Please Review My Bid/Ask Strategy

[carltonp 10]

Hello Traders,

 

Would some of you experienced traders please provide comments on my bid ask strategy that I have compiled using Excel.

 

Let me give you a brief explanation.

 

The strategies goal is to help me determine who the major players are at any given moment by looking at the bid/ask price and bid/ask size for the stocks of the DJIA.

 

The following caption was taken from http://www.tradetrek.com

 

Bid/ask prices are always posted with corresponding bid and ask sizes, which serve as measures of the strength and depth of the bid/ask prices. They tell us about the supply/demand pressures on a stock at a given moment. We can summarize important Bid/Ask size concerns as follows:

 

A large bid size indicates a strong demand for the stock.

A large ask size shows that there’s a large supply of the stock.

If the bid size is significantly larger than the ask size, then the demand for the stock is larger than the supply of the stock; therefore, the stock price is likely to go up.

If the ask size is significantly larger than the bid size, then the supply of the stock is larger than the demand for the stock; therefore, the stock price is likely to drop.

 

Because bid/ask prices and sizes change quickly in real-time, supply and demand also change quickly in real-time. Experienced traders always pay very close attention to the bid/ask sizes of a stock to monitor the supply-demand dynamic. Short-term traders usually buy a stock only when the demand is higher and sell a stock if demand suddenly becomes lower relative to supply.

 

With that said I have compiled a spreadsheet which does the following for each stock and makes a tally of the numbers.

 

The formula is as follows:

 

If bid prices for the majority of the stocks of the DJIA are greater than ask price and bid size is greater than ask size and the current prices are greater than previous prices for the majority of the stocks then the underlying sentiment is bullish.

 

For bearish sentiment the formula is as follows:

 

If the ask price for the majority of stocks of the DJIA are greater than the bid price and ask size is greater than the bid size and the current price is less than the previous price then the general sentiment is bearish.

 

The overall aim is to assess the bid/ask prices/sizes of the stocks of the DJIA to trade the mini-dow. So if I see large bidding in for the 30 stocks I will go long YM (mini-dow).

 

But there is one thing I haven't included in the formula which is volume.

 

Can someone please first comment on the strategy, secondly let me know if I should take volume into account (I think not because I'm already looking at bid / ask sizes, but would like you're suggestions.

 

Cheers

 

Carlton

 

P.S.

Sorry for the bad grammar.

[Tradewinds 12]

With that said I have compiled a spreadsheet which does the following for each stock and makes a tally of the numbers.

 

Where are you getting your data? Do you have any programing skills? Can you chart Supply/Demand relative to price to see if there is any correlation? What platform are you using? Do you have a way to get data on actual trades made as opposed to bid/ask that may not have filled?

[TheNegotiator 13]

Well I am guessing orders in general are more genuine in stocks than they are in the futures, I would would also say that they are still probably spoofed from time to time and also orders are not executions. So the participants have not committed to the trade, which is why people often use delta(either at price or per bar difference between execution at bids and offers) as a strength indicator.

 

http://www.traderslaboratory.com/forums/technical-analysis/9314-delta-volume-intraday-trading.html

 

If you just want a proxy, could you not just use TICK or TIKI(for Dow)?

[TheDude 10]

Hmm. 2 points:

 

1. If you want to trade YM, I'd focus on YM bid/offer, not the stocks. Futures can get out of whack with their underlying which is where arb traders make their money.

 

2. Personally, I'd disagree with the concepts you read. Study the market for your self and you will find that if the bid is larger than the offer, the market will tend to fall, not rally. This is because large traders will look at the size as an opportunity to execute their large trades. Also, look for spoofing where large size is placed in the book hoping locals/algo's will lean against it. the order is then pulled and the market jumps a few ticks and carries on.

 

Think of active/passive trading. If I want to buy I can either:

a. Join the bid with a limit order, I'm being passive. It means I can wait for a lower fill/better price. But, I may not get filled, especially if the market is volatile.

b. I can lift the offer to buy. This will ensure I get my fill, but I pay the spread for the privilege. This is actively aggressive. It means my desire/demand to get the product is greater than the people sitting on the bid. Thats more telling of demand than size in the book.

 

You may want to look at TICK or TRIN (cant remember which). This tells you how many stocks in the index are trading at the bid/offer.

[Tams 20]

Hello Traders,

...

The following caption was taken from Welcome To Tradetrek.com

 

Bid/ask prices are always posted with corresponding bid and ask sizes, which serve as measures of the strength and depth of the bid/ask prices. They tell us about the supply/demand pressures on a stock at a given moment. We can summarize important Bid/Ask size concerns as follows:

 

A large bid size indicates a strong demand for the stock.

A large ask size shows that there’s a large supply of the stock.

If the bid size is significantly larger than the ask size, then the demand for the stock is larger than the supply of the stock; therefore, the stock price is likely to go up.

If the ask size is significantly larger than the bid size, then the supply of the stock is larger than the demand for the stock; therefore, the stock price is likely to drop.

 

....

 

are you talking about the best bid size and best ask size?

or the cumulative of the ladder?

 

have you looked at the DOM,

and verified the theory is correct? (hint: I don't think so)

 

are you taking into account the wall effect?

[carltonp 10]

Thanks all for responding,

 

I will answer you questions when I get back to my desk.

 

In the meantime, I welcome more suggestions/comments.

 

One thing I would love to hear your comments on is if you guys thinks its a good strategy to use the underlying stocks of the DJIA to trade YM?

 

The comments from this forum are really insightful.

 

Cheers

 

Carlotn

[BlueHorseshoe 10]

One thing I would love to hear your comments on is if you guys thinks its a good strategy to use the underlying stocks of the DJIA to trade YM?

 

No. Stocks usually react slower than futures.

 

Nevertheless, I think that your idea of looking at interest at bid and offer is an excellent one, and if you invest the time to properly develop this based on the actual market behaviour (as manifest in historical data) then it should reward you.

 

What you should be able to move towards is a more quantitative answer to the question that many of the accomplished daytraders on here often ask - 'who is buying/selling at this price, and why?'

 

Hope that helps.

 

BlueHorseshoe

[BlueHorseshoe 10]

Thats more telling of demand than size in the book.

 

Well, it's more telling of historical demand . . . But otherwise I agree with everything in your post.

 

BlueHorseshoe

[BlueHorseshoe 10]

Do you have a way to get data on actual trades made as opposed to bid/ask that may not have filled?

 

Depending on what Carlton wants to do, this may not be useful.

 

Once orders are filled it is too late to capitalise on any opportunity they may have presented. It may be more useful to know about orders that have not filled before they have not filled, so to speak.

 

BlueHorseshoe

[BlueHorseshoe 10]

I think not because I'm already looking at bid / ask sizes, but would like you're suggestions.

 

Hello,

 

Ideally what you need to know is neither the historical number of completed trades nor the current number of limit orders. What you want to know is the number of buyers who will, in the future, be prepared to pay the spread.

 

Because of the more simple and reduced scheme of order types available to futures traders, the information you need is more easily derived from futures than stocks. Futures are also far more liquid, resulting in a greater natural 'smoothing' of interest.

 

Consider the following scenario:

 

BIDAAAAASK

AAAAAAA84

AAAAAAA83

AAAAAAA82

81

80

79

 

There are seven key pieces of information that are now of value:

1. The number of traders prepared to buy at bid with limit orders at 81 (or less) ***
   
2. The number of traders prepared to sell at ask with limit orders at 82 (or more) ***
   
3. The number of traders prepared to buy at ask with market orders at 82 (or more)
   
4. The number of traders prepared to sell at bid with market orders at 81 (or less)
   
5. The total number of traders who currently hold positions (open interest) ***
   
6. The total number of traders who may want/need to trade at this price
   
7. Where your own order sits within the order book.
   

I have asterisked the information that is available in your data feed.

 

Two important derivatives of the above are the following:

 

1. The ratio of traders who are prepared to buy at ask (with market orders) versus those who are willing to sell at ask (with limits).
   
2. The ratio of traders who are prepared to sell at bid (with market orders) versus those who are willing to buy at bid (with limits).
   

 

If you can work out how to obtain decent estimates of the information above that is not disclosed by your data feed, then this should form the basis of the information you need to judge liquidity and very short term price movement.

 

BlueHorseshoe

Edited July 30, 2012 by BlueHorseshoe

[ForexTraderX 10]

Hmm. 2 points:

 

 

 

2. Personally, I'd disagree with the concepts you read. Study the market for your self and you will find that if the bid is larger than the offer, the market will tend to fall, not rally. This is because large traders will look at the size as an opportunity to execute their large trades. Also, look for spoofing where large size is placed in the book hoping locals/algo's will lean against it. the order is then pulled and the market jumps a few ticks and carries on.

 

You may want to look at TICK or TRIN (cant remember which). This tells you how many stocks in the index are trading at the bid/offer.

 

100% dead on with 2. In fact, I know of some HFT models that look for a large cumulative offer before executing a BUY order... or a large bid before a large SELL order. One must think deeper than the obvious. Remember, the obvious has been thought of, and if it worked, we'd all be rich.

 

It's like the news. you can't just buy blindly when good news comes out, or sell when bad news comes out and expect to make a profit. You must understand the motivations behind why actions are being taken, and what they represent to the counterparty who is taking them.

 

In futures for example, it's typically the "more desperate" party who is willing to cross the bid/ask threshold.... so large players will "fish" by throwing out a large contract number on the bid or offer, to see if price jumps up or down towards the big number... because they want to see if there is a "big player" who is desperate to dump what they have, and willing to execute at market price for it.

 

And why does said big player wait until a large number hits the market? because they don't want slippage.

 

Some things in the market can be taken at face value, but others.... can't. figure out which ones can and what can't, and you'll be ahead of the game.

 

TraderX

[ForexTraderX 10]

Hello,

 

Ideally what you need to know is neither the historical number of completed trades nor the current number of limit orders. What you want to know is the number of buyers who will, in the future, be prepared to pay the spread.

 

Because of the more simple and reduced scheme of order types available to futures traders, the information you need is more easily derived from futures than stocks. Futures are also far more liquid, resulting in a greater natural 'smoothing' of interest.

 

Consider the following scenario:

 

BIDAAAAASK

AAAAAAA84

AAAAAAA83

AAAAAAA82

81

80

79

 

There are seven key pieces of information that are now of value:

1. The number of traders prepared to buy at bid with limit orders at 81 (or less) ***
   
2. The number of traders prepared to sell at ask with limit orders at 82 (or more) ***
   
3. The number of traders prepared to buy at ask with market orders at 82 (or more)
   
4. The number of traders prepared to sell at bid with market orders at 81 (or less)
   
5. The total number of traders who currently hold positions (open interest) ***
   
6. The total number of traders who may want/need to trade at this price
   
7. Where your own order sits within the order book.
   

I have asterisked the information that is available in your data feed.

 

Two important derivatives of the above are the following:

 

1. The ratio of traders who are prepared to buy at ask (with market orders) versus those who are willing to sell at ask (with limits).
   
2. The ratio of traders who are prepared to sell at bid (with market orders) versus those who are willing to buy at bid (with limits).
   

 

If you can work out how to obtain decent estimates of the information above that is not disclosed by your data feed, then this should form the basis of the information you need to judge liquidity and very short term price movement.

 

BlueHorseshoe

 

I find the side with the least fluctuation, tends to be the most reliable to force price up if it is currently moving up already, or down if it is down.

 

say we are trending upwards... the offer side will often have a cumulative total bigger than the bid, except when the deeper level orders are pulled up higher, they will flash away, and then reappear, so there is a larger variance in order size on the offer as the market moves up...the faster, the move it will fluctuate.

 

And, the bid size will stay relatively constant compared to the offer size...

 

I don't even know why i'm telling all of this. lol. anyway. good luck with it.

 

Bottom line is....watch... VERY carefully first to find out what you observe...and then, question why it is that way. if it then makes sense, you now understand why it works, and can extrapolate that condition and either develop a model to trade it, or find another similar circumstance to develop a model around.

 

Good luck

[uexkuell 10]

Stocks usually react slower than futures.

 

If that would be true it would be key to a fail safe strategy.

 

 

("Buy the stock basket when futures go up and vice versa for down."

 

Needless to say it does not work this way.

Can never be sure if futures are leading or lagging.

Mostly today the delay is anyway in a sub second timeframe.)

[BlueHorseshoe 10]

If that would be true it would be key to a fail safe strategy.

 

 

("Buy the stock basket when futures go up and vice versa for down."

 

Needless to say it does not work this way.

Can never be sure if futures are leading or lagging.

Mostly today the delay is anyway in a sub second timeframe.)

 

Hi Uexkuell,

 

It is indeed the key to a fail safe strategy, often called 'Futures vs Basket Arbitrage". Many market participants exploit it hundreds of times per day, but not retail traders.

 

As you correctly point out, the delay occurs in sub-second timeframes. Unless you have the infrastructure to take advantage of it this strategy is of no direct utility.

 

BlueHorseshoe

[ForexTraderX 10]

you can always arb futures and their underlying...and it doesn't have to be sub second stuff.

 

For example, you can right now, today, go long the September expiration 6A contract at the price of 1.0534 (right now)... it's $100K value.

 

you can also go short the equivelent of the AUD/USD spot market...which right now is priced at 1.05674.

 

That's about 33 pips (or ticks) of value that you'd get a guaranteed profit on in about... oh, 6 weeks.

 

so... about $330 in 6 weeks per contract. Of course, you have to be able to weather the volatility if the spread between the two increases while you hold it...but, this is a relatively low risk profit potential, and it's also a guaranteed profit if you can hold for the time.

 

Just some thoughts.