Market Depth patterns

FuturesTrader71,

Just wanted to say -- an exceptionally thought-provoking thread so far, indeed. Really appreciate your (and others') in-depth contributions. Can't wait for that video from you some time next year... hey, no pressure! :)

What I've been wondering is -- to what extent would your scalping methodology lend itself to a typical retail trader's setup? You know... standard broadband connection, DSL and/or cable, with latency in a few hundred ms range; a trading platform perhaps not as high-end as X-Trader, although still expressly designed to facilitate rapid scalping, such as the remarkable ButtonTrader; ~$5 / RT commissions; and so on.

For the sake of simplicity, let's assume that the human element remains intact -- it's still you, or one of your traders, in the driver's seat. (That's a huge, key assumption, I realize.) From your perspective, what % of your edge, roughly, would you be able to retain, under those "adverse" conditions? In what ways, if any, might you need to modify your methodology?

Thanks very much,

late apex
 
Couple of quick comments relating to longs (for shorts just reverse what I am saying) Initially, the offer has to be bigger than the bid because there has to be a "ladder" for price to climb. Also scalpers should be aware that it is the FREQUENCY with which bidders are willing to leave the bid and lift the offer that constitutes momentum and accelerates the market's upward movement. So two things are necessary for a market to move up. One is the number of bids has to increase below the offer. Two is that number changes (decreases, then increases) as bidders abandon the bid and lift the offer. This creates an effect that I call "avalanch" effect. As more bidders leave the bid and lift the offer markets start to climb. As bidders see this train pulling out of the station, they scramble to get on board. At some point everyone who wants to go north has "got on board" (paid up). The rest of the traders stop because they believe they have missed their entry. I am using ButtonTrader to see the action, but I have also demo'd MarketDelta. Whatever way you get there, ultimately you have to develop your understanding before you can see the action and make sense of it. That last scramble to lift the offer is the buying climax. I hope this provides some value to the discussion. Regards, Lefty.

 
Quote from late apex:

For the sake of simplicity, let's assume that the human element remains intact -- it's still you, or one of your traders, in the driver's seat. (That's a huge, key assumption, I realize.) From your perspective, what % of your edge, roughly, would you be able to retain, under those "adverse" conditions? In what ways, if any, might you need to modify your methodology?
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I'm glad you are finding some ideas in this thread.

I would say that those "adverse" conditions would be detrimental in my case. Part of my edge is my ability to demand the lowest possible commission in order to minimize cost for volume. While others might trade less, use stops and have a fully backtested plan, I rely more on the DOM, tape, flow and momentum. With a high latency, high roundturn cost and assuming that my orders get submitted to the exchange as fast through Button as X-Trader, I would be forced to find another method. Honestly, I don't think I would last a month with $25,000 in margin trading the way I do under those conditions. That is a huge % of my edge. Part of the reason to trade volume is to minimize cost and maximize participation in moves. This wouldn't be possible for $5 per turn. My cost per turn is much much lower than that. I would also need to trade a product with a much higher tick value to be profitable trading the way I currently do.

One of the main reasons I'm on ET is to discover what others are doing to be profitable without rely on speed and low commissions. I need to have a secondary system trading on a longer term basis. Dbphoenix, Acrary and others have provided some good starting points in their threads.

PS: This thread has been a great distraction for me while I sit on my butt all day doing year-end financial stuff and planning for next year. Thanks to all.
 
Very interesting thread. My compliments to all of the participants.

I thought I would like to draw a few distinctions here. First let me say that I'm biased....I'm not really a believer in scalping per se. Been there done that from both the floor and off the floor. For a screen trader my belief is that there are bigger fish to fry.

That said, I watch market depth in the ES daily, along with many other things. My opinion is that the market depth is the least useful thing that I watch. Now, before I ruffle any feathers, let me just say again that I'm not scalping per se. But I continue to watch the market depth because it does give some clues out from time to time....but I rarely would make a trade on this information alone.

It seems to me that one of the underlying assumptions that one must make regarding market depth is that the ES (if that's what you are trading) is more important than the underlying index and various stocks/sectors, all of which are trading independently, with their own bid/asks, their own size configurations. I don't buy that assumption. In fact, my techniques rely on judgments that I make from the various sectors/ stocks that make up the basic movements that drive the index. Many times futures led moves are failure type moves in my experience. This last statement is not 100% true...alot depends on the context, but suffice it to say that the futures in the end cannot move without the underlying cash, which cannot move without key stocks, unless you are talking about small movements that some of us might call noise.....a quick point or two that terminates abruptly because their was no underlying move to go with the futures.

I also watch the trades taking place at the bid/ask. Again, most of what I just said I believe also applies to the size. I think we can say for sure that every important move is probably kicked off by some size trades at the outset. Unfortunately, so are lots of unimportant (to me) moves.

A point made above is that speed and costs are critical to a successful scalper. So assuming you have the latent talents, you better also have a first class, and low cost setup.

Fortunately, it is not necessary to be the fastest gun in the west, nor is it necessary to have the lowest cost. But you do have to understand what game you're playing, and then bring the talents and advantages that you possess to bear on that particular game.

Again, my intent here is not to ruffle feathers, but to simply put out a different viewpoint.

OldTrader
 
I have always enjoyed your posts. In reference to this clip from your post:

Many times futures led moves are failure type moves in my experience. This last statement is not 100% true...alot depends on the context, but suffice it to say that the futures in the end cannot move without the underlying cash, which cannot move without key stocks, unless you are talking about small movements that some of us might call noise.....a quick point or two that terminates abruptly because their was no underlying move to go with the futures.

Could one plot this difference and when the arbs equalize the futures through buying and selling and other traders jump on that might cause the imbalance and the futures get ahead of cash abnormally and not what the arbs intended, could this create 2 or 3 tick opportunities for the retail trader on the reflex action?

Michael B.
 
Quote from ElectricSavant:

Could one plot this difference and when the arbs equalize the futures through buying and selling and other traders jump on that might cause the imbalance and the futures get ahead of cash abnormally and not what the arbs intended, could this create 2 or 3 tick opportunities for the retail trader on the reflex action?

Michael B.
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Michael:

Understand first of all that I don't view 2-3 ticks as an "opportunity" for the retail trader. This just is not where my head is focused at all. Granted, if this occurence happend in connection with a trade that had a bigger objective, and allowed you to get started with a couple of ticks advantage...hey, that sounds great. But honestly I don't focus in this direction at all. In fact, even if I thought I might be able to scalp a couple of ticks I don't for fear that I will disturb an existing position, or I'm miss the forest while I'm focused on the trees.

Now, let's say I'm bullish on the market for some reason, and a downward move takes place which I believe is unsupported by the underlying key sectors/stocks, I will probably use that as an opportunity to buy...but not for a couple of ticks. The reason is that if I'm right, the move was unsupported, when the scalpers, etc all figure out that the move is going no where, and close their positions, it's going to move alot farther than a couple of ticks.

Besides, if you're trading for a couple of ticks what type of risk control do you use? I would find it next to impossible to use a tick or two as a stop.

OldTrader
 
Since the topic is scalping. Does anyone have the calculation or website that would provide me with the fair value of the DAX futures?

Do any of the scalpers out there think fair value is important in scalping the DAX?

Have a good New Year!!
 
Quote from OldTrader:

[....]In fact, my techniques rely on judgments that I make from the various sectors/ stocks that make up the basic movements that drive the index. Many times futures led moves are failure type moves in my experience. This last statement is not 100% true...alot depends on the context, but suffice it to say that the futures in the end cannot move without the underlying cash, which cannot move without key stocks, unless you are talking about small movements that some of us might call noise.....a quick point or two that terminates abruptly because their was no underlying move to go with the futures.
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You are absolutely right. You are hitting on the basics of futures trading. I am making the assumption that those who trade futures understand how to make up the index using its underlying stocks, apply cost of carry and dividend effects and understand the major components of it. I also expect the trader to have a detailed understanding of the product's contract specification. If not, then one is asking for trouble.

Although your comments are absolutely right, when scalping, I don't find it particularly necessary to pay very close attention to the underlying. If you calculate the index using the underlying and overlay that over the futures contract, you will find that the relationship changes all the time during the intraday session.

For example, the Dow Jones cash is updated by the exchange every 2 seconds, so it is fast enough to watch without having to rebuild the index using the 30 stocks. Now overlay that symbol with the YM and you will see the relationship interaction every 2 seconds.

Like you said, in the end, the futures have to follow the underlying because that is what they are based on. However, for scalping, where market depth patterns are one of the main focuses, one can get away without watching the underlying. It is important to develop that ability over time though. Some of the best opportunities happen when the futures and underlying are out of wack and machines/arbitrageurs trigger volume to close the gap.
Fortunately, it is not necessary to be the fastest gun in the west, nor is it necessary to have the lowest cost. But you do have to understand what game you're playing, and then bring the talents and advantages that you possess to bear on that particular game.

Again, my intent here is not to ruffle feathers, but to simply put out a different viewpoint.

OldTrader
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Again, you are absolutely right. Speed/low cost gives one an advantage but not if it is misdirected. My method of scalping is not something many people succeed at. This is why I put an emphasis on mentoring and my initial margin for each account is required to be high. Unless one has access to a high-end setup and very very low latency, then it is difficult to get out ahead.

A very much enjoyed your posting. Best wishes for the new year.

PS: It takes A LOT to ruffle my feathers, so please throw out your thoughts, advice and ideas freely.
 
Quote from sean606:

Since the topic is scalping. Does anyone have the calculation or website that would provide me with the fair value of the DAX futures?

Do any of the scalpers out there think fair value is important in scalping the DAX?

Have a good New Year!!
More...
You need to learn to calculate fair value for yourself because there isn't really a website that does it frequently enough to be useful.

Please bookmark this link to the Deutsche Boerse which shows the underlying and their weightings on the index:
http://deutsche-boerse.com/dbag/dis...tesDoc=/maincontent/Kennzahlen+DAX&expand=1.1

There is a full handout on calculating the index correctly. I will try to find a link to it. If you have futher questions, please PM me or post your question at the Eurex forum. There is a thread on this already.

Good luck.
 
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