need help understanding market depth

Discussion in 'Order Execution' started by barmaleev, Jan 15, 2009.

  1. Hi,
    Can somebody clarify 1 aspect of the market depth as the more I think about it the more confused I become :)
    I am learning to scalp, so don't get shocked by what I percieve as local S&R levels....

    In the attached image, is the ask price of 923.00 seen by the market as resistance and a price of 921.75 as support?

    If so, what happens when, on a downtrend, the price approaches 921.75? this where traders will (or not) start buying again in an attempt to uptrend the market?

    ....if trades occur at bid then the contracts will be taken out of this price level (921.75) and the price will fall to 921.50, if 921.75 is a buy limit seen by many on what conditions will the price start to move up again?

    ...for this to occur, trades must occur at ask, but how can this happen if BUY LIMIT is set at 921.75 (to be executed at bid)? it because the buyers can't wait until 921.75 and start buying at ask maybe at 922? does this mean 921.75 is never reached because of anticipation of an uptrend?

    Is it the same for the sell side?
    On an uptrend, once the price reaches 923...buyers must be willing to buy at ask.....but since too many sell....they probably can't win...and so we have local resistance?

    Can somebody confirm my thoughts?
    There is some action at those prices which must imply they are important somehow....

    what other situations could play out at those prices?

    given the speed at which the dom changes is it worth learning it?

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  2. I will try and help you with my perspective, I am a DOM trader.

    It is not the size of depth at each level that matters - that can change in a microsecond and doesn't account for market orders and limits that suddenly blast in. And big fake bluff orders that get cancelled.

    The useful part is the TAPE - i.e.

    -whether or not the trades are going off mostly at the bid or ask

    -what size trades print respectively on bid and ask - and are the levels getting swept clean as the market advances? Or is enough size coming back in before a level get exceeded?

    -does the bid chase with more size or does the ask chase with more size?

    If you watch the DOM very closely for about a year, at least a solid hour or two per day, then you'll start to see buy & sell "pressure". And you can also see if a move is solid with real follow through or just a thin spike that may need to be faded (or take profit fast before it fizzles).

    IMHO, this is the true footprint of the market happening in real time. It can't be hidden.

    Again, entirely my own perspective, I can't prove it with math or anything. But it works for me.
  3. moarla


    i woud say the bigger players (= market movers) you will not see on a DOM, they are using market orders or they enter on the bid ask so that you will not see it they enter the order, (too fast in eecution)....
  4. Exactly, you can only see the print of their trades, not them sitting there on depth.
  5. Slapshot, thanks for your reply.
    I actually look most of the time at the tape and the reason why I'd like to understand the dom is that it can show in advance what could be a next S or R level before the tape records it.....i.e. those limit orders in my image.
    the thing is how to identify if those limits are true levels or a manipulation by big players....
    if they are true (not removed), then the tape can confirm that they are genuine.

    Do you know if the orders seen in a dom (or in the tape) show only orders from the broker that I use or all orders (from all/many brokers) cleared for that specific contract at that time?
  6. Moarla,
    Yeah, common sense tells me that showing their true intentions is the last thing they want to do :)
    But still, those orders in dom can probably indicate where there could be some price pressure....or where the marker movers want you to believe price pressure could be ;)
  7. "Consider everything that appears on the tape as an evidence of support and lifting power, or pressure and selling power. Continually compare the strength of these forces. Use all the judgment and reasoning power at your command. Endeavor to improve your judgment by constant study and practice. Strive to lift your judgment from commonplace to good; from good to better; from better to excellent."

    -- Richard Wyckoff
    Don't bother to go that way... just look for patterns of bid-ask behavior. A common eg. you'll see a bid with 100 lot size comes. There will be a flurry of buying orders but the offer keeps selling without showing its size. Then the bid gets printed in one go and the sotck drops like a stone. This is only one. If you track one minute charts with the DOM you'll find many.

    You may like to read Larry Harris' book on Microstructure to get initiated for bid-ask strategies.
  8. If we are talking about CME/Globex, it is all electronic orders on the exchange - as far as I know, anyway - but remember there are pit orders also.

    Example, say you are trading ES mini S&P 500 - you could be looking at substantial "ask" depth, but then some big-ass trader (or group of them) buys 5000 full-size S&P's in the pit - this pretty much makes the e-mini depth you are looking at irrelevant as it will get wiped clean in an eyeblink . . .

    Becuase of this, I do not agree with your statement that the DOM accurately shows support or resistance in the depth of orders showing - rather, it is the price action of the prints on the tape near those price levels that is key IMHO.

    In other words, because the DOM obviously can't show the intent of traders who have not yet pulled the trigger on any orders - traders that are nowhere in the limit order queue - it is not a reliable indicator of S & R.
  9. Redneck


    Think of DOM as advertising (pure and simple) - and you know whay they say about "Truth in advertising" - There ain't any

    Stick with the inside bid/ask - for an "indication only", and of course the tape (Time & Sales)

    Food for Thought
  10. Thanks for these clarifications.
    Now I have to look at the market to see your thoughts confirmed.
    I am gonna go and watch the tape for an hour or two before I go to sleep :D
    #10     Jan 16, 2009