I've noticed that most of the time, when the market rallies, the offers in my DOM outnumber the bids, sometimes greatly so, and vice versa during a sell-off. I saw a thread here that even discusses how to scalp based on this fact. To me it makes absolutely no sense. If there are more offers than bids, that means more people are interested in selling than buying, so why would the market go up? Is this a sign that the market is being manipulated? I.E. there really are more "regular" people who want to sell, but the manipulators (whoever they are) are having some fun at everyone's expense? TIA for any explanation, Shraga
It's only "manipulation" if you're losing money. Remember, aggressive buying makes the market rally, not posting large offers above the market. Nobody is conspiring against you.
Have a look at the charts I posted here http://www.elitetrader.com/vb/showthread.php?s=&threadid=78980&perpage=6&pagenumber=20 Also search for the thread on ACV.
A market exists for one reason and one reason alone - to facilitate trade. And, generally, markets that are more efficient at facilitating trade attract more participants/business. That is, they are more successful. In order to efficiently faciltate trade the market (ie: prices) must continually gravitate toward size - because this is where there is the most business to be done. Fairly obvious I would have thought? bolter
I agree with you in theory. Which is exactly my question! For some reason rallies are always accompanied by offers above the market that are larger than the bids below the market, which just doesn't make sense to me...
Dcraig, what you wrote there really makes sense, thank you. Your chart seems to show that tracking the ask/bid is really a valid way for tracking the bullishness/bearishness of the market... I hope you don't mind me quoting you for the benefit of anyone reading this thread. Quote from Dcraig: "I've read various explantions for 'the market moves towards size' but here's my take. At any time there are more or less equal numbers of buyers or sellers in the maket (otherwise it would take off at great speed). However they are not necessarily equally enthusiastic. When the market anticipates increasing price, the buyers are placing marketable orders (limit, market or stop). These are not visible in the book but their effect is visible in the market delta and time and sales. If you believe the market is rising, there is not a lot of point is placing a buy limit below last traded price. The market exists to facilitate trade. On the other hand, the sellers anticipating a rise in price, are placing sell limits which are visible in the book. In this sense, the order book on occasion leads all other indicators of market activity and shows a majority view of where the market is heading."
Read mind of market and try to understand initiative and responsive activity. An offer is not a seller. To me, an offer is someone who is presenting as if he wants to sell. If he really want to sell it so bad, he would just hit the bid. That way u will have price moving lower. Hitting the bid is initiative activity. A resting offer is reponsive activity.
One interesting thing about this DOM behavior is that it is far more noticeable in stock index futures than Globex currency futures such as EUR. I would speculate that the forex futures are much more subordinate to an underlying cash market and that is the reason. It would be interesting to hear any other thoughts about this.
dcraig, Obviously the currency futures markets do only a tiny fraction of the volume that goes through the cash market - even the majors. The cross-rates - forget it. Arbing ensures the futures pricss never get too far out of line, but anybody who has studied these markets with Market Delta or similar, as I'm sure you have, will know that they are not purely volume based supply/demand driven. They follow the cash market. There are other reasons why the currency futures trade differently also. For example, alot of funds who trade currencies actually execute orders in the cash market, for liquidity reasons, but their order is then EFP'ed into the futures market. This is done for portfolio valuation purposes. A future has a single clear and unequivocal settlement price each day. Valuing a position in the cash FX market is less straightforward. regards, bolter