Quote from BKuerbs:
This is a phenomenon you will see quite often: one side is much larger than the other, say, like in the example you watched, it is the ask side.
People think now, market should drop, because it takes much less effort (contracts) to push it down. Not so: the ask side being much larger usually means, sellers want to sell at their limits, they do not want to hit the bids (sell at market). And this means bidders have to step up their bids (take the offer) to get a fill; result: the market rises.
DOM is just another arrow in your quiver: you should use it only in the context of the whole situation and then it will start to be useful. The most important thing is, to recognize when to ignore it. How to get there? I do not know, experience probably is the only way.
Have a nice weekend
Bernd Kuerbs
Hey Bernd, who sent you a PhD on the the whole cumulative depth volume theory?
I have since come to a lot more in-depth conclusions about cumulative depth etc, i.e. have widely expanded my research there and discussed it with someone very versed at this indeed. Yet, Bernd, I'm still waiting for a relative cumulative volume display feature to be built into our favorite trading platform...
To all those who don't get any of this: Most people have not the faintest idea about this. Cumulative depth volume is a leading indicator! Whenever one side of the market is larger, that is where price has to go. Most people think it's the other way 'round, thus lose. Reality is, more sellers = price goes up (buying energy), more buyers = price goes down (selling energy). I wrote a very intricate analogy about this a while ago but I think it went by rather unnoticed, since rather un-understood, like apparently most of the stuff I write about on ET, anyway:
http://www.elitetrader.com/vb/showthread.php?s=&postid=304132&highlight=bacteria#post304132
So, you'll ask now, how the heck can it be this way?
Well, as a matter of irony, it MUST be this way! Otherwise a minority of people couldn't be making money off a majority, and the futures game wouldn't be worth playing for anybody! Clearly, the majority always has to be "on the wrong foot" in order to make this game a game. Does this make sense? It's nothing but perfect logic. Yet there's still so many people believing a fat ask means price goes down and vice versa...
OK, there's several reasons. I've written essays about this, but these are off the top of my head, here in illustrated for bullish moves:
- There must be more sellers than buyers in order to host a nice, fast raise that's profitable to a low number of bulls. (= buying energy)
- Exchanges and brokers profit from volume, not trade outcomes
- The market always follows the path of the most volume, in order to make a minority profit from a majority (and the brokers & exchanges)
- The really smart market participants know all this, and they hunt for volume. Then they hunt for stops as an extra bonus
- The smart players (hundreds or thousands of contracts) also tend to "load" their side of the market with fake volume, to further amplify this effect. As price comes closer, the volume suddenly "evaporates" from the "fat ask", and ON TOP OF THAT gets entered in the opposite direction via market orders! The effect of this needs no explaining.
The market always follows the path of the most volume, in order to make a minority profit from a majority (and the brokers & exchanges). This is perfectly congruent with the P/V relationship on a price chart, too. More volume, price continues, less volume, price stalls and goes the other way. Or how do you think an uptrend could happen on rising volume unless the ask was constantly growing over the bid? Clearly, you have to have a growing number of sellers in order to have growing buying volume. Somebody has to sell in order for these to buy. At some point, volume will stall, because the majority is convinced it's going up now and doesn't want to sell anymore. At this point, the bid will also be pretty fat, and probably much fatter than the ask... Time to turn around and screw the crowd the other way again (now selling, hitting the dumb, fat bulls). Sounds cruel, but that's the volume reality of the market most people never understand. I trade like this pretty much all day long.
Using a DOM display that visually displays depth volume, the way professional platforms (ButtonTrader, X_Trader) do, you can very "graphically" hunt for the volume all day long. You just look at the screen, see where the volume is/was and fire at it.
Always take out the naiive and weak crowds and squeeze them hard, until they're stopped out, then you can turn around and go the other way again (to make extra profits from the undisciplined revenge traders / stop-reversers as well). Think you aren't powerful enough to squeeze the crowds? Don't worry - you'll have plenty of help from the big pro's...
Rule #1: Never follow the crowds. Always fade them. You either sell the tickets to the show, or you buy them!!! No compromise...
I think this volume stuff is more useful information than I should even be revealing on a public forum like this for everyone to see. But why not give something back? Have fun with it, and have a good think about it. Good trading to y'all!
Scientist.
