After reading some of the ideas on the other thread with regards to tape reading, I thought I'd put down a few observations and some of my own ideas. I hope I can get some good feedback from others who make different observations when viewing bid/ask and size. This isn't intended to be a system per se, but merely a clarification of my interpretation of a simple tape reading method that was discussed in the other thread, and expanded by my own practical observations, and is mostly for my own benefit in organizing my ideas and in getting feedback from others. 1) The basic idea is to align yourself with the large size. For example, if there are 200 on the bid and 800 on the ask, you want to be a seller. There is a lot more to it than that, however. 2) You want to go with large size that is significantly larger than the other side. For instance you want to see a 3 to 1 ratio or more. So merely 500 vs. 400 won't be enough to sway your opinion, but 500 to 100 would be a significant ratio in favor of the larger side. 3) You need to have a significant absolute # of contracts to turn the trend. In addition to being larger, and being significantly larger by a 3 to 1 ratio or more, you also want the absolute size at the bid/ask during the trading day (depending on what the liquidity is like at the time) to be large in order to indicate a trend change. In most instances in the current market this is 500 contracts or more. So you would like to see 500+ on the Bid with say 150 on the Ask to indicate a turn to the upside. Having 200 vs 50 isn't enough of an absolute # of contracts to trigger a trend turn, even though it exceeds the relative 3 to 1 ratio. 4) With regards to going with the larger size, it doesn't apply when the market is making new highs in an uptrend, or new lows in a downtrend. Let's take an uptrend for example. In an uptrend, the price is consistently breaking to new higher levels. At each new level, the Ask size is going to start off large, and then get whittled down as price moves up to the next level. So at the outset of a new high level, you may have 100 Bid, 1200 on the Ask. This doesn't mean that you fulfill #1, #2 and #3. In order to fulfill these rules, you need to first have (at least) one shift down in both the bid and ask price from the new high spread level. Then if the Ask forms 1200 and the bid goes to 200, you would have larger size forming on the Ask price, and the larger size is significantly larger than the size on the bid in both absolute and relative terms, indicating a change in the balance of power to the downside. For example, price is trending up: bid 1046.00 500, Ask 1046.25 800. Price ticks up to the next level: bid 1046.25 100, Ask 1046.50 1150. Rules #1-#3 aren't met because this is an uptick in an uptrend according to rule #4. The spread then moves down one tick so we are back at bid 1046.00 1300, Ask 1046.25 300 Then size makes a dramatic change and we get: bid 1046.00 300, Ask 1046.25 1200 This size change gives us a signal that the balance of power is shifting from up to down. This shift in the balance of power occurs on a downtick for a shift to the downside, and vice versa on an uptick for a shift to the upside. Because this is the case, we then apply rules 1-3 and find that all are met, so we do have a shift in the trend from up to down, so in theory we would go short under this scenario, or say that according to our tape reading the trend is now down.
I'm convinced there are size buyers/sellers out there that put up phony orders on the opposite side of their true trade in order to influence the market. For example, the trading is somewhat stalled at a particular price level. There is a size buyer at the inside bid that isn't getting filled. He places orders for several hundred or maybe even a thousand contracts on the inside offer expecting traders to see that as a sign that the market is heading down. As expected, traders start hitting the bid. The size buyer gets filled, and immediately pulls his orders on the offer.
I watch time and sales on ES while I am trading but do not place much faith in the size. I simply try to capture the spread when I am entering a trade by waiting for a large number of trades to go off at my price. It helps but is far from perfect.
Good Point. I think in many cases a big order will be canceled because the arb can see that price in the other contract has either already gone or is going up to the next level, so rather than eat the whole thing, they cancel and move up to the next level.
The orders are real. But as you state, the game is to get the other guy(s) to blink. Kind of a shark vs. the fish maneuver. Sometimes it appears to work, often it doesn't. When someone is playing that game, it isn't unheard of for someone else to play Gotcha by hitting the "phony" order. Kind of like a poker game where you call the other guy's bluff. At least when you call, you think the other guy is bluffing, but he may be holding a full house.