Please look at the figures below. A) Bid volume = 2000 Ask volume = 1000 bid/ask ratio = 2:1 B) Bid volume = 4000 Ask volume = 2000 bid/ask ratio = 2:1 Both ratios are equal but the volume for B) is double that in A). How could I distinguish the two in terms of a ratio or an alternative? Thank you. Grant.
You could maybe add a variable called spread? bid/ask 1 = 2 spread 1 = 1000 bid/ask 2 = 2 spread 2 = 2000 Does your answer have to have a result with only one parameter? Another possibility is to take the log of each number, then look at the ratio of logs. 1) log bid/log ask = 1.100343 2) log bid/log ask = 1.091193 You get a 10% incremental gain for each doubling that happens relative to 1,000 shares bid. But if the reference is no longer 1,000, the gain will drop proportionally. i.e. 1000/2000 = 10% 2000/4000 = 9.12% 3000/6000 = 8.66% or 1000/4000 = 20% (doubled twice) 2000/8000 -= 18.24% 3000/12,0000 = 17.31% 4000/15,000 = 16.71% notice this tell you about doubling magnitudes and gives you an incremental difference the magnitude of the original quantities moves up.
Dtrader98, Thank you for the reply. Being mathematically backward this was a difficult one for me. As you pointed out the problem will be if the reference itâs constantly changing, which it is. However, I reckon Iâve found a solution: Originally A) Bid volume = 2000 Ask volume = 1000 bid/ask ratio = 2:1 Solution Bid vol = 2000 log(2000) = 3.301 log(3.301) = 0.519 Ask vol = 1000 log(1000) = 3.000 log(3.000) = 0.477 0.519 + 0.477 = 0.996 B) Bid vol = 4000 Ask vol = 2000 = 1.075 Extreme example: Bid vol = 15,000 Ask vol = 1000 = 1.098 Grant.