Interpreting Bid/ask Spread

[Sparrow 10]

Hi,

 

I've been wondering if interpreting bid/ask spread can be used in short term trading. I think that market makers drop the bid or increase the ask if they want to bring their books back into balance.

This can completely halt a move or at least decrease momentum until the locals have unloaded some of their excess inventory. If the market will continue in the same direction afterwards depends on how determined buyers/sellers are.

Is someone else using this in their trading or is there an error in my theory?

 

Cheers

[Soultrader 12]

Hi,

 

I've been wondering if interpreting bid/ask spread can be used in short term trading. I think that market makers drop the bid or increase the ask if they want to bring their books back into balance.

This can completely halt a move or at least decrease momentum until the locals have unloaded some of their excess inventory. If the market will continue in the same direction afterwards depends on how determined buyers/sellers are.

Is someone else using this in their trading or is there an error in my theory?

 

Cheers

 

Hi Sparrow,

 

I use such information more of a confirmation. If I am looking for a setup and this pattern occurs, great. Otherwise I do not apply this info as a stand alone strategy. On the Nikkei were it takes hundreds of contracts to move 1 tick, this sort of bid/ask pattern is crucial information. Usually occurs around the 00 levels as bids start getting thin and a sudden selling of 300+ contracts can force price to slip 5-7 ticks instantly. ($500-$700 a contract)

 

The way I see it, it can be applied into a trading setup if it occurs at the levels you are watching. Otherwise it happens so quick and catches me off guard that I have no time to act on it.

[Sparrow 10]

Hi James,

 

thanks for the info, I was not thinking of using this pattern as a setup rather as an early signal for the market slowing down or reversing combined with price action and s/r. It's by far less work than constantly looking at the level II screen which gives me a headache and takes a lot of attention.

 

However I haven't studied it over a longer period of time.

 

Cheers

[rod30 10]

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