Depth of Market Trading

[gaussian]

I have seen a few posts now on this and realized I don't know enough about it. I've spent around an hour total (amazing, I know) watching some videos on this. I've learned quite a bit and it seems to me that this was the way that pit traders more or less worked. I trade relatively systematically in small lots on the ags and MES now that I've moved to AMP futures (thanks everyone). I found watching the order book allowed me to take the signal I received from my system and try to get an idea of where the action in the market might head. I really only have a high level idea of it though.

I kind of just wanted to open up a discussion on it. It seems like there is real edge in it in the lower time frames (hi @padutrader) and is quite possibly the only way to trade these lower time frames with any sort of edge (that I can see).

For people who worked the pits:

Is order book/DOM trading pretty close to your experience? How would you say trading the order book is vs. trading the pit?

For people who trade the order book:

Is there any place where I can find some kind of tutorial or guidance on the basics? I'd maybe be willing to throw some small amount of money (say $1000 trading 1 lots MES on some small time frame) just to pay some tuition and try it out. I'd like to learn more about this. It is interesting to me.

For everyone else:

Why or why not do you believe that order book trading works?

 

[maxinger]

Quite a few former pit traders use order book.
And they have been struggling perhaps because of HFT and also orders might not be genuine.
Why they don't use charts? Because they don't know .

 

[emojitrading]

Once you start trading MES, don't chart or read the DOM on MES, read the ES contract. MES stays close enough to ES that you will be in a better place by analysing the traded volume and liquidity from the more actively traded e-mini contract.

There are many youtube videos on trading the DOM. Look for material from Peter Davies/Jigsaw Trading; John Grady/NOBS Trading. In my experience, most DOM traders are in reality looking at:
- volume profile and traded volume patterns of the session or the immediate near term history (that can be reset in the DOM). This is analogous to looking at a footprint chart of a similar period
- changes to liquidity in the order book. Is large liquidity in place at particular levels? Is this made up of large orders (you'd need level 3/CME Market By Order visibility to see this - currently only available on a limited number of platforms, e.g. TT XTrader's order grid and MotiveWave v6 DOM using Rithmic data). Is resting order volume being added (stacking) or removed (pulling)? Bookmap's heat map and similar implementations in other trading platforms provide a different more linear way to visualise this activity
- how related markets (e.g. all the equities ES/NQ/YM/RTY; all the bonds: ZB/ZN/ZF/ZT) are moving as a group. Can you get clues relating to the above in a given related market that provide insight to the market you are trading.

There is lots of material out there demonstrating it. Not so many people adept at explaining it, in part because it is real time and moves quickly! This is where the heat map visualisation can help you understand the concepts as you can see changes over time, however, it's a lot of visual noise too when one is trading.

Start by understanding the hows and whys of price movement - how market orders consume liquidity:
https://www.emojitrading.com/docs/order-flow-basics/what-do-we-mean-by-order-flow/introduction/
Once you have this nicely embedded you can start to interpret more about the implications of changes in liquidity that you see in the DOM and also the implications of the volume that has actually traded.

Some other good background reading to get the key concepts down before you start staring at the DOM:
https://tradeproacademy.com/level-2-trading-professional-traders/
https://tradeproacademy.com/order-flow-the-professional-traders-secret/
http://www.ranchodinero.com/2017/01/order-flow-and-traded-volume-a-crash-course/
http://www.ranchodinero.com/2017/10/order-flow-a-crash-course-part-2/
https://tradingthetape.com (read the 'Think Like A Pit Trader' section)

 

[qlai]

Why or why not do you believe that order book trading works?

Because, all games aside, to profit directionally one needs to actually get into position and get out of position.
Below is from pit trader:

One thing I would add is that while the concepts maybe the same, some instruments lend themselves better to this kind of trading than others. In my opinion, liquid Futures are very hard to read with DOM alone.