New to DOM reading, some questions and advice please

[qlai]

PRICES that overvalue an instrument are quickly rejected by the marketplace.

Defining "quickly" and "rejected" is the hard part, no?

 

[bone]

Defining "quickly" and "rejected" is the hard part, no?

Not hard at all - those are the price ranges that last seconds; not minutes or hours or days. On a chart they appear as a “long pole” bar or candle. They almost always occur after an economic release or market moving event. To trade them, you have to be very fast and you will have to step out and hit a bid or lift an offer. My personal best trading day ever was courtesy of a five second span of time immediately after a US Civilian Unemployment Report.

 

[Z2TT]

Hi Bone. How do you anticipate or catch the top of a quick spike like that that sucks right back. I've seen them a lot. Trading them will require a tight stop loss. That's the issue I have. They look great once they've happened, but in the live then and now when I see it shoot up, do you wait for it to momentarily stall right after spiking, or enter on the close of that candle if price is still high at time of close

 

[bone]

Hi Bone. How do you anticipate or catch the top of a quick spike like that that sucks right back. I've seen them a lot. Trading them will require a tight stop loss. That's the issue I have. They look great once they've happened, but in the live then and now when I see it shoot up, do you wait for it to momentarily stall right after spiking, or enter on the close of that candle if price is still high at time of close

Typically you have to anticipate it (like an economic release) and have a resting order well away from the market. And a pair of stones.

 

[Z2TT]

Is there any specific rules or parameters you follow. Do you compare it to previous times it has happened, or perhaps a ratio of how far the "spike" candle is from the current trend?

 

[bone]

Is there any specific rules or parameters you follow. Do you compare it to previous times it has happened, or perhaps a ratio of how far the "spike" candle is from the current trend?

Yes - know in specific detail the daily trading limits (points, tics) for the instrument you are trading. That way, your counter party or the exchange can't nullify the trade.

 

[Z2TT]

Interesting.

Is there anyway the DOM can help in this situation? Would we sometimes see a certain price level firming up with lots of limit orders ready to smash it down, or will these generally be market orders which immediately bring the price back to normality ?

 

[bone]

Interesting.

Is there anyway the DOM can help in this situation? Would we sometimes see a certain price level firming up with lots of limit orders ready to smash it down, or will these generally be market orders which immediately bring the price back to normality ?

Severe price dislocations have extremely short lifetimes measured in a few seconds and sometimes fractions of a second. And they are rare. And modern automated trading systems will be much faster than you ever could dare to be sitting at a desk with a mouse in your hand staring at a computer screen. And those same automated trading systems in my opinion make DOM reading somewhat antiquated and unreliable.

The DOM is not a panacea for good tradecraft, and the DOM is not a wellspring for some sort of 'holy grail'. You need to be wary of 'rabbit holes', and the DOM is possibly such a trap. In other words - you can get sidetracked for a very long period of time on things that ultimately prove to be a dead end.