Depth of Market - How Does It Impact on Your Trading?

[BlueHorseshoe 10]

Hello,

 

I was wondering how other people respond to greater depth in the order book at a specific price level, particularly when they already hold a position?

 

Take a look at the image below, for example.

 

There are a lot of sell limit orders sitting at the 1800 price. One would imagine this is partly due to the effect of longer term traders ("I'll short the S&P if it gets above 1800"), and it is also a tick above the high of the day at the time of this screenshot. But sometimes there is greater depth at a price level for no obvious reason.

 

So, if you were long at the time of the screenshot, what effect if any would the depth of price have on your position?

 

Some possibilities are:

 

- Have greater confidence that price will trade up to 1800 to seek out the liquidity there.

- Expect the market to initially struggle to break through the 1800 level due to the increased depth there.

- Doubt the validity of the current upwards price movement because lots of (passive, informed?) traders are looking to get short.

 

Any thoughts or experience are welcome . . .

 

BlueHorseshoe

Edited November 18, 2013 by BlueHorseshoe

[BlueHorseshoe 10]

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[kuokam 10]

Like always, anything can and do happen. I mean, you can actually trade long to that level and short from there. Problem is you never know where exactly price will stop and reverse.

My observation so far is that first huge orders are stop losses, and the ordres to enter are a bit farther. Anyway I tend to act with that on my mind.

 

Here's what happened to me this afternoon, as an illustration. I was watching crude oil (dec. CL). As it approached the HOD huge ordres started getting hit at offer around 94.14. I left the titans play their game, and not long after I saw the bids starting to equal the offers. I put a limit sell at 94.18. Got filled and carried away till 94.30, but luckily it stopped there and started a fantastic downfall. I got but a small part of the ensuing 100+ ticks down but that is my eternal problem to sit tight in a winning trade.

Conclusion : decide in advance what you will do at your area of business. Once there, don't forget you are awaited by the monsters to swollow you up, so let them fight and follow the winner AFTER THE FIGHT, not before.

What I like in CL is that huge orders are really outstanding. At times you can see an order the size of the total of the then resting ordres.

 

  BlueHorseshoe said:

Hello,

 

I was wondering how other people respond to greater depth in the order book at a specific price level, particularly when they already hold a position?

 

Take a look at the image below, for example.

 

There are a lot of sell limit orders sitting at the 1800 price. One would imagine this is partly due to the effect of longer term traders ("I'll short the S&P if it gets above 1800"), and it is also a tick above the high of the day at the time of this screenshot. But sometimes there is greater depth at a price level for no obvious reason.

 

So, if you were long at the time of the screenshot, what effect if any would the depth of price have on your position?

 

Some possibilities are:

 

- Have greater confidence that price will trade up to 1800 to seek out the liquidity there.

- Expect the market to initially struggle to break through the 1800 level due to the increased depth there.

- Doubt the validity of the current upwards price movement because lots of (passive, informed?) traders are looking to get short.

 

Any thoughts or experience are welcome . . .

 

BlueHorseshoe

[BlueHorseshoe 10]

  kuokam said:

Like always, anything can and do happen.

 

Hi Kuokam,

 

Some great points there, I think.

 

Anything can and does happen, but reactions to these large orders are seldom ambivalent, and often polarized.

 

Sometimes, they seem like a giant magnet, sucking price towards them - as though everyone is looking at a large bid and thinking "there's a nice bit of liquidity to sell into", and at other times they prove a barrier which price is clearly reluctant to test - as though everyone is looking at a large bid and thinking "it'll never sell its way through that, no point shorting".

 

  Quote

Once there, don't forget you are awaited by the monsters to swollow you up, so let them fight and follow the winner AFTER THE FIGHT, not before.

 

That seems like a good piece of advice.

 

  Quote

What I like in CL is that huge orders are really outstanding. At times you can see an order the size of the total of the then resting orders.

 

Can you explain this a little more? Do you mean you see the depth at a given price double?

 

One issue with the ES is that the orders tend to get shredded. A greater depth is just as likely indicative of where a lot of participants want to act, as where one single participant wants to act. That's not especially problematic unless you ascribe significance to the actions of large traders rather than large groups of smaller traders (I don't).

 

  Quote

My observation so far is that first huge orders are stop losses, and the ordres to enter are a bit farther. Anyway I tend to act with that on my mind.

 

The resting orders we see are limits - how could they be stop-loss orders? I'm a bit confused by this.

 

Thanks,

 

BlueHorseshoe

[kuokam 10]

Hi Bluehorse, please find my reflections below yours.

 

  BlueHorseshoe said:

Hi Kuokam,

 

Some great points there, I think.

 

Anything can and does happen, but reactions to these large orders are seldom ambivalent, and often polarized.

Sincere apologies for poor English ...

 

Sometimes, they seem like a giant magnet, sucking price towards them - as though everyone is looking at a large bid and thinking "there's a nice bit of liquidity to sell into", and at other times they prove a barrier which price is clearly reluctant to test - as though everyone is looking at a large bid and thinking "it'll never sell its way through that, no point shorting".

 

Well, you have to watch and derive your conclusions, knowing it is a probalities games: some will hold and some will get run over. Many times they will do both, attract and repulse.Remember, the very large traders are in search of volume and will fight for it.

That seems like a good piece of advice.

 

 

 

Can you explain this a little more? Do you mean you see the depth at a given price double?

 

I will post a picture if I can, but what I mean is this. You see 10 resting ordres ranging from 5 to 48, their total being 178. Suddently an order shows up with 140 figure. It is the same as the image you posted but so striking on crude oil and even gold. Probably because they are thinner markets than the ES or the bonds.

One issue with the ES is that the orders tend to get shredded. A greater depth is just as likely indicative of where a lot of participants want to act, as where one single participant wants to act. That's not especially problematic unless you ascribe significance to the actions of large traders rather than large groups of smaller traders (I don't).

 

I actually preffer to live the ES alone...To much games

 

The resting orders we see are limits - how could they be stop-loss orders? I'm a bit confused by this.

 

You are right. Actually, I use a different DOM than yours, where I see the resting orders but also the actual trades.

Thanks,

 

My pleasure, Sir!

 

BlueHorseshoe

[BlueHorseshoe 10]

  kuokam said:

Hi Bluehorse, please find my reflections below yours.

 

I have to plot the executed orders separately as what is typically known as "volume delta", and don't see them on the Matrix (or not by time - I can view cumulative profile against the DOM if I wish).

 

I assume that you don't mean that you are able to see un-executed resting stop orders? These aren't held on the exchanges servers. If you can see these via your broker, please let me know what broker you are using

 

Kind regards,

 

BlueHorseshoe

[kuokam 10]

No, I don't see non executed stop orders. Orders to escape losing shorts and entering longs are both executed at ask. When I see orders executed at ask, it is MY judgement that lets me think they might be traders exiting or entering, given the prevailing circumstances.

I also use the cumulative delta.

 

 

  BlueHorseshoe said:

I have to plot the executed orders separately as what is typically known as "volume delta", and don't see them on the Matrix (or not by time - I can view cumulative profile against the DOM if I wish).

 

I assume that you don't mean that you are able to see un-executed resting stop orders? These aren't held on the exchanges servers. If you can see these via your broker, please let me know what broker you are using

 

Kind regards,

 

BlueHorseshoe

[kuokam 10]

Hi BHS,

 

Here is a vue of my dom this morning, to illustrate our yesterday exchange.

 

Best,

 

Kuokam

[kuokam 10]

What happened next is: the order got triggered, price went down 8 ticks and came right back to trade 8 ticks up. As of this writing it 6 ticks up.

But I am not trading, I preffer the highs and lows, they seem to me more dependable than the steps in the profiles / value areas.

Please note that this is January 2014 contract.

Edited November 19, 2013 by kuokam

[BlueHorseshoe 10]

  kuokam said:

What happened next is: the order got triggered, price went down 8 ticks and came right back to trade 8 ticks up. As of this writing it 6 ticks up.

But I am not trading, I preffer the highs and lows, they seem to me more dependable than the steps in the profiles / value areas.

Please note that this is January 2014 contract.

 

Hi Kuokam,

 

Thanks for that - a helpful insight!

 

Your platform does indeed appear to provide more information than does mine, although there is a possibility that I can tweak the default settings on the DOM to see at least the total bid and ask size. And I do see what you mean about the thinner depth in Crude making it easier to spot a large order (or group of orders) - you'd have thought they would have gone to at least a bit of effort to shred an order that was nearly half the resting bid!

 

I have found the Value Area High and Low of the prior day's session to hold significance for initiating trades against, although I agree that the highs and lows are certainly what provide the context in terms of direction.

 

If you were short, then, at the time of the first shot you have posted, would you have had increased confidence that the market would take out the 93.50 level to consume the liquidity there? If you knew you wanted to take profit a little below that level, would you have brought your buy limit topside of the 93 contract bid?

 

Cheers,

 

BlueHorseshoe

[kuokam 10]

You are right on the value area boundaries. Like always, context is king. I took a trade the other day against the prior day's poc and it worked perfectly.

My general bias going into a huge order is that we will hit it and go a bit farther and then reverse. So, if I were short by the time of that shot, I would put my limit buy order about 4/ 5 ticks below that level. But if watching to go long, I would wait to see how it clears up there, especially I need to see buyers jumping back in.

Very sorry my poor English won't allow me understand the last question. I would ideally not put an order above 93, in accordance with what I said above.

 

Cheers

 

Kuokam

 

 

 

  BlueHorseshoe said:

Hi Kuokam,

 

Thanks for that - a helpful insight!

 

Your platform does indeed appear to provide more information than does mine, although there is a possibility that I can tweak the default settings on the DOM to see at least the total bid and ask size. And I do see what you mean about the thinner depth in Crude making it easier to spot a large order (or group of orders) - you'd have thought they would have gone to at least a bit of effort to shred an order that was nearly half the resting bid!

 

I have found the Value Area High and Low of the prior day's session to hold significance for initiating trades against, although I agree that the highs and lows are certainly what provide the context in terms of direction.

 

If you were short, then, at the time of the first shot you have posted, would you have had increased confidence that the market would take out the 93.50 level to consume the liquidity there? If you knew you wanted to take profit a little below that level, would you have brought your buy limit topside of the 93 contract bid?

 

Cheers,

 

BlueHorseshoe

[BlueHorseshoe 10]

  kuokam said:

Very sorry my poor English won't allow me understand the last question. I would ideally not put an order above 93, in accordance with what I said above.

 

Cheers

 

Kuokam

 

Hello,

 

It was my English that was poor - not yours!

 

"Topside" isn't really a word (except as a cut of beef!) - I should have said "to the top side of" or "above" . . . Your post answers that question anyway

 

Thanks,

 

BlueHorseshoe

[kuokam 10]

This monster order at 9500 just kept price away, now back up around the POC (9521), but I suspect the attraction power of the order intact

[Guest epic research]

Well market do affect trading as it's up and down is also decided through market.

[peterevanson 10]

Market depth tells the list of buy and sell orders in the market for particular securities and its important for certain interest rate securities.