Clarification regarding Depth Of Market trading.

[HolyGrailSeeker]

Previously reading one of the hall of fame threads about DOM method for trading. The poster claim that if for e.g there are more ask than bids in the ratio of say 2:1, it is more likely for the price to go up in the short term.

From my little experience, this is not the case? Reason being that if there are more ask than bids, it means there is a larger volume of SELLERS than BUYERS. Therefore it makes logical sense that in the short term if bid > ask, the price is likelier to go downwards as those who were "camping" at a higher price might than give up and sell at the lower bids. Also, since there are lesser bids, prices will more drastically shoot downwards as the liquidity is thinner, while it will occur resistance if there is a large number of asks. This is why a sell wall will work so well in pushing the prices downwards and prices will only go up quickly once this resistance is removed.

Can anyone explain to me the reasoning why more asks than bids will result in price going up?

 

[Robert Morse]

There is an old tape readers saying that the market gravitates to size. I think the old thinking was that if the market is not fading those large offers, the buyers are more aggressive and not showing bid. I honestly think that today there is very little value for most traders with DOM as many of those bids/offers outside the current NBBO can be automated and change before your can access them.

 

[qlai]

prices will only go up quickly once this resistance is removed.

I think you answered your own question.

 

[tommcginnis]

The poster claim that if for e.g there are more ask than bids in the ratio of say 2:1, it is more likely for the price to go up in the short term.

From my little experience, this is not the case? Reason being that if there are more ask [contracts] than bids, it means there is a larger volume of SELLERS than BUYERS. Therefore it makes logical sense that in the short term if bid [contracts]> ask, the price is likelier to go downwards as those who were "camping" at a higher price might then give up and sell at the lower bids.

Watch for a consistent pattern, first. (Before you attempt to explain it.)
There may indeed not be any insightful consistency. (Over, say, a 1min candle, observed over RTH over 2-3 M-F trading day cycles....)
When you believe you have seen a pattern, right it down, in some detail.
See if it holds over time.
*Then* when you have some patterns worth thinking about, run them through some Straw Man tests -- "If X explains the pattern, then Y should be an observable corollary."

(Having said that, ...)
In the market for index futures, it is not uncommon to observe contracts loading up on the side of where the market will go over the next 5-10 minutes, watching a DOM. (In fact, it is better than 50-50.) Since that loading can change in 30 seconds, though, it's best to be nimble. )

 

[bone]

Previously reading one of the hall of fame threads about DOM method for trading.

The only part of the DOM worth watching is the best bid and the best offer and what actually trades.

You'll find better risk/reward skews in other trading methodologies IMO. For example, try to find out the correlated factors that are moving the market you're interested in. HINT: it's not the shifting illusory bids and offers.

 

[TommyR]

agree agree. I would say there is a real effect here. Owners of barrier options, who don't want the barrrier to be hit are often traded by large punters who engage in this sort of thing since they believe they can 'defend barriers'*. These deltas are often massive. Soros for example defends his short usdjpy barriers by offering 500mm usd every 10pips for the last big figure, borderline illegal since you would never have slippage with a take profit order and if you were delta hedging correctly you would be doing it the other way round whilse the barrier is live. in fact its the banks hedging who keep the spot rangebound (they then unwind the whole thing though the barrier so it can often jump through, the cleints don't often hedge so don't have the offsetting order). *notable exception rennaissance in nikkei can defend barriers but you need to know what you are doing.

 

[bone]

I can't tell you how many times I've personally seen mega sized bids or offers get filled.

Brokers get paid on a per contract basis. Brokers get paid on fills, not on placed and cancelled orders. If they see size, they will shop it around to their whale clients. I've seen 10,000 lots trade out in the Eurodollars. I've seen 2500 lots trade out in the Bonds. I've seen blocks of 5 and 10 thousand CL trade on WebICE. While the minnows are racing in the opposite direction like cockroaches with the light turned on - the brokers are speed dialing their whales and shopping it.

 

[TommyR]

so the price goes up because large stagnant offers usually signify that there is someone who makes a lot of money if spot gets through those levels and they usually have much more ammo but are just waiting for the right time.

 

[bone]

so the price goes up because large stagnant offers usually signify that there is someone who makes a lot of money if spot gets through those levels and they usually have much more ammo but are just waiting for the right time.

No not at all. You have no way of knowing the purpose or motives behind a large order. Could be from a portfolio or commercial hedger just as easily as a big speculator. Could be from an arbitrageur spreading futures against the cash or physical markets.

Most large orders are done through ICEBERG fills. You'll never know by staring at the DOM like a zombie that Rosenthal Collins Group filled 5,000 ES for a hedge fund client injecting 30 lots into the order queue with automation. And volume footprint studies won't pick it up either.

https://www.tradingtechnologies.com/help/x-trader/order-types/iceberg-orders/

I once stood next to a floor broker in the Five Year Note pit who had an order from a very famous hedge fund client to buy a 5 lot at market every five minutes during the entire course of the day trading session. By the end of the day he had filled something like 3500 or so for the guy.

 

[qlai]

I once stood next to a floor broker in the Five Year Note pit who had an order from a very famous hedge fund client to buy a 5 lot at market every five minutes during the entire course of the day trading session. By the end of the day he had filled something like 3500 or so for the guy.

And that did not move the market? I though in the Pits everyone was watching everyone else.