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Anyone find any edge with activity based charts over time based charts?

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iantg View Post
Hi reduktion,

This type of analysis won't be very useful for 99% of most retail traders because it is looking at an extremely granular view of the market. But here is the general idea:

The picture below shows the DOM with the strong side and weak side noted:

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The strong side: These are the two sides that carry resting volume to the transaction level. Because people can place orders ahead of time and wait in the queue, the strong side will typically accumulate more volume than the weak side and therefore historically the strong side beats the weak side.

The Weak Side: This represents new price levels that are spontaneously created and filled with limit orders at the birth of the price level. By Contrast this side can not pull resting orders from existing price levels into it. So this puts it at a disadvantage in the match-up against the strong side. The weak side will typically lose against the strong.

At the very center the two colored numbers represent the best bid vs. the best ask on the transaction level. For every price level, one side will pull resting volume from the strong side, and one will spontaneously build volume up, (this is the weak side) and the two will do battle until the market orders chop down the limit order volume from the side that breaks first, then the market will move to a new price level and repeat.

*** Notes below only apply to the ES:

When I speak of winning or losing between the strong side or weak side (Which side breaks first), I do not mean this anecdotally. I analyzed every price level change on the ES in 2017 and the ratio was: Strong side 65% weak side 35%. In times of higher volatility this becomes more even and you will see anywhere from a 50% / 50% split to as much as 45% strong side to 55% weak side. I think you will have hard time finding days where the weak side ever beats the strong side by more than 5% to 10%. In medium volatility it is usually 55% to 60% strong side winning. In low volatility this is usually 65% to 70% strong side winning.

All instruments will likely have a similar pattern, but the ones that are more mechanical will be more like the ES. I also looked the the NQ, and YM and they favored the strong side less, but this is obvious because they have less resting volumes typically and are not as automated by trading algo's.

Regarding transacted volume vs. resting volume:

Resting volume just means the volumes you see posted on the DOM from the strong side on each price level. In this example (Enclosed image) We can see that outside of the transaction level, the lowest volume on both the bid and ask is at 300 ish, and this goes as high as 800 to 900.

Transacted Volume: The transacted volume refers to how many contracts traced at the bid or ask on a given price level. *** This is the part where this analysis will lose most retail traders. Most traders aggregate their charting tools up based on fairly arbitrary units of measure such as (By # of trades, (Ticks), by Time, (Every 10 seconds, every 1 minute) etc. The action that occurs on an individual price level is important and should ultimately be viewed for each price level to make heads of tails of what occurred.

For example:

The Starting volume from the strong side = 400
The Starting volume from the weak side = 0.
As soon as the price level is created and traders get this information the following occurs:

1. 100 HF traders immediately cancel the strong side volume, moving it from 400 to 300.
2. HF traders add 200 limit orders to the weak side. (So now we have 300 SS vs. 200 WS)

*** 1 and 2 above occur before any market orders even hit the price level.

3. Now 100 market orders hit the strong side and chop down the volume from 300 to 200
4. Market orders do not seem as interest in the weak side and only take out 20 of the 200.

*** Reaction from points 3 and 4.

5. Based on points 3 and 4 above: HF traders fill up even more volume on the weak side, they are now betting this side will win because of light interest from the first round of market orders. So now the weak side is up to 300
6. HF traders that were on the strong side see the weak side volume increasing and the market orders to their side keep coming, so it is becoming obvious that this is losing battle. Out of the 150 or so that are left. 100 cancel strategically getting out of the way, avoiding the impending doom.

7. The Ending: There are now 50 or so unlucky traders still left on the strong side that did not land their cancel in time, or did not know to cancel (Retail traders) The market orders quickly take them out and this side breaks, the strong side loses and the weak side wins.

From the points 1- 7. We can observe that around 50% of the starting volume from the strong side was strategically canceled and not transacted. Reconciling this, you can simply get an output of the transacted volume by Bid and Ask for this price level and see it.

You take the starting volume before the price level the transaction level:

1. 400
2. The transacted volume: In this example, 200 or so
3. So the delta here is 400 - 200. So this implies that 200 of the original volume was speculative, strategically cancelled and this can give you clues about a whole host of other things, but most of this will be useless to retail traders.

I think this will give you some ideas:

The edge case here is not really something that most people would ever pick up on or use. But comparing transacted volume to resting volume can give us clues about the market dynamics.

Hopefully this fields you query, and peaks your interest in micro structures a little.

Happy Trading


This is EXTREMELY interesting to me, honestly I understand about 85% of what you said above the last few points kind of ran together, any chance you have some recommended material/starting point for understating this?

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