Box of Shark

First, I came up with this independently, but if you know someone else has already published it or something very similar, please let me know so I can give the appropriate credit.

Second, if you publish it then give me the appropriate credit. A link to this page or website certainly couldn't hurt.

Third, I've given you this indicator and how to calculate it for free. In the spirit of "you get back what you give out". If you come up with a decent way to trade with it, or a way to change it to make it better, you must leave a comment on this page detailing it. There's no being a Scrooge. In fact, it doesn't make sense - more people following your system will result in more people buying when you are buying, which should theoretically mean better results.

Fourth, comments and criticisms are welcomed.

---

Background

I came up with this indicator after reading about "Market Profile".

Essentially, when a new bar has closed, that close price fits into price area. For example, a USDJPY price of 114.23 fits in the price area of 114.20 to 114.24.

114.23 also fits in the price area of 114.20 to 114.29, 114.00 to 114.49, 114.00 to 114.99, etc. It all depends on the number of pips you decided upon for each price area.

A number of other close prices also fit within that price range. You add up the total number of "hits" that each price range gets, and that number is what you chart.

I don't think there's anything new yet.

Here's an example of a Box of Shark:
114.00 to 114.04: 1
114.05 to 114.09: 0
114.10 to 114.14: 0
114.15 to 114.19: 2
114.20 to 114.24: 2
114.25 to 114.29: 4
114.30 to 114.34: 8
114.35 to 114.39: 2
114.40 to 114.44: 0
114.45 to 114.49: 1

In total, the above example plots 20 close prices. That's the period for this Box of Shark. And the box size is 5 pips.


Theory & Interpretation

When you chart this kind of thing, the chart has 2 dimensions.

When all the prices are grouped together in a small range (i.e. congestion), the number of price ranges used becomes small, and the average becomes big. In the example above there are 10 price ranges, with 20 close prices used, so the average is 2. But if the last 20 close prices fell between 114.10 and 114.19, then there would be just 2 price ranges, with the average becoming 10.

The number of price ranges, or the average, could therefore be used as some kind of warning - either the number of price ranges shrinks (and average grows) and therefore we are in congestion, or the number of price ranges grows (and average shrinks) and therefore the prices have become quite spread-out and volatile.

The other dimension is the total number of close prices that fall in a price range. In the example above, 8 is the maximum, and 2 is the average. This could be used as a replacement for support and resistance lines - any price range containing more than the average (or more than a multiple of the average) could be considered as an area of support or resistance.


Trading Ideas

You can use a rising average as signs of congestion, which might keep you out of a trade you might have otherwise entered.

Conversely, you might want a declining average, as a sign of increasing volatility, before you enter a trade.

In either case, I don't think those two signals could be used independently to make trading decisions - more likely they would be used as a further confirmation before entering a trade based on your other rules.

---

As I mentioned, the number of hits in each price range could be used as an alternative to support and resistance lines. In our example, the price range of 114.30 to 114.34 has 8 hits, so if the last close price fell in the price range of 114.25 to 114.29, and you were looking to go long, perhaps you wouldn't.


Box of Shark Histogram

I was just looking at the rules I've already coded into Thinking Stuff to handle the Box of Shark. And I saw these two - "Box of Shark Histogram positive" and "Box of Shark Histogram negative". It was so long ago that I made this indicator up, and I had completely forgotten where the Histogram part came from.

Well, seems like I caught a MACD craze. The Box of Shark Histogram is calculated by taking a slow and fast average, of the average, and subtracting the slow from the fast.

Let's say the box size is 5 pips, and the period (number of close prices to chart) is 20, slow average has a period of 20, and the fast average has a period of 10.

Thus:

1. Construct the Box of Shark, with period 20 and box size of 5 pips.
2. Work out the average, which is the period divided by the number of price ranges that you end up with.
3. For each new close price, you will get a new average. So, do the above 2 steps until you have 20 average values.
4. Add up the last 10 averages, and divide by 10. That's your fast average.
5. Add up the 20 averages, and divide by 20. That's your slow average.
6. Box of Shark Histogram = Fast average - Slow average.

The Box of Shark Histogram is going to be positive when the Fast average is higher than the slow average.

What this means is the most recent averages are getting bigger. And averages getting bigger means the price is heading into congestion. All in all, not too much different to above, but perhaps a better signal than just using "one average is higher than another", because we are basing our judgement over many averages.


Naturalised Box of Shark

I also have rules such as "Last X B.O.S. Naturalised Average(s) Falling". A naturalised average just means rounding the average to a whole number. The average changing from 8 to 7, say, is a stronger signal than the average changing from 7.8 to 7.7.


Summary

Grouping the prices into boxes lets you step back a bit from the absolute detail of the price chart. This kind of thing is nothing new. It's used in Market Profile, and also P&F Charts, etc.

It's unknown whether the techniques above are going to be useful or not. Only backtesting will tell. At the least, they give objective ways to determine times of congestion and volatility, and of support and resistance levels.