madspeculator

Humbled: There seems to be an unverbalized assumption in the posts of a few traders that, on surface, seem to suggest an existence of a difference of opinion in the suggestions given to you by traders. One poster even went to the extent of noting this [non-existing] difference by implying one set of suggestions are better than others. The way I see it is that we all seem to have the same end-goal in mind. However, we are going about it in different ways. On the one hand, some have suggested that you should start by watching T&S [a.k.a DBPhoenix’s rule “observe price”] and use that as a base to build everything. This is absolutely necessary if you are scalper. There is no way around it. If you want to scalp you should seriously consider John Grady’s product. [Disclaimer: I have no affiliation to him] On the other hand, if you are a intra-day position trader, or a swing trader, although you can build everything from watching T&S, there is another option: You can identify some points of reference first based on previous day’s activity, VWAP, PoC or based on extremes of some intra-day bar, etc and watch T&S around that point of reference as a starting point [a.k.a Modified DBPhoenix’s rule “observe price around reference point”] and build everything from there. [ This is what I do; and if you have read market wizards, you will find a few who follow this option ]. Although price does not move based on bars, the net effect of the order flow is captured in the summary statistic called the bar; however, a lot of good information is also lost in that summary statistic. But as a intra-day position trader or swing trader, you are only concerned with the price action around extremes. Either way, the end-goal is to determine if price has the “strength” to proceed in the direction you expect it to move. You said: No one can predict what price will do next. The best we can do is to determine if price has the conviction to move in the direction we expect it to move. Don’t fall into the “prediction” trap. This probably will be my last post. I have offered you everything I can possibly offer in terms of advice. I have a rule not to give advice on how to trade: that, I believe, is something a trader has to discovery for himself. I wish you all the best in your quest for consistency. -MadSpeculator.

Humbled: You said: There might be difference on "how" (the specifics of how to do it) but I believe the "what" (what should be done) is the same. Don't just concentrate on the "how" but abstract it out and get to the "what". I have given you the "what", with a suggestion to help you try the "how" (using the 30-min bars). Enigmatics has given you the "how". Keep the distinction in mind. The difference between how and what is this: how is the equivalent of "giving a man a fish"; the what is "teaching a man to fish". "what" will eventually help you develop your own methodology. Whenever you learn or review a trading methodology always ask "what are they trying to achieve". This will get you to the "what"; the only way to increase your knowledge. All the best! -MadSpeculator.

And Humbled, what Enigmatics had to say above is the hallmark of a "consistent" trader! -MadSpeculator.

Humbled: A few more thoughts for you to consider (in general on trading): DbPhoenix is response to my post said Although valid in principle, this statement is loosely formed [and when it comes to trading, as in any other profession, loosely formed sentences creates more confusion than clarifications they provide]. For example, a scalper might see the prices moving UP, whereas, as a intra-day position trader, I might see prices as moving DOWN; and both of us could be right! So, what is missing in the above statement? A point of reference. So, the above statement should have read: The central question remains, again, whether price is going up or down with reference to a trader’s point of reference. So, the question arises as to what this “point of reference” is? A point of reference is that price from which you determine the trend (see the definition of trend in my first post on this thread). Some call this reference point as support or resistance, and some as Point of Control, etc. As a trader trying to understand market action, you need to do the following: Wait for price to reach a point of reference. Observer if price is accepted or rejected there. That gives you the trend for now; Once you determine the trend, determine the next target (a future point of reference). This is the target you expect the price to reach. If the price reaches that target, observe if that target accepted or rejected; this will determine if the trend persists or changes; Always monitor for trend change before the target is reached (i.e., price fail to reach the target). As you can see, the process is simple: you determine the trend, next you determine a target, observer what happens at the target (or if price fails to reach the target), and the cycle continues. Trading from this stand point is very simple; however with a big qualifier: you need to know how to (a) pick points of references; (b) monitor price to determine acceptance and or rejection at the point of reference; and © determine when a price failing to reach a target is really that as opposed to a temporary reaction. As a debutant trader, (a), (b) and © are what you are trying to observe. This is the “feel” for the market. In suggesting to use the 30-min bar, I have removed (a) from the list of things you have to do -- you have points of reference easily identifiable. You will have to concentrate on (b) and ©. Once you develop the ability to perform (b) and ©, then you can come up with your own (a) using whatever logic that appeals to you. I have studied Wyckoff including taking courses offered by SMI. I have studied John Durrand whose series of articles in the “ticker tape” and “the magazine of wall street” is the bedrock of Wyckoff’s ideas. I have studied VSA, a derivative of Wyckoff. However, I found Wyckoff very subjective for my taste. I have studied Market Profile with Steidlmayer in person; again the same problem. Whereas with Wyckoff I was, in principle, in agreement with Wyckoff’s theory, I cannot say the same about Steidlmayer’s. I have studied an underground classic: a series of newletters published by a price action trader, Joseph Hart, between early 90 and early 2000s. However, I found objectivity in Hayek’s work on complexity and in Brian Arthur’s work -- not the route you would expect a intra-day trader to take; but to each his own! I combined their work with the ideas of George Douglas Taylor (not his methodology but his ideas) to develop, what I consider, an objective trading system. My in depth analysis of Fisher’s ACD methodology might have also played a role in developing my trading system. The reason I am telling you all this is because before you go ahead and try to develop a trading plan you need to subscribe to a theory that justifies your trading plan -- for me it was the class of patterns I was looking for based on what complexity theory had to say. Please don’t try to shoot from your hip here; take your time. You are most likely to become consistent when you can objectively pick (a). However don’t stop there. Once you are comfortable in determining (a), you will notice something very odd -- the market does have a pattern! Remember (a) are the trees in the forest, and your ultimate goal is to map the forest (determine the pattern). This will definitely be a “zen” moment! You will never look at trading the same way you look at it now. Trading is really boring and unexciting when you reach this place and I can vouch for that! And remember, please don’t waste your money trading before you have a solid trading plan. All the best! -MadSpeculator.

DBPhoenix: I know you are a revered member of the TL community and a lot of struggling traders value what you have to say. So, when you say I feel you are doing a disservice to all those traders. Not knowing how you define “complex”, I can’t comment on it; but all financial markets are complex systems (see the characteristics I have outlined in my earlier post in this thread; also refer to Hayek’s essay on complexity). However, saying that a market is “extremely simple” is misguided. The right analogy is not of a simple produce stand, but one of multiple produce stands in close quarters all vending the same products competing for customers and making inventory decisions. There is nothing simple in the dynamic of each produce stand. But, the aggregate patterns that emerge out of that “system” is indeed simple. The above might seem like nitpicking on detail, but the implication of this differentiation is very important when one is trying to “observe price with intent” as you have said elsewhere before. Not everything said in a messaging board is bullshit, although for both the ignorant and arrogant it might seem so! Humble: I am sorry to have hijacked your thread. I will refrain from commenting on other people's post henceforth. -MadSpeculator.

Humbled: I rarely post on TL but wanted to share a few of my thoughts in the hope that it might be of help to you as you decide your next steps. Your effort is applaudable; however, you have expended all your effort in what is the most difficult methodology in trading -- trade based on price patterns. I know of no [yes, I said no] CTA or traders, who make a living, that trade based on “pure” price patters. Unfortunately, most of the debutant self-teaching traders trade price patters and they fail. Why is trading price patters difficult? In my opinion, there are two reasons for it: Financial markets are complex systems. The characteristics of a complex system are: the behavior of any individual market participant is independent of the aggregate behavior of the system; they consistently produce classes of patterns, but it is impossible to predict when an instance of a patterns belonging to a class might occur, or the exact pattern of that instance. For example, during the tech bubble everyone knew there will be an impending correction (a class of pattern), but predicting when that correction would start (instance of a class of pattern) or how the pattern would look (exact pattern of the instance) was not possible; Given that instances of a class of pattern are dissimilar, it is impossible to describe them algorithmically. This has a huge implication on using statistical methods on price and volume; The statistical methods should be used only on classes of patterns generated by the system; but I digress. Patterns occur at different scales: micro, macro, and everywhere in between. [*]Price pattern is a first order abstraction of order flow. I define order flow as the result of the effort made by “buyers” and “sellers”, each trading to fulfill their objective (whatever that objective might be). A Price patterns is a visual instance of a class of pattern. It is impossible to predict when they might occur; and no two price patterns belonging to the same class of pattern are similar. Since price pattern is a first order abstraction, a price pattern can be “confirmed” only ex-post. Based on my reasons listed above, the only way to trade “pure” price patterns is (a) mechanically; and (b) relying solely on probability and money management to extract profits from the market. However, because of 1.b and 1.c, this methodology of trading is very difficult and traders who follow it usually fail or alter the methodology. Fortunately, modifying a methodology based on “pure” price patters is relatively simple: Filter your trades based on trend. However, trend should not be based on price action as is always suggested in books [if you do this, you end up introducing a second order abstraction]. Trend should be defined as the direction of price movement conditioned on the price action around the last identified target [e.g. support or resistance level]. The above definition of trend introduces a very important class of pattern: Price action around key support or resistance levels. These patterns occur often, are very tradable, and provide a good reward-to-risk ratio. Furthermore, we are not interested in the exact pattern of the instance of this class of pattern, but the outcome: are the support or resistance levels accepted or rejected; and we update our strategy based on that outcome. Almost all CTAs and traders who make a living trading trade based on these class of patterns [examples include scalping for a few ticks based on “reading the tape”, intra-day position trading using order flow (this, by the way, is my style), trend-following, or swing-trading]. Identifying trend as defined above will give you the “feel” for the market other traders are taking about. Although Thales has done a fantastic job of guiding you, I have to disagree with his latest suggestion that you take a sabbatical from the market. When DbPhoenix talks about observing price, and noting repeated behavior, he is not taking about price patterns -- He is a wyckoffian, and Wyckoff warned his students against trading price patterns; I am sure DbPhoenix heeds to his teacher’s advice. So what does all the above mean to you? Here is a plan of action (given that you are an intra-day trader): Do not turn-off the chart and look at T&S as you are being advised. You will go crazy. There is a easier transition; Set your chart to 30-min bars. An obvious pattern you will notice is that price goes above the high of the previous 30-min bar or below the low of the previous 30-min bar. Lets exploit this pattern and try to define the trend based on what happens around those points. Look at T&S as price approaches/penetrates the previous 30-min bar extremes. You are looking for patterns that signals acceptance [which means price will continue in that direction;] or rejection [which means price will reverse AND head towards the other extreme of the 30-min bar]. Also take note of conditions [T&S patterns] when price is rejected at an extreme but cannot make it to the other extreme of that 30-min bar. Sometimes, the current 30-min bar becomes an “inside bar” relative to the previous 30-min bar, in which case, you don’t do anything. Do this for couple of weeks, and you will get a “feel” for the market. Build on what I have outlined above. You will also notice that you will find entries that are different from the price pattern based entries you currently use. When you reach this stage, you have all the tools you need to reach the elusive “consistency” you are seeking. And you will never question “if everyone who becomes consistent can see behind the curtain” for you, my fellow trader, will be “seeing behind the curtain” too. All the best! -MadSpeculator.

Numerous books, websites, and “trading gurus” [correctly] prophesize the relationship between trading profits and trading plans. Although they all clearly and eloquently list the ingredients of a trading system: Risk Management, Exit, Entry, etc., there is no article that this author is aware of which talks about HOW (i.e., the process) to develop a system and the areas where one should focus when performing ORIGINAL research or where existing indicators might fit within the grand scheme of things. This article is an attempt to fill that void. The author wishes he had access to such an article when he was a noob many many years ago. For a seasoned trader, everything in this article will be obvious, for she has internalized all these steps. However, for those struggling traders and noobs, this information might be beneficial. Note: To this author, a trading “system” or a trading “plan” are synonymous. Hence the words “plan” and “system” will be used interchangeably. Bias: We are all speculators. Unlike hedgers, our reason to engage with the market is based on our opinion of the market -- for outright traders it is our opinion on market direction; for options traders it could be market direction or lack there of, or volatility; for spreaders it is the direction of the spreads. Our opinion or bias can be derived from fundamental analysis, technical analysis or a hybrid of both. Note: The definition of technical analysis is debatable with the “holier than thou” quants insisting that mathematical models based on price-action and/or volume are NOT technical analysis. However, according to this author, anything that is not fundamental analysis IS technical analysis and that is the definition used in this article. This author practices technical analysis as per the above definition even though he uses mathematical models based on hetrodox economic theory. All trades should be motivated by a trader’s bias. Hence, the first order of business when developing a trading plan is to objectively measure a trader’s market bias. Numerous indicators exist that provide a basis for a trader to establish her bias. Should the trader not be happy with any existing indicator, then the trader should develop indicators to objectively measure her market bias. The identification of Bias can be dynamic (i.e., identified as the market evolves) or static (i.e, based on previous price action). The complexity increases as one moves from static to dynamic identification. Practical Note for noob: The old trading adage “Trend is your friend” is very true. However, should you decide to engage in original research, don’t limit yourself to identification of “trend”. This author trades outrights based on the author’s bias on price volatility and volume distribution. Stop, and Exit: Once you have identified your market bias, you need to identify the following: Stop area; Exit Criteria; The easiest of these areas to identify is the Stop area, yet many noobs and poorly capitalized traders choose a “bad” stop area only to see their other wise good trade prematurely stopped out. The key to selecting a “good” Stop area is to select a support/resistance that is properly formed and is visible to a higher time frame. A noob should reread the previous sentence and reflect on it: think why that is important. Such a selection of Stop area would allow for a smaller position size than a trader would want but it will prevent premature exits. As a trader gains experience in understanding market dynamics, she will seldom let price reach the Stop area. The identification of Exit Criteria defines you as a trader. This is the reason why one finds numerous articles and books on entries and not much information on exits. Research exits based on your tolerance and personality. You will note that the author has mentioned Exits not as a “area” but as a “criteria” (unlike entry and stops which are “areas”), and the author has used plural (criteria) instead of singular (criterion). The noob would be wise to spend a lot of his time researching exit criteria. Risk Management: Numerous good books and articles are available on risk management. So the author will not rehash the same information here. However, this author suggests the following methodology for risk management: Identify the amount of capital you want to risk per trade, x% (usually all good risk management books tell you a percentage between 1 and 3. It is up to the trader but understanding the reasoning, based on principles of probability, for suggesting such risk capital is vital); Fix the position size you want to trade (as a noob, do not calculate position size based on entry price and stop area. Always fix your position size up front). Based on the Stop Area calculate your Entry Area. Entry Area: Entry areas are NOT entry “setups”. This is the area where a trader should contemplate an entry should price reach this point/area. Too many noobs spend inordinate amount of time exploring entry “setups” without understanding when those “setups” might work. If, based on the market dynamics, the trader expects to get an entry better than the entry at Entry Area, she might at her discretion do so. Doing so will not only requires experience in understanding market dynamics but also lower the risk per trade. According to this author, there are three take aways about entry: Only enter trades in concert with one’s market Bias; Patiently wait for price to approach the Entry Area; Do not spend time researching entry “setups”. Note on Trade Management: All the books a trader might have studied and the countless hours she might have spent in front of the screen to understand market dynamics should be used NOT to come up with an entry “set up” but to manage the trade once entered. Most of the time, if the entry is aligned with one’s market bias, and if such market bias is the view held by majority, the trade will work. When that happens the trader might take some heat, but the trade will eventually be a winner. However, there will be times when one’s market bias is not the view held by majority or the market bias changes due to changes in market conditions. These are the times when one will have to manage one’s trade. A trader will not know before hand of such changes, but as a noob gains experience in gauging market dynamics she will be able to detect such changes. Note on Trading Psychology: Do not fall for the hyperbole that “fear” stifles traders and hence it requires consultations with Trading Coaches/Psychologists. Trading coaches who advertise based on such “fear” are not being forthright. Fear of trading can arise due to a lack of confidence in the trading system. Such fear can only be mitigated if one makes the trading system her “own”. The only way to do it is to UNDERSTAND one’s trading system -- why it works, when it is expected to fail, etc. The easiest way to understand YOUR trading system is for YOU to build or re-build it!!!! No psychologist can help a trader here. Fear of trading can also arise due to the human tendency of risk aversion. As humans we are very bad in making decisions under uncertainty (assessing probabilities) and make very predictable mistakes. A way to overcome this fear is understand the theory of probability and decision making under uncertainty. There are a lot of books on this topic which might be of help (look up the works of Tversky & Kahneman; the author found the books by Mark Douglas insightful. The author has no affiliations with any of the mentioned authors). If you needs help in this area, you should seek help but before you do so please ask yourself if you REALLY want to be a trader. Trading is NOT for everyone. Final Note: Once a trading system is found to have a positive expectation based on backtests, the trader using that system must become an execution machine: for the edge in that system is only as good as the trader’s discipline to execute that plan. Even better, a trader should strive to automate her system if possible. Short Summary: If the author were to start all over again with the knowledge he has gathered over time, he will conduct original research or use existing indicators to: Measure Bias; Devise Exit Criteria; and Understand market dynamics so as to manage trades better. He wouldn’t have spent ages trying to come up with the “best” entry setup or trying to understand market dynamics to get a “good” entry. “Learn all you can from the mistakes of others.* You won't have time to make them all yourself.”* ~Alfred Sheinwold Good trading! -MadSpeculator.

Fulcrum, You missed the point. The point is a "hedge" happens IRRESPECTIVE of where price is; otherwise, the hedger will be taking on grave position risk and the financing agency's risk managers will be all over the hedger (could result in an increased haircut). If you don't remember what you said, you said: Once again, please don't pretend to know more than what you know. All the best with your trading. Regards, MadSpeculator. Urma: Sorry for hijacking your thread like this. I will refrain from making any other off-topic comments in this thread going forward.

Fulcrum, I, like many others in this forum, appreciate you sharing your trade ideas. However, please refrain from making comments like above, which is nothing but your opinion masqueraded as a fact. What you say above is incorrect. It makes me think that you dont understand what a "hedge" is. I used to work for a group that did exactly what you say does not happen. Please keep up your otherwise good work. Regards, MadSpeculator.

There are couple of other products that are worth considering if this route is taken: Streambase, and AMQP based products esp. RabbitMQ. While all these products except RabbitMQ are tailored towards building trading infrastructure, RabbitMQ gives a very high-speed, flexible and robust middleware that is worth considering. We evaluated RDT Tango, Streambase, Apama, and RabbitMQ, and decided to go with RabbitMQ. My 2cents! Regards, MadSpeculator.

Dude, I think you mean well when you wrote the post: providing a cautionary statement for readers. However, I think you miss the point. Your comments are very similar to some quants I used to work with in my "earlier life". They took things at face value even though they knew better. I don't know your background, but I am going to assume that you are new to trading and proceed from there. As you are aware, all the intricacies of a financial market cannot be captured by a model. However, in order to trade one needs to "tell a convincing story" (a.k.a model) that one can subscribe to. All the terminologies that are used in these posts and others are just "labels" that model developers use inorder to develop a model (a.k.a "tell a convincing story"). These labels are very important for communicating the ideas behind a model. However, these labels should neither be interpreted at face value nor should be dismissed as "a vain attempt at categorization". What is really important is to really try and understand the intent of such labels. For example, Wyckoff used the label "Composite Operator" in an attempt to communicate his ideas behind his model for market operation. The uninitiated dismissed that model sighting that there was no "Composite Operator" in the market. They completely missed the point; in fact, had they taken the step to understand the term "Composite Operator" they would have understood Wyckoff's reasoning. In the case of "Commercials", unfortunately, there exists a duality. There are [real] commercials that operate in the ag. markets. However, the label "Commercials" used by most of the traders does not necessarily mean the [real] commercials, but means a block of volume that has the ability to move markets. This block of volume could be generated by any number of traders executing any number of strategies all acting as a group (for e.g. Fulcrum's trifecta defined above could be the result of Index arbs, but who cares; all we are interested to know is if that block of volume have the ability to move markets, and we label that block of volume as "Commercials"). As a non-relative-value trader, one has to monitor volume and anticipate future price action. So, carefully analyze what Urme, Fulcrum and others have to say without being bogged down by your own definition of labels, and you might learn something. All the best with your trading. Regards, MadSpeculator.

AgeKay: I haven't used CQG's datafeed for order book analysis. Depending on what kind of information you need for your order book analysis, CQG might or might not work for you -- for example, if you need cancels CQG will not provide you. In general, I have found CQG to be very robost. You might also want to check out a FIX interface. The information you get from a FIX interface is vastly superior to that from any prop. API provided by market data vendors. Hope this is helpful. All the best. Regards, MadSpeculator.

You are correct that the moves they produce are phenomenal, and so is their inventory effect. However, the reason one needs to be aware of those arb programs is to expect it. Also, you will be surprised that many a times, because of the way they operate, a trader who can recognize such trades will be able to get really good trade locations before the move starts. The usefulness of a vol-surface for a trader like me (primarily high-frequency) is very limited. They seldom change appreciably during the day unless there is an event, and they only show the option MM's collective long-term bias. It will be great if I could some how read each of the option MM's individual vol-surface (which will show their inventory bias), but that is not possible. On the other hand, may be, there is information in the vol-surface that a high-frequency trader can make use of, but I haven't discovered it yet.

I haven't found an acceptable way to control for "local" stochastic vol. The way I overcome the problem of estimating such "local" stochastic vol is by creating a proxy that is a function of the traded funds (my risk). The biggest problem with this approach is that I am using a proxy which is not correlated to the local stochastic vol. I am ok with it, for now. If you or anyone else have any other suggestion, I am all ears!

I am not going to pretend that my infrastructure resembles that of a typical retail trader. I have a messaging bus the connects all components of my infrastructure. The components include a MySQL db, R, trading platform (home grown), and broker interface. I also have a CQG feed that I use for cross-checks.

According to my definition of liquidity providers and liquidity takers, yes, it is the placement of orders that determine the category. You are very close to the answer as per the proposed theory, but will have to "invert" your logic. Viewed within the framework of the proposed theory, the entity while accumulating inventory is a liquidity provider, and is a liquidity taker when disposing such acquired inventory. The reason for this line of thinking is to make the measuring process relatively easier compared to your line of thinking (which is also correct, but another way of looking at the same situation) makes measurements very difficult 'cos one has to look into the future to determine if the present trade is a "liquidity provider" trade or not (just my opinion). Yes, this is where the liquidity providers supply and demand comes in.

Karish: I don't know how FT interprets his measures, so I can't comment on his use of CVD. However, I can issue a word of caution to you: If one blindly split buys and sells as is done in the industry today (two approaches used are: (a) using quotes to split the T&S data (the perils of which I listed in my earlier post to BlowFish); and (b) as was described in Orline Foster's work: "The Ticker Technique and the art of tape reading"), one will double count the split volume. Once such double counts are rectified, CVD could be used as you mentioned (although I haven't had the opportunity to analyze it yet -- a project for later!) Hope this answers your question.

@pmwhite, @gooni: I concur with BlowFish's answer to your questions. @gooni: Further, BlowFish's comments and my response to his comment might provide you some clues as to why all market order buys at the ask are not necessarily "buys". A small hint: By assigning all market order buys at ask as buys, one will be double counting buys! Enough said. As I said in my reply to BlowFish, BlowFish might be on to something!

BlowFish: This is exactly how client order execution algos work! You might be on to something here. Now, go one step further and think about how index arbs programs might work, and how index option market makers might trade index futuers (these two steps are necessary only if you trade index futures or futures that might be used for hedging other financial instruments), and you will get the "full" picture! Yes. This is the reason why in an earlier post (I think in reply to pmwhite) I said, I assume that all the "purchase" is for the bank although such an assumption is not necessarily valid.

clmacdougall: You used the word "market structure". I don't know how you define this word, but the way I define this word is thus: An existence of underlying structure in the market that can be determined. Further, as an extension to this definition, such market structures can only be determined ex-post since we are using the [past] data in our analysis. Now that "market structure" has been defined, I will attempt to answer your question: Yes, I do believe in a market structure -- a structure where people trade for various reasons, and that order-flow captures such activity. Can I use it to "predict" future actions? No, I can't because I don't know what will happen in the future (please refer to my response to Kiwi's question on how I use these measurements). As you can see the observable supports and resistances in the market are due to people's actions. This part of your question make me think that you think traders automatically take off or put on trades when prices come to points of pre-identified support or resistance. Please correct me if my assumption is incorrect. I know of no professional trader who does that. In fact, they all look at order-flow at those points to determine their course of action. I am doing nothing different. NOTE: I don't have to wait for the opposing order flow imbalance to come in in-order to take off my trades; I can take them off when the existing order flow imbalance weakens. To paraphrase Steidlmayer, it is the order flow imbalance that moves markets. Hope this answers your question.

I don't "identify" support or resistance levels before hand. I look at order-flow and go with order flow. Support and resistance, according to me, is created when a large group of traders enter the market as per their trading system. This is reflected in the order-flow imbalance. Since I don't know which trading system is going to kick-in when, I don't want to be in the business of "identifying" support and resistance. This is a loaded question! I believe in trades based on value when it comes to arb. trading (of which index and other futures play an important part; a futures trader should understand how such trades are done and the impact such trades have on the market even if she is not going to do such trades). However, I don't believe in "value" as defined by the MP theory.

Very similar. If you look at the T&S data from CME for Globex, you will see a "I" indicating that this is not a true transaction but a indicative quote. I am not sure which data feeds expose this field, but I know one can extract this information from a FIX connection. However, don't get bogged down by this if you are starting out. ES and other markets are tight enough that you should be able to proceed with your work without quote information. Even in other markets, the error in classification is going to be so small that it might not be worth the time and effort to get "perfect" data.

pmwhite please understand that a trader becomes a liquidity provider due to her actions: placing a limit order. It is not the around way around: A liquidity provider does not place a limit order. In other words, there is no "liquidity provider" or "liquidity taker" category until the trader's (who is category-less) action creates one. This is a very small distinction albeit a very important one. Now, 1.b is a technicality that is required to make sure that a trader can be both a "liquidity provider" and a "liquidity taker" at the same time. If this were to be the case, then competition between the categories should not be present. No, this should not affect your analysis. Everything is possible. However, I am yet to find proof of such value. Also, new research in finance and economics is questioning the existence of value as we presently understand it. Yes, they are transactions. Yes.

Blowfish: In a tightly traded limit-order book market like ES on Globex, one doesn't need the quote data as long as one is also tracking indicative bids-asks quotes (indicative bids-asks quotes seldom happens during RTH in ES, unless there is a major event during RTH -- like FOMC announcements. These are helpful for overnight though). In other markets like Nasdaq, which is a quote-driven market, monitoring quotes are helpful, but only for "jumps". Otherwise, the inherent delay between the T&S reporting and its corresponding quotes (in other words, quotes might have changed before the T&S for the previous quote is being sent out) might unnecessarily complicate the analysis. Just my opinion and experience!

Gooni: There is an old adage in the "street": "One has to sell some to buy some". This adage is true even for algos. If one is "selling some" to meet a client's buy order, that "selling some" becomes excess inventory. Note: I also try to track how much, in the above example, is being bought. Sometimes, banks buy for themselves instead of buying for clients. I have no way of differentiating that, so I assume that all purchases are for the bank and proceed with my analysis (not a great assumption but seems to help my analysis).