I met someone who is an HFT in Chicago, and he said that he traded based on order book data and trade price/volume. Stupid question, but can someone explain what this means??? I guess the order book is the bids and asks at various prices, and the trade price and volume are obvious, but how can you trade based on this? Is there a very simple, well known strategy that someone could point me to so that I can read up to understand this?
Hi, It is a long subject to explore but you can start exploring the VSA(Volume Spread Analysis) principles. The fastest way is to read Tom William's book "Master the Markets". Another good way is to visit TradeGuider.com and take their course. It is good. Also, read the works of Wickoff and Humphrey Neil on tape reading. Hope it helps you. Regards, Joao Paulo
I have been thinking about this stuff for a while but haven't had time to get past collecting data. I have worked with databases of limit order books but not for anything predictive. My approach will probably be to come up with a few measurements that capture the status of the book and do event study analyis when interesting levels are reached. You could start with something like size on best 5 bids - size on best 5 asks, to get the depth imbalance. Get a time series of depth imbalances and subtract its from its moving average. When it reaches an extreme level, that is your event. Look at what happens from the next second out to 2 minutes, see if it predicts anything. Collect a sample of events like that and analyze Define a bunch of different types of order book events and have fun. I have seen some academic papers with examples of order book analysis, I'll look for some and share if the thread keeps going
If you trade forex, have a look at orderbookfx.com. They have a tool that gets the order book depth from a pool of liquidity and then, you can see the limit orders and sizes. Just look for the sizes becoming bigger on bids or asks and observe the price behavior. You can trial the tool for 7 days free. Note: I have no participation nor business or financial interests with orderbookfx.com site, its products and company. I am only a user and would like to share knowledge about their tool. Regards, Joao Paulo
The answer is already in your good question, you got it. It means nothing. It's just like saying "I trade based on charts". No, there ain't a *simple* strategy. But there are ways to use the order book. It might be helpful to look into this old (but still interesting) thread on ET: http://www.elitetrader.com/vb/showthread.php?s=&threadid=42947&highlight=market+depth