Is Market Profile an Outdated Tool?

[joshdance 10]

3. Are the futures markets built, consciously or unconsciously, to benefit its smallest members the most?

 

Perhaps this is a case of: you're better if you're very small (agile, in and out quickly), or very large (you can actually have a meaningful impact on the market). If you're in between, you may not have enough advantages of being small (not as easily in and out), yet not enough size to make a difference.

[gosu 10]

Perhaps this is a case of: you're better if you're very small (agile, in and out quickly), or very large (you can actually have a meaningful impact on the market). If you're in between, you may not have enough advantages of being small (not as easily in and out), yet not enough size to make a difference.

 

Bigger is definitely not better in the markets. Yet I look at being small in the market not as an advantage in and of itself but as not being a disadvantage. For the retail participant, the advantage comes from being able to operate parasitically with respect to the large pools who are the real movers. That level of operation has to be chosen, however. It doesn't just come automatically with opening an account at ABC Retail Futures.

[xioxxio 10]

There is no right or wrong answer, there are some very effective strategies that only work if you have the very large size. I am referring to selling at the bid and leaving it offered over and visa versa.

[joshdance 10]

Bigger is definitely not better in the markets.

 

These quotes taken from the following article disagree, just for a different perspective:

 

The inexplicably successful Wall Street firm lost money on only 19 trading days last year, which means it made money on 244 days out of 263. And Goldman did not simply make some money, it made lots of money. The firm booked a daily profit of more than $100 million on 131 trading days – that’s almost ten times the number of $100 million days it booked in 2004.

...

From what it looks like, however, their traders are benefiting from two advantages: information not available to the market, and muscle. These two things give the firm an edge that almost guarantees substantial ‘trading profits’ quarter after quarter.

 

 

Goldman

[gosu 10]

These quotes taken from the following article disagree, just for a different perspective:

 

 

 

 

Goldman

 

I don't see it as a disagreement. The article is referring to Goldman's HFT activities:

 

“We’ve seen the scandal over High Frequency Trading, where Goldman and other firms have computers positioned at the New York Stock Exchange, getting information on trades a millisecond before they are posted publicly. Goldman sees where the market is going second by second, positions itself for very short term profits, and in effect extracts a tax on trading by individual investors and mutual funds. Goldman Sachs is the biggest player in this business… "

 

As I stated in my original post:

 

1. Who is best positioned of any participant to win at this game?

 

A: The best positioning goes to those who get the information the fastest and whose costs are the lowest. These are the players who run automated programs that extract very small profits at high frequency.

 

 

I probably should have been more clear, however, that my "bigger is not better" statement refers to the size of the account being traded or in the case of large players, the size of their capital pool under management.

 

Without making any judgment about fairness, I see what Goldman and other HFT firms are doing as more akin to market making rather than trading or managing money, albeit without any of the regulatory responsibilities. That being said, I think the writing is on the wall that HFT cannot continue as is and the only question is whether the regulatory response will be so broad that it impacts small players like us.

 

Until then, just keep on trading.

Edited September 26, 2011 by gosu

[xioxxio 10]

That being said, I think the writing is on the wall that HFT cannot continue as is and the only question is whether the regulatory response will be so broad that it impacts small players like us.

 

I have to disagree with you, if anything HFT is increasing at an exponential rate. It is a dream come true for the exchanges, more fees.

 

This topic can be debated till the cows come home. Investment banks use these HFT algo's to trade client orders. (Retail vs Institutional another debate)

 

Retail will always be at a disadvantage due to exchange connection line speeds via brokers, who may not themselves have ideal connection speeds

 

I can go on and on and on.

 

HFT is here to stay, the game is still the same, the players have changed.

[gosu 10]

I have to disagree with you, if anything HFT is increasing at an exponential rate. It is a dream come true for the exchanges, more fees.

 

This topic can be debated till the cows come home. Investment banks use these HFT algo's to trade client orders. (Retail vs Institutional another debate)

 

Retail will always be at a disadvantage due to exchange connection line speeds via brokers, who may not themselves have ideal connection speeds

 

I can go on and on and on.

 

HFT is here to stay, the game is still the same, the players have changed.

 

I am not predicting anything. Just stating my observation of what I see in the current political and regulatory environment. Where have you been? When 60 MInutes has a segment putting it in a negative light and articles like the one that was posted earlier are being written, you can be sure HFT has a big fat target on its back.

 

Even without the media attention, HFT is an easy target for so many reasons, one of which is the need for revenue by the government. See, for example, the FTT. Moreover, the idea that a stock exchange can sell faster access to information that is being exploited by a firm like GS has to be on borrowed time in this current environment. Again, not a prediction, just stating the obvious.

 

There WILL be changes, as there are after every market upheaval. See, e.g., PDT rule; penny incrementation for stocks.

[xioxxio 10]

I am in Australia. When did 60 minutes have a segment on it?

 

Thanks

[MightyMouse 12]

It is in Goldman's best interest to put information out there indicating that they can achieve great results from trading a "magical system" that pulls money out of the market.

 

The magical system attracts funds so that they can collect more fees.

 

Goldman's edge is its knowledge of customer intentions and positions. This edge is something slightly different from the perceived edge of HF trading.

[clmacdougall 11]

Hi gosu

 

Being a small lot retail trader in my opinion puts you in a position where you can easily move yourself into and out of the markets with nearly no "unwinding" necessary. One of the few things I've read and held onto from Steidlmayers books was the idea of "trapped money."

 

Essentially you are identifying a large participant on the wrong side of the market having to unwind an errant position. This type of activity is identified in the book, "Trading & Exchanges" by Larry Harris as "Dealers lose to well informed speculators because they end up being on the wrong side of the trade. Prices tend to move against their positions before they can trade out of them. All traders try to avoid trading with well informed speculators."

 

He goes on to identify the successful speculator as an "informed trader who finds less well informed traders that are willing to lose to him"

 

The retail trader has many more strategies and methods available to him just due to his sheer lack of size. A large trader has to add a liquidity factor to his method search that a small trader never has to worry about. In effect the larger the trade the more necessary the, "hoping." A retail trader never has to include liquidity in his method search and can always count on the market providing an optimal exit strategy regardless of success or failure. Unwinding a large trade can never have predictable results, it always effects the market around it and can lead to a loss even with a successful entry after calling the market right.

 

More and more HFT has no effect on the retail trader. This game is being played over our heads, it's a liquidity game that has nowhere to go as more HFT enter the market. The only player effected by this would be someone who takes the DOM too seriously. Posting and then removing an order before getting filled has gone up nearly 400% over the last 10 years, why?

 

Because more and more HFT are relying on the DOM as "expected liquidity," it's a stupid game of fruitless "hope" known as "quote flickering".

 

It's a quick posting and removing of orders in order to confuse the algo of another HFT. Essentially confusing a computer by placing "expected liquidity" in front of another stupid computer and waiting to see them take the bait and become part of a much smarter algo trading strategy. The retail trader doesn't need to trust in the DOM because he will never need that type of "expected liquidity " in front of his trade. He can always enjoy a mastery over the other players who need to "hope" in more elements of the market working in their favor in order to make a profit.

[gosu 10]

Hi gosu

* * *

 

A very nice post.

 

I view HFT in the same light as you do: HFT has added a lot of liquidity, which is a good thing.

 

As you point out, an independent trader's best level of operation is as a frontrunner to larger players. I believe the author of the book you reference calls it "parasitic" trading.

 

Personally, I don't particularly care for that description but I can't disagree with it.

[Lornz 10]

I realise this question is off topic but......

Can somebody explain the difference between a normal Auction and an Electonic market.

I often see anomalies in my daily price feed which is not an auction.

e.g.while prices are rising the spread is 10 points

when prices reverse , the spread becomes 30 points

My market is the Top 40 futures index (South Africa), similar to the Dow,and the trading platform is supplied by I G Markets in London.

Regards

bobc

http://cdn.traderslaboratory.com/Pictures/smilies/Missy.gif

 

IG Markets offers CFD trading, the spread is how they make their money. You are not watching the feed of the futures market!

[bobcollett 10]

IG Markets offers CFD trading, the spread is how they make their money. You are not watching the feed of the futures market!

 

Hi Lornz,

What is "the feed of the futures market"?

regards

bobc

[bh_trade 10]

Good post!

 

I've often wondered why the small traders who frequent these forums gripe about quote flickering as it truly is irrelevent when it come to our execution needs.

 

Hi gosu

 

Being a small lot retail trader in my opinion puts you in a position where you can easily move yourself into and out of the markets with nearly no "unwinding" necessary. One of the few things I've read and held onto from Steidlmayers books was the idea of "trapped money."

 

Essentially you are identifying a large participant on the wrong side of the market having to unwind an errant position. This type of activity is identified in the book, "Trading & Exchanges" by Larry Harris as "Dealers lose to well informed speculators because they end up being on the wrong side of the trade. Prices tend to move against their positions before they can trade out of them. All traders try to avoid trading with well informed speculators."

 

He goes on to identify the successful speculator as an "informed trader who finds less well informed traders that are willing to lose to him"

 

The retail trader has many more strategies and methods available to him just due to his sheer lack of size. A large trader has to add a liquidity factor to his method search that a small trader never has to worry about. In effect the larger the trade the more necessary the, "hoping." A retail trader never has to include liquidity in his method search and can always count on the market providing an optimal exit strategy regardless of success or failure. Unwinding a large trade can never have predictable results, it always effects the market around it and can lead to a loss even with a successful entry after calling the market right.

 

More and more HFT has no effect on the retail trader. This game is being played over our heads, it's a liquidity game that has nowhere to go as more HFT enter the market. The only player effected by this would be someone who takes the DOM too seriously. Posting and then removing an order before getting filled has gone up nearly 400% over the last 10 years, why?

 

Because more and more HFT are relying on the DOM as "expected liquidity," it's a stupid game of fruitless "hope" known as "quote flickering".

 

It's a quick posting and removing of orders in order to confuse the algo of another HFT. Essentially confusing a computer by placing "expected liquidity" in front of another stupid computer and waiting to see them take the bait and become part of a much smarter algo trading strategy. The retail trader doesn't need to trust in the DOM because he will never need that type of "expected liquidity " in front of his trade. He can always enjoy a mastery over the other players who need to "hope" in more elements of the market working in their favor in order to make a profit.

[Lornz 10]

Hi Lornz,

What is "the feed of the futures market"?

regards

bobc

 

You are not trading futures, you are trading CFDs... With the exception of a few ASX-listed CFDs, they are all OTC. You are receiving quotes from your broker, not the exchange. I don't know how I can make it any clearer.

[bobcollett 10]

You are not trading futures, you are trading CFDs... With the exception of a few ASX-listed CFDs, they are all OTC. You are receiving quotes from your broker, not the exchange. I don't know how I can make it any clearer.

 

Hi Lornz

Norway,the inventers of the ice cube.

Your reply is aggressive.BUT your reply is very important to me, because most members on this forum dont know what a CFD is.

Please start again.

bobc

[juniorh 10]

Simple question really, do you think MP is really a tool for the 21st century fully electronic markets which we trade? Does it fully represent the auction or are important details missed out? What are the alternatives anyway?

 

 

No. I use it along with VWAP and Order Flow setups for execution. I use the insight of Market Structure and Developement that Market Profile Trading provides me with. I trade that insight as oppposed to trading the profile as just another indicator on my chart. More can be found on this in the Value Trading article.

 

DowIndexTrader(DIT)

[Lornz 10]

Hi Lornz

Norway,the inventers of the ice cube.

Your reply is aggressive.BUT your reply is very important to me, because most members on this forum dont know what a CFD is.

Please start again.

bobc

 

I did not mean to sound aggressive, I was just being brief. If you don't know what a CFD is, then why are you trading it?

 

Contract for difference - Wikipedia, the free encyclopedia

 

Futures contract - Wikipedia, the free encyclopedia

[bobcollett 10]

Hi Lornz,

And if I traded Forex?

And questioned the anomolies.Would you reply that I was not watching the correct price feed.The forex price feed also has no centralised exchange. It comes from your broker. So if you have two brokers , you can get two different prices.

My original question is unanswered.

What is the difference between an auction and an electronic market?

Maybe I should change it .How do they operate an electronic market?

How do they decide on the spread?

Is there some girl sitting inside the computer pulling levers? (no pun intended)

Or is it totally automatic? If so , how is it possible to open with a gap.?.

Regards

bobc

[joshdance 10]

How do they decide on the spread?

 

Or is it totally automatic? If so , how is it possible to open with a gap.?.

 

Don't know if this is what you're looking for, but...

 

Imagine 10 people gathered in a room, 5 who owned a widget, and 5 who wanted to own a widget.

 

The 5 who owned a widget would each offer a price. Say, $5,$6, and the other three at $7. The buyers bid $3,$2, and the other three bid $1. The spread is $2. The spread is simply the difference between the best offer ($5) and the best bid ($3). If one bidder (say, one of the ones who's bidding $1) decides to pay up and buy the best offer at $5, then the spread will be $3 (best bid is still $3 and best offer is still $6). If one of the other offers (say, one of the ones offering $7) lowers his offer to $4, then the spread will now be $1. This is the way the market works.

 

A gap occurs because the lowest offers and highest bids change between the time the market closes and when it reopens. For example, if the bid/offer on ES is 1100/1101 at the close on Friday at 4:15pm, and over the weekend the S&P downgrades the US's credit rating (does this sound familiar?), suddenly the picture changes, and the best offers to sell (because this is bad news) will be lower, and the best bids to buy will be lower as well. At the open on Sunday at 6pm, the market, that is, traders who bid and offer, reach some equilibrium point, say at 1050/1055, and thus when the market opens, it will open here, and price has "gapped".

[bobcollett 10]

Hi joshdance

Well explained. You should have been a teacher..Are you saying there is no difference between the auction process as you describe and an electronic market. Then how come , for example, the spread is 10 points in a rising market and 30 points in a falling market I believe the electronic market is manipulated .

Similarly, I believe a gap is often manipulation when it starts closing immediately.

I have a test for this .If the opening gap trade went through at very low volume (on the tape), e.g. 10 shares, then somebody bought and sold to himself.The electronic market does this regularly.

I am still a little in the dark

Kind regards

bobc

[joshdance 10]

Are you saying there is no difference between the auction process as you describe and an electronic market.

 

That's not what I said at all.

 

Then how come , for example, the spread is 10 points in a rising market and 30 points in a falling market I believe the electronic market is manipulated .

 

Which market? What are you talking about?

 

Similarly, I believe a gap is often manipulation when it starts closing immediately.

I have a test for this .If the opening gap trade went through at very low volume (on the tape), e.g. 10 shares, then somebody bought and sold to himself.The electronic market does this regularly.

 

Why would someone buy and sell to himself without any other volume to take advantage of more price movement? When you buy and sell to yourself you don't make any money. You need someone else to manipulate for this to work, and you're talking about a situation with very low volume. So, again, I don't understand.

 

How is any of this relevant to actual trading?

[bobcollett 10]

That's not what I said at all.

 

 

 

Which market? What are you talking about?

 

 

 

Why would someone buy and sell to himself without any other volume to take advantage of more price movement? When you buy and sell to yourself you don't make any money. You need someone else to manipulate for this to work, and you're talking about a situation with very low volume. So, again, I don't understand.

 

How is any of this relevant to actual trading?

Hi joshdance

My market is carefully explained on this thread no. 70

 

When a broker buys and sells the same deal , its called a "bookover"

He has a buyer and a seller for the same stock at the same price.Or a price at "best".

It requires no volume to post a gap trade. If there is no volume I believe the gap will close

Just my thoughts

regards

bobc

[Lornz 10]

Hi Lornz,

And if I traded Forex?

And questioned the anomolies.Would you reply that I was not watching the correct price feed.The forex price feed also has no centralised exchange. It comes from your broker. So if you have two brokers , you can get two different prices.

My original question is unanswered.

What is the difference between an auction and an electronic market?

Maybe I should change it .How do they operate an electronic market?

How do they decide on the spread?

Is there some girl sitting inside the computer pulling levers? (no pun intended)

Or is it totally automatic? If so , how is it possible to open with a gap.?.

Regards

bobc

 

If you don't have access to the interbank market, I wouldn't touch forex. Price discovery is virtually nonexistent.

 

If you trade a liquid market, there will only be a 1 tick spread -- the smallest amount possible. In less liquid markets there will be larger spread, which is set buy supply/demand. In your case, the CFD broker artificially sets the spread in order to make money.

 

The market can open with a gap due to electronic trading outside the open outcry.

 

I would suggest going to the website of the exchange in question and educate yourself about market mechanics.

 

I am not familiar with your specific market, but if you decide to switch to Globex trading -- buy this book:

Amazon.com: The CME Group Risk Management Handbook: Products and Applications (Wiley Finance) (9780470137710): CME Group, John W. Labuszewski, John E. Nyhoff, Richard Co, Paul E. Peterson, Leo Melamed: Books

 

I am signing off this thread now.