Iâd like to outline my initial impressions based on a couple of weeks of observation. This will hopefully prompt some discussion and an interchange of ideas by those who have more experience in applying the DOM to their ES trading. In typical fashion, I prefer to dramatize ideas for visual impact. (Disclaimer: In continuing the stylized Medieval warfare analogy, there will be gross oversimplification and copious historical inaccuracy!) * * * * * Red and Blue. Two warring factions, locked in eternal conflict⦠RED = ASK 1270.25 = 1210 1270.00 = 1432 1269.75 = 824 1269.50 = 623 1269.25 = 242 BLUE = BID 1269.00 = 106 1268.75 = 434 1268.50 = 789 1268.25 = 832 1268.00 = 1687 1269. Sword clashes upon shield, frenzied screams fill the air, and blood is spilled. The air is thick with the stench of battle. Skirmishers throng, thrusting and parrying, locking eyes and scowls. 1268. Behind the tumult, the Blue pikemen hold their line, feet planted, weapons braced in steely unison. 1270, 1270.25. The Red pikemen form serried ranks, glaring in defiance and defending their position with strength in numbers. The Blue army swells. Red soldiers fall, corpses bursting into dust, and the Blue pikes march relentlessly forward. [to be continued...]
Ok, I think it may complicate (rather than simplify) things to remain in the original vein, so will continue posting observations. Referring back to the above DOM, lets say 1270 is a significant resistance level. Strength The greater the number at 1270, and the greater the depth of support (i.e. number of ticks deep), the greater the commitment of the sellers to hold that level. Confidence If the 1k+ numbers start from 1269.75, that would suggest the sellers are confident, whereas if the 1k+ numbers begin from 1270.25, that would suggest diffidence, with the degree of confidence/diffidence affecting the distance of the 'front-line' from the established S/R level. Breakouts If 1270 is challenged by the buyers, and 1432 drops to 432 in one second, that would increase the probability of a breakout. If 1270.25 drops too, and both levels are taken out in quick succession, that would suggest the momentum is with the buyers. If, however, support builds up in depth above 1270, and every time 1270 is taken by the buyers, it is quickly retaken by the sellers, then the likelihood of a breakout will drop significantly.
neoxx You can have a look through this thread http://www.elitetrader.com/vb/showthread.php?s=&threadid=42947
By coincidence, I've been studying DOM myself. I found that Button Trader has been helpful because it shows a tick chart alongside the DOM. In addition, the DOM also shows a ratio of cumulative bids to asks. What got me interested in this was a posting I read where some guy claimed he could trade the DOM all day just sitting in a Starbucks. No charts, no TA, just DOM. Of course you must take everything you read on the internet with a grain of salt. Still it sounded intriguing.
Thanks for the link, BoyBrutus. Excellent thread. I'm pretty sure I'll need to read it a few times to understand everything, especially once I'm more familiar with the inner workings of the DOM. Some of the main points I took away were: 1) Bid/ask pollution by spoof orders 2) => Transactional data > Nominal quotes i.e. Prints > bid/ask 3) Market trading to size in a trending market 4) Change in DOM trumping absolute size for utility due to FIFO
Yeah, Button Trader got a few mentions in that market depth thread. Will have to look into it. And one of the main posters was possibly your Starbucks guy. Not sure if my powers of concentration would be up to just staring at the DOM all day long...
IMO, it's more important to recognize when someone is not buying rather than when someone is selling. One can't analyze a transaction exclusive of the impact it has on the market. Someone might sell 1,000 contracts, but as long as there is someone there who is happy to buy, it's not going to move the market in a significant way. The bottom line is that large size doesn't necessarily equate to an imbalance in supply and demand.
I honestly believe the DOM for any contract is deceiving...why...many "fake" orders could be entered...also...many could be covering a short position etc. rather than entering one...no way to know...so, would not put much "stock" in following the DOM of ES, YM etc.