandwidth, but each does it differently.  ESignal combines ticks at the Bid or Ask, consolidating them into single larger trades.  I have been assured that they do not mix trades at the bid and ask together.  IB consolidates their bandwidth by time, not trades, and IB does mix together trades at the bid and ask.  Since Delta calculations require accurate bid and ask volumes, programmers must assume some split of bid and ask volume for each time-based "tick" to work with IB’s data.  I do not know the assumptions made by the different programmers to work with IB data, but I doubt their assumptions are identical.  I cannot say how accurate Delta may or may not be, calculated from the IB data feed.  I did not put together a direct comparison of charts from the two data providers.  I use ESignal exclusively now for charting.

Working with charts, especially longer-term charts will require that they be refreshed from time to time. The bulk of the refresh data available from ESignal and IB is time-based and cannot be used to calculate an accurate Delta.  Only the limited amount of tick-by-tick refresh will be accurate.  In the case of IB, none of it will technically be "accurate".  I feel it was important for me to know how Ensign handles refresh data so that I can plan effectively for upsets.  Others may want to create their own plans that are pertinent to the software they use.

Ensign refreshes Volume, Tick and Range based charts from the approximately six days of tick-based data available from ESignal.  Time-based charts are not refreshed with tick data, they are refreshed with time-based data.  Therefore, time-based Ensign charts displaying Delta will only be truly accurate if the data is acquired in real-time.  To work around this issue Ensign provides a proprietary indicator called Buy Pressure and Sell Pressure.  Whenever part of a chart needs to be built from time-based data Ensign substitutes Buy and Sell Pressure calculations for Delta.  There is a noticeable difference between the two indicators that accounts for the charting "anomalies" that I observed.

Other charting software programmers will have their own rules and procedures for refresh data and will make assumptions as needed.  I think it is important for traders to understand how their software works and plan accordingly.

My plan is to slowly build larger volume-based charts for swing trading, eventually abandoning time-based charts altogether.  In the meantime I will use Ensign’s Buy and Sell Pressure indicators on 60 minute charts.  All my smaller "timeframe" charts are now volume or range based.  I keep a backup copy of all my chart files each day.  That way, if the next hiccup gets my feet wet, I can substitute yesterday’s chart files, and any refresh to get back on line will be within the six day tick-based limit.

As an aside Ensign with an ESignal feed is a very stable charting package.  I have talked about the inevitable "hiccups".  It turns out that I was causing some of my own problems until recently.  Howard helped me through those in the process of composing this memo.  Upsets should now be very infrequent, but when they do happen, I have a plan.

Conclusion:

Our trading group makes extensive use of Delta calculations from several different software providers.  I found it was important for me to investigate and confirm the potential issues that can affect my trading decisions based on Delta calculations.  I encourage others in the room to make sure they understand how their software and data providers work together so that they are looking at stable and repeatable representations each time they sit at the table with real money.

My Very Best Regards and Good Luck in Your Trading.

'I am back to using Ensign after using ~~~ for several months.  I don't remember now why I went to ~~~, but it was a mistake.   If there is something Ensign can't do, I don't think I have found it yet.  It is more powerful than ~~~, more user friendly, easier to program (whether using dyo's or espl). Backtesting is simpler and faster, and easier to find issues that need to be adjusted.'  -S. Geist  09-01-2007

'I am impressed with the leaps and bounds progress you are making in reduction of CPU usage.  EW has never challenged the available memory on these old P4 1.7 GHz machines. When the Index Futures volume surged in late July, the CPU usage immediately rose to intimidating levels.  Using the Beta version during the past two market opens have returned the CPU usage to the levels observed when
these machines were purchased 6+ years ago.'  -C. Clark  08-20-2007

'Just wanted to send a note to say thanks for the great service.  I've been a customer for about 3 years and could not be happier.  I had my first $12k day on Thursday while trading 5 different futures contracts and 3 different stocks.  It took awhile to settle in on the right workspace which now has multiple charts of different contracts and stocks.  As opportunities come up during the day it's easy to visualize them with Ensign.  The IB feed has also been flawless during all the volatility & volume over the last two weeks.  Thanks again for the great product.'  -H. Parrish  08-17-2007

'I am in about the 7th year of using Ensign and think it is one of the best charting programs out there, and more importantly I can contact you guys with questions and get very timely responses.   Your support is the best.'  -E. Naylor  07-24-2007

'I have been using Ensign Windows for over 2 years now and I'm still find that there are many features that I've yet to learn. You have truly built an excellent piece of software. Keep up the good work :)'   -D. Oh   07-18-2007