Please Review My Bid/Ask Strategy

Discussion in 'Risk Management' started by carltonp, Jul 20, 2011.

  1. Hello Traders,

    Would some of you experienced traders please provide comments on my bid ask strategy that I have compiled using Excel.

    Let me give you a brief explanation.

    The strategies goal is to help me determine who the major players are at any given moment by looking at the bid/ask price and bid/ask size for the stocks of the DJIA.

    The following caption was taken from

    Bid/ask prices are always posted with corresponding bid and ask sizes, which serve as measures of the strength and depth of the bid/ask prices. They tell us about the supply/demand pressures on a stock at a given moment. We can summarize important Bid/Ask size concerns as follows:

    A large bid size indicates a strong demand for the stock.
    A large ask size shows that there’s a large supply of the stock.
    If the bid size is significantly larger than the ask size, then the demand for the stock is larger than the supply of the stock; therefore, the stock price is likely to go up.
    If the ask size is significantly larger than the bid size, then the supply of the stock is larger than the demand for the stock; therefore, the stock price is likely to drop.

    Because bid/ask prices and sizes change quickly in real-time, supply and demand also change quickly in real-time. Experienced traders always pay very close attention to the bid/ask sizes of a stock to monitor the supply-demand dynamic. Short-term traders usually buy a stock only when the demand is higher and sell a stock if demand suddenly becomes lower relative to supply.

    With that said I have compiled a spreadsheet which does the following for each stock and makes a tally of the numbers.

    The formula is as follows:

    If bid prices for the majority of the stocks of the DJIA are greater than ask price and bid size is greater than ask size and the current prices are greater than previous prices for the majority of the stocks then the underlying sentiment is bullish.

    For bearish sentiment the formula is as follows:

    If the ask price for the majority of stocks of the DJIA are greater than the bid price and ask size is greater than the bid size and the current price is less than the previous price then the general sentiment is bearish.

    The overall aim is to assess the bid/ask prices/sizes of the stocks of the DJIA to trade the mini-dow. So if I see large bidding in for the 30 stocks I will go long YM (mini-dow).

    But there is one thing I haven't included in the formula which is volume.

    Can someone please first comment on the strategy, secondly let me know if I should take volume into account (I think not because I'm already looking at bid / ask sizes, but would like you're suggestions.



    Sorry for the bad grammar.
  2. Bob111


    comments? sure... not going to work. partially cause of those HFT's fake orders
    a question to you: ok, you saw dis-balance-let's say 2:1. then what? long till what?
  3. Locutus


    Try it on a simulator and see how it works out.
  4. Thats another discussion. Any comments on my strategy?
  5. Locutus


    I haven't found bid/ask imbalances to be universally predictive of future price movements.
  6. Locutus,

    I wonder if anyone agrees with you? I've used it for a short while and I would tend to agree..
  7. bone

    bone ET Sponsor

    Bid / Ask sizing ultimately has nothing to do with the direction that price takes in the future. Initiating (aggressive offer lifting or bid hitting) order flow can be helpful for very short timeframe horizons.
  8. What I have found in both futures and stock markets is actually the opposite. The market moves towards size in the book, as that is what the market is built to do. Efficiently process trade.

    Simple terms, I have found bigger offers attract heavy buyers, and bigger bids attract heavy sellers. Why? It is easier for buyers to buy if there are more sellers wanting to sell.

    Ex. RIMM is trading at 29.99 x 30.00. Naturally there is way more offers in the book as it is a whole number. 80% of the time however, they probe above the $30 area and break those offers. Very rarely do you see a stock's high or low be a round number.
  9. bone

    bone ET Sponsor

    There can be alot of spoofing and order-crossing going on in terms of gamesmanship - especially during the off-hours.
  10. Locutus


    Yes, but that knowledge in itself isn't a trade able system. However if you are very short-term trading I think it helps your odds if you trade "towards" size in the book rather than away from it like the OP's strategy wants to do. Still even "trading towards size" isn't really a good system because an adverse move can still very easily happen.

    The way I've always thought of it is, if there are many offers near the last price participants aren't worried about not getting lifted higher (otherwise those offers would be hitting the bid NOW and driving prices lower instead of just sitting there) and vice versa. A weak bid side would imply buyers are not "relaxed" at all and are worrying about not getting filled. It's probably not a good idea to be a contrarian on this timeframe.

    Edit: For the shortest timeframes I think this reasoning applies best to the most liquid futures markets because it's impossible to "game" these things too easily without taking insane risks.
    #10     Jul 20, 2011