Market Depth patterns

Wow - I didn't think I would get this much response in so short a time.

To take things a little further I use the depth on either side of the market, applying ratios and presented in a non-DOME like manner. I use this in conjuction to what I determine as upcoming (as well as previous) support/resistance in my charts and along with other indicators trade accordingly.

It's probably pretty crude and very unmathmatical compared to some of the papers I have attempted to read - some mentioned earlier by Science_Trader - and also compared to what you guys have come up with. However, it seems to work pretty well and I would love to know if there were ways to improve it.

Sorry not to spill the beans about exactly how it works but I'd like to keep something up my sleeve !
 
Futurestrader 71,

re: 'There are good reason why the market will trade towards size'.

Definitely size seems to act as an irresistable magnet (even if it is just because the fact that there is size there indicates it is viewed as a significant level by many).

I can think of some reasons like stop running/possibility of move from S/R breaking, or just getting filled instantly with size at a neo guaranteed price (i.e. price now vs time risk to VWAP), but there may be others that are no so apparent. If you can outline any others would be appreciated.
 
Trading to size is the way to go as big orders can have a set area they can already see to liquidate at. If you are trading big size you want a whole bunch of orders parked at your targeted profitable exit level to go and grab. You can use T&S and market depth to do these type of trades most of the time during the day. If you have a 1000 contract position LONG that you have pieced in just under (3 to 5 ticks away) an area of only 300 to 400 parked orders...how are you going to liquidate...you will need price to move more north to hit the next tick levels to grab those orders to get out (lowering probability). In other words...you want to see your exit (area to liquidate at) before you even go in.
 
A couple of thoughts on the subject of Bid/Ask Analysis:

First, I have been looking at bid/ask for a while now. Specfically I am looking at the frequency with which trades go off at the bid, or at the ask. If you think about it, there will always be a natural tendency for traders to want to jump on a trend in either direction. Some will be late, some early. Frequency of prints on the bid or on the ask accelerates as the trend progresses and moves to a climax point. There is a kind of avalanche effect that can be detected as prints gain momentum in either direction.

What got my attention is the claim (and I agree) that you will need a computer program to detect the changes. In my experience, a computer program that looks at the changes in ratio of executions by millisecond gets that job done. Even if you are very experienced, by the time you "see" it, you are going to be a little behind the curve. In my opinion, this is due in part to the effect of program trades on the market.

I appreciate any comments you might have. Regards, Lefty

By the way, I just scanned the paper "fluctuations and response in financial markets......." Seems to me that the qualitative difference between how market orders and limit orders "hit" the market are part of what I am saying in my comment. The power law referred to also correlates pretty well with my own observations.
 
Quote from Lefty62151:

A couple of thoughts on the subject of Bid/Ask Analysis:

First, I have been looking at bid/ask for a while now. Specfically I am looking at the frequency with which trades go off at the bid, or at the ask. If you think about it, there will always be a natural tendency for traders to want to jump on a trend in either direction. Some will be late, some early. Frequency of prints on the bid or on the ask accelerates as the trend progresses and moves to a climax point. There is a kind of avalanche effect that can be detected as prints gain momentum in either direction.

What got my attention is the claim (and I agree) that you will need a computer program to detect the changes. In my experience, a computer program that looks at the changes in ratio of executions by millisecond gets that job done. Even if you are very experienced, by the time you "see" it, you are going to be a little behind the curve. In my opinion, this is due in part to the effect of program trades on the market.

I appreciate any comments you might have. Regards, Lefty
More...

Great post on a surprisingly good thread. Yes, size trades to size. The size of the bid/offer is mostly predicated on how leanable the underlying basket is at that particular snap shot. It's not that the size is bogus it's just very temporary. I keenly watch many stocks so I know when the programs have the room to move. However coming from the floor I really never got that flow/feeling because I agree Lefty the REAL information is on what actually trades. I'm so myopic on the bid/offer that I just can't keep track of what's traded and in ES particularly there are so many meaningless trades 1,2,1,5,1 rapid fire on both sides that it's impossible to eye them quantitatively. I will look into a "counter". It's ironic. Volume and price. The two most important indicators are the least tracked by me because of the mechanical (by sight) reason you mention.
 
Quote from Lefty62151:



By the way, I just scanned the paper "fluctuations and response in financial markets......." Seems to me that the qualitative difference between how market orders and limit orders "hit" the market are part of what I am saying in my comment. The power law referred to also correlates pretty well with my own observations.
More...

And of course stops are the biggest "market" orders electronically.. When that first uptick trades "naturally" it's important to gleam how many stops are then auto-executed at that price as an indicator/sample of liquidation and or new commitment.
 
Quote from Lefty62151:


By the way, I just scanned the paper "fluctuations and response in financial markets......." Seems to me that the qualitative difference between how market orders and limit orders "hit" the market are part of what I am saying in my comment. The power law referred to also correlates pretty well with my own observations.
More...

It's always very pleasant to see that mathematical/experimental facts match some traders 'feelings' ;-)
 
Quote from mokwit:

Futurestrader 71,
If you can outline any others would be appreciated.
More...
AMT and others have provided some of the other reasons. On a very basic level, the nature of the market is that the maximum profit comes from the highest number of participants being "wrong". In other words, one cannot make money if the majority is "correct". This is basic Mass Psychology of the markets. It is often forgotten that this is a negative sum game and someone has to pay out for another to profit and both participants have to pay the exchange and clearer. Hence, the size may be momentarily correct, but it is often a counter-indicator. It all depends on the prints, so the tape (T&S) is extremely important if you scalp.

For example, if I'm long 40 Dax and prints come in on the offer during a breakout, I'm immediately looking for size to come in on the bid (as other participants try to go long or cover shorts). As soon as size does show up on the bid, I'm ready to hit it as soon as prints on the offer shrink in volume (naturally, it depends on where S/R is and other factors). Ironically, when size shows up in my direction, I become extra sharp and suspicious ready to get out quickly. The ER2 trades the same way often times: It magically goes to size.

As smaller traders bend over backwards to determine what an S/R level is with accuracy, participants who are trading size only look at those areas as zones. Hence, if I need to get out/in, as AMT indicated, I need to look for a zone that affords me the best liquidity. Therefore, I go to where the size is. Basic supply and demand.

Additionally, like you said in your message, often times, size has stops behind it. If one wanted to get short NQ and one knows they are queued well and size is backing them up, they wil probably have their stop a tick or two above the size where it is a bit thinner. This often causes the "avalanche" effect that Lefty discusses above when that size gets taken.

Again, my perspective is that of a scalper, so I'm sure others will have a different views.

Happy holidays.
 
It would be an opportunity of a lifetime to fly out and sit next to
FuturesTrader71, and watch him trade for the day.

Michael B.

On a very basic level, the nature of the market is that the maximum profit comes from the highest number of participants being "wrong"
 
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