Alright, back in the day when I was trying to learn how to trade, I spent lots of time watching the DOM display. I read so much info about it, gurus on ET claiming that it's "all they need" and they "don't even need to look at the charts" (lol, don't Woodie's followers say the same thing?). I never got that. I thought maybe whichever side had more open orders would attract price. Nope. It was random. I thought maybe whichever side had fewer open orders would attarct price. Nope. It was random. I added crap like bar charts, totals, all these cool options to mY DOM screen to give me all sorts of information about the orders. No patterns. No predictibility. It was random. I read the theories that said "price goes where the orders are." Market makers don't care where price goes, they just go where the orders are. This seemed to be true about 50% of the time. lol. But I do have a question: Who decides which way price goes? Say price is currently at X, and there are orders at X, X+1, and X-1. Actually, ignore the orders at X. Say there are orders at X+1 and X-1. Equal numbers of orders, or unbalanced, it doesn't matter, you pick. What determines whether price goes to X+1 or X-1 next? Also, why does it skip over numbers sometimes? Price will be X, and there will be orders at X, X+1, and X+2, and X+3, yet the next tick will be X+3. Why did X+1 and X+2 get skipped over? Conclusion: DOM movement is random (because price is random) and provides no edge (at least not to a human trader).
Predicted responses: - "DOM can be used. I can use it. You can't cuz you're dumb." - "DOM can be used. I'll teach you how for money" (this will likely be a PM) - "Just because YOU can't figure it out doesn't mean it's not possible. This is why you fail, you've got a loser's mindset, blah blah blah" (this post will come either from a losing trader or from a "guru" trying to sell something)
1a2b, Not familiar with DOM but my understanding of order flow is that it gives you not only the number of buy/sell, but the distinction between "aggressing" orders as opposed to "reacting" ones. Meaning it tells you which side is initiating the transaction. If the market trades at X, then bids at or above X and offers at or below X are the "aggressors" as opposed to bids with limits below X and asks with limits above X. If you have that info, then you know which way the market is going to move. By definition, that info is only available before it hits the market, since as it does, the order is filled, so it is not in the published order book. Not aware that this is public information. In fact, this is the better "edge" in FX. Do you have that in DOM?
Learning how read tape off the DOM takes a lot of time. Some ppl believe that the cumulative of the DOM determines where prices is going in the next, this counter intuitive. For example, if the sum on ask side is 90 in CL and 50 on the bid side, price most often moves up. I prefer to just watch price action up ticking vs. down ticking. If prices BO of R and then is up ticking 3 and fast vs down ticking 1 and slower I know momo is upside and that's were I should be. There are lots of good info at Big Mikes or TL, not much here
You're not describing (or perhaps not seeing, if your data sucks) all the ticks in between. If a liquidity-consuming buy order hits that moves price from x to x+3, it will in the process buy everything at X+1 and X+2. Now, if you want to predict the flow of liquidity consuming orders from the book, you're going to fail - they're not in the book. At best you can loosely predict one class of them - people trying to move size. Many liquidity consuming orders aren't moving much size on a per-order basis, and to predict those you have to look somewhere other than the DOM.
Its a free world as they say, and everyone's entitled to their opinion. Besides market makers are the same as traders, trader implies educated directional guess which MM obviously isn't.