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The price discovery process and Delta


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The price discovery process and Delta

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  #1 (permalink)
 1LotTrader 
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Hi all

Fairly new here, have been on once in a while but don't follow the boards much. Recently I have started getting into some volume studies and introduced to a whole bunch of new ideas and studies like market profile the volume footprint chart etc.

One of the ideas that intrigues me is the use of Delta but at the moment I'm not quite sure if I'm comfortable with the idea of trying to determine open inventory etc. by studying only certain orders in the market. A question that's come to mind and I've been hunting around for answers to, is to do with the price discovery process itself.

I notice allot of Delta proponents talking about how Delta only shows us information about market orders since it is a Market Order that one would use to hit the bid or lift the offer thus giving us volume traded at the bid or offer.

Now what happens in the case where a buyer actually enters a Buy Limit order into the market at the Offer price. Do we assume because the offer was there first based on sub second time stamping that it is the buyer that has come across the spread? Even though theoretically by putting in a limit at the offer he has effectively raised the bid to the offer and closed the spread meaning the transaction took place where the bid and offer were equal. Or at least that is how it seems to play out in my mind but I'm not sure if I've missed something because I keep hearing this Delta only tracks market orders.

If anyone could enlighten me a bit to the mechanics of it I would be much obliged.

Cheers
Ross

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 Big Mike 
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You might start with the two detailed webinars in the webinar section from FulcrumTrader. Then also look at those webinar discussion threads, as he answered some questions.

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 1LotTrader 
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Thanks Mike, will do.

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 josh 
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DangerBoy View Post
Now what happens in the case where a buyer actually enters a Buy Limit order into the market at the Offer price. Do we assume because the offer was there first based on sub second time stamping that it is the buyer that has come across the spread? Even though theoretically by putting in a limit at the offer he has effectively raised the bid to the offer and closed the spread meaning the transaction took place where the bid and offer were equal. Or at least that is how it seems to play out in my mind but I'm not sure if I've missed something because I keep hearing this Delta only tracks market orders.

Ross,

When you enter a bid at the best offer or higher, this becomes what's known as a "marketable limit order." Since every transaction must have one and only one party who initiates it, this order essentially becomes a market order, and would be counted as volume transacted at the offer (an addition to delta for the period). Search google for "marketable limit order" and you will find some information on it.

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 1LotTrader 
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Thanks Josh that was exactly what I was after. Having the correct term always helps with a google search. Found a decent excerpt from the book "Trading and Exchanges" which covers the topic nicely.

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