The inside scoop

Something you could not know by looking at a standard bar chart is that during the first minute following the release of the employment number, the inside bid-ask prices changed more than 280 times — almost five times per second. Being able to see the action of the inside market immediately after this release is valuable as an example of market conditions traders might face when trying to execute a trade, either to enter a new position or exit an old one after employment data is released.

It shows a “TradeFlow” chart in which the individual bars display price action in terms of the bid ask spread. The lower panel shows the TradeFlow volume study, which shows the actual number of contracts traded at the bid or ask. In effect, a TradeFlow chart tracks the inside market rather than last price. The low of each TradeFlow bar is the best bid and the high is the best ask. The bars are colored based on the percentage of volume of trades executed at the ask price (green) vs. the bid price (red) portion.

For example, if the market was 1.2789 bid for 300 contracts, and 400 contracts were offered at 1.2790, the low of the bar would be 1.2789 and the high would be 1.2790. If a total of 100 contracts traded hands and traders bought 60 contracts at the offer price of 1.2790 and sold 40 contracts at the bid price of 1.2789, the bar would be 60 percent green and 40 percent red.

The width and brightness of each bar shows it relationship to typical volume. If the volume is high relative to typical volume, the bar will be wide and the colors will be bright; low-volume bars will be thin and darker. Thus, the bars highlight low and active periods along with emphasizing whether buyers or sellers are the aggressors.

The volume study lets you see the actual trading volume that occurred at the ask price (green histogram bars) vs. at the bid (red histogram bars). Using the preceding trade example, the green volume histogram bar would have a +60 reading and the red histogram bar would have a -40 reading. It shows typical trending action — the inside market is zigzagging upward, and for the most part the spread between the high and low of each bar is one tick. Notice during the period of sideways price action the bars tended to be a little wider and colored a higher percentage of green than red. This indicates that during the sideways movement traders were buying at support more than they were selling; the market subsequently pushed higher. If sellers had been more aggressive about hitting bids during this period, it would have cast doubt on the potential for another up swing.

Also, notice the solid red bars, which indicate that traders were only hitting bids. These bars tended to be narrow, and therefore indicated the volume was light not much selling pressure was hitting the market at these points.

Finally, with one exception, the volume study was dominated by tall green histogram bars rather than deep negative red histogram bars, confirming that throughout this trend, traders were more aggressively lifting offers than hitting bids.