charlotte nc
Trading Experience: Master
Platform: ninjatrader
Broker/Data: NinjaTrader
Favorite Futures: Emini (ES, YM, NQ, ect.)
Posts: 379 since Jan 2015
Thanks: 69 given,
918
received

Revan,
The best way for me to explain this, it to show you an example. I think this will help you understand the tools that you will need at a minimum to be successful. You might view this as the "HF world" and that would be a fair characterization to a point, but nonetheless without a very specific approach here, you won't have any success ever trying to scalp 1 tick.
Here is an example of the market microstructure for the ES:
Please register on futures.io to view futures trading content such as post attachment(s), image(s), and screenshot(s).
The market has a strong side and a weak side.
1. On the first row you will see clearly that the bid price of 2737.75 has all the volume stacked in it's favor 247 contracts to be precise.
2. Also on the first row you can see that the ask price of 2738 is the weak side. It starts off with virtually 0 volume. In 90% of all cases the weak side will break first, and the strong side will win.
3. Because the bid of 2737.75 is the strong side and strong side typically wins, the market moves up one tick to the next price level. Here the Ask side is now the strong side and starts this price level with the resting volume it was able to drag in, and the bid has to spontaneously backfill it's volume and it starts with practically 0 volume. So just like with the first example, the strong side once again wins and the bid breaks.
4. Back down now we go to the price level where Bid = 2737.75 and is once again the strong side. This process repeats over and over with only the strong side winning each sequence. And in each of these sequences, the winning side is only able to clear a very small portion of it's queue, where as at the same time the weak side which loses clears 100% of it's queue.
5. This back and forth between adjacent strong side's winning repeats until the first row that I highlighted bold shows up. Here the pattern finally breaks. The price moves up to Bid = 2738 and this is the weak side starting as usual with little to volume. But a large market order goes through on the Ask side, The HF traders cancel in mass on that side, and the Ask side breaks. This causes a shift in the pattern and now the market moves to a new sequence with 2 new adjacent strong sides.
So this is how the market moves. Where this concerns the trader using limit orders is understanding what the fill rate is on the side that actually wins the price level. The losing side clears 100% of it's queue, but the winning side typically clears far less. In truth overall there is around 25% or so of the price levels where the entire quantify of the starting volume gets cleared and the side actually wins. In most cases only the top 10%, 25%, to 50% of the queue will get filled from the winning side. Most retail traders only path to a fill is a toxic fill.
I provided 2 examples showing the types of patterns of the market microstructure.
1. The first example was the fight between the first two strong sides: Bid = 2737.75 and Ask = 27838.25. In this example both of these two strong sides could have cleared a large majority of their queues before the price level change. This is less common.
2. Starting with the significant price level change where the bid price moves up to 2738.25 you can see the more common case. Neither strong side is able to clear any significant amount of their respective queues. The only fills that occur are toxic fills.
I show this to give you some insight of what the odds are that you will ever get filled on your limit orders. It will break down something like this over thousands of trades (assuming you do no queue optimization, infrastructure optimization, or any further research into the HF world)
Over 100 Trades this would be your realistic fill rate (Assuming you have a 50% / 50% odds of correctly picking direction in the first place. It would be far worse if you were not at 50% / 50% odds on direction picking).
1. Toxic Fills: (You picked the wrong direction) 100% fill rate. So for 50 trades you start 1 tick down immediately.
2. Missed Fills: You picked the right direction, but you were not far enough up in the queue to get filled: 30 times this will occur. You knew which way the market was going, but you were not able to get filled. Bummer.
3. 20 Times. You picked the right side and got filled! This is around your non toxic fill rate with no optimization. I can further quantify this for any one skeptical here, but this is what it is going to be around.
So after 100 trades, the fills will look like this.
1. Toxic fills: 50
2. Non Toxic Fills 20
3. What about the rest? 50 to 20 doesn't equal 100. That's right... You picked the right side correctly, but you were not far enough up in the queue to get filled, so you missed these.
Why are the misses 30, higher than the fills from the winning side 20? I am actually being a little generous here.... The fill rate from winning side will typically clear the full starting queue only 25% to 50% of the time. So for people that posted late and are in the very back of the line (Most retail traders) the only path to a non toxic fill will be through the first example. Which is an outlier. But a ratio of 50 toxic to 20 non toxic fill should be enough to scare most people away, even if the reality is that a 50% / 50% rate of correctly predicting direction is generous and a 20% non toxic fill rate from the back of the queue is generous. So you can see where an even slightly more pessimistic view will be catastrophic. And in my experience the pessimistic view is the more realistic view for chart retail traders.
So at this point there is little you can do other than aim for a larger target, or take on more risk by setting a profit target of 1 vs a stop loss of > 1. Something like 5 or 10 ticks for example (This can actually work, but it does carry more risks). Both of those options may be viable for you. But scalping with even odds (1 tick profit vs. 1 tick loss) will kill you unless you can solve some of the problems that I brought up.
Hope this helps.
Ian
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. 
Last edited by iantg; July 11th, 2018 at 01:50 PM.
