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

  #21 (permalink)

charlotte nc
Trading Experience: Master
Platform: ninjatrader
Broker/Data: NinjaTrader
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Posts: 385 since Jan 2015
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Hi MiniP,

Thanks for expressing interest in this area...

I am not aware of any material that covers the topic of price levels clearing and provides statistics / historical information.
Everything I have learned on subject I have had to learn it the hard way by trading, collecting the right meta-data, then analyzing it later. (Plowing through tens of million rows of level 2 data in SQL, etc.) I suppose what we are really talking about here are the statistics underlying micro-structure. There are plenty of books on micro-structures generically but none that I am aware of that share the statistical outcomes. Here is what I am referring to, and this will get you thinking the right way about it.

We all know that if you pick the wrong (bid / ask) side to place your limit order, you will get filled. You will always catch a 100% fill rate if you are on the wrong side. (Volume goes to 0, the price level breaks. Since your order was for at least 1 contract, you had to get filled for it to go to 0)

What we don't know obviously, and what a good deal of my research is based on now days, is around optimizing for how far up in the queue you need to be to get filled on the side that actually wins: So if the Bid goes to 0 first and breaks, then how many people got filled from the Ask queue. The top 10%, the top 50%, the top 75%? What are some historical data points across different instruments, markets, volatility levels, etc.

What most people assume are "good signals" in the market are actually causing them more harm then good, and here is why. Your fill rate on the losing side will be 100%, but your fill rate on the winning side will be extremely low if you get there late. A good bit of order flow traders get killed by reading the transaction level.... seeing that one side has 2x or 3x the volume of the other and then jumping on the side that has the higher volume. This seems like a safe bet, they are picking the side that will win surely. But in practice, because they are late, the only fills they will get, will be toxic fills. So even if there is an edge to seeing obvious volume ratios on the transaction level, acting on this will play out like this:

1. Fill Rate From being on the side that loses: 100%
2. Fill Rate from being on the side that wins: Very Very low because you are late. Maybe 10% or < depending on how late you decide to join the party.

So if your "so called edge" I.E (the bid volume is 3 X the Ask volume.... Join the bid queue) actually leads to the market moving higher by 1 tick on the next price level 70% of the time, and it is wrong 30% of the time (I am being generous here with the edge ratio). Here is how it will play out for you.

Full Expectancy: over 100 trades
1. 30% of the time your bet is wrong, but because your bet was wrong, everyone in the bid queue including you got a toxic fill: So out of 100 trades, this = 30 trades that were losers, all of which you got filled on.
2. 70% of the time your bet was right, the bid side won! But, you were late to the party and only got filled 10% of the time. so 100 trades * 70% bet was right * 10% order was filled = 7 trades you won on.

So you will end up with 30 losers and 7 winners. So that is how the full expectancy of this so called "good bet" works in practice. And everyone is doing it just like this and they are all getting killed.

The first thing I suppose you should research are toxic fills, and understand how these are impacting your trading. This is one of the least obvious, but most important aspects of trading that I think everyone overlooks, or just doesn't understand. But I just gave a high level explanation of it, so hopefully it helps.

I haven't seen any threads here that cover these types of topics in detail, so I may start one if there interest and cover this type of thing in more detail.

Happy Trading!


MiniP View Post
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?

In the analytical world there is no such thing as art, there is only the science you know and the science you don't know. Characterizing the science you don't know as "art" is a fools game.
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