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DOM: Why do prices move in direction of cumulative depth?


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DOM: Why do prices move in direction of cumulative depth?

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  #1 (permalink)
Mainz, Germany
 
 
Posts: 15 since Jan 2019
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Hi Traders,

I noticed that when prices rise, the cumulative depth of sell orders outweigh all buy orders in the DOM. This is contrary to my understanding that demand (Buy Orders) should outweigh supply (Sell Orders) when prices rise.

I know that rising prices in the long term have their root in a shortage of supply or demand outweighing it. I've already been told some time ago that in the short term, as you see it in the DOM, prices seem to do the opposite.

Can somebody help me here, it seems to me I miss here something fundamental.


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  #2 (permalink)
Market Wizard
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ApolloEleven View Post
Hi Traders,

I noticed that when prices rise, the cumulative depth of sell orders outweigh all buy orders in the DOM. This is contrary to my understanding that demand (Buy Orders) should outweigh supply (Sell Orders) when prices rise.

I know that rising prices in the long term have their root in a shortage of supply or demand outweighing it. I've already been told some time ago that in the short term, as you see it in the DOM, prices seem to do the opposite.

Can somebody help me here, it seems to me I miss here something fundamental.


price moves also on how aggressive the orders are being executed . it also my look like there are more orders on one side or the other . some are iceberg orders that do not show up in the limit order book . as the orders that show up in the book are being executed an algo keeps adding orders to it at that price. it may show 1100 a price A but the real order could by 4000 as an example .

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  #3 (permalink)
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ApolloEleven View Post
Hi Traders,

I noticed that when prices rise, the cumulative depth of sell orders outweigh all buy orders in the DOM. This is contrary to my understanding that demand (Buy Orders) should outweigh supply (Sell Orders) when prices rise.

I know that rising prices in the long term have their root in a shortage of supply or demand outweighing it. I've already been told some time ago that in the short term, as you see it in the DOM, prices seem to do the opposite.

Can somebody help me here, it seems to me I miss here something fundamental.


Hi ApolloEleven,

Price does not move based on standing or pending orders. Price only moves based on actual or filled orders that are accepted.

Even then there are variables where price goes higher on less buyers/sellers. For example - Let's say that there are 100 contracts available to buy at $3,300 and 10 contracts at $3,400. When all of the contracts are bought at $3,300 price will move 1 tick. If somebody buys that next 10 contracts the price will move another tick since that's all of the contracts available at that level. Hope this helps.

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  #4 (permalink)
Legendary Market Wizard
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Here is a pretty good explanation of some fundamental order flow concepts...


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  #5 (permalink)
Mainz, Germany
 
 
Posts: 15 since Jan 2019
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Thank you guys, very interesting to read your replies. I've got answers from several traders the recent days and it was surprising to me they all had a lot of different views on this topic. After listening to several opinions, reading and watching some webinars I now understand this observation of higher cumulative limit sell orders in rising markets as follows:

The orders you see in the DOM don't represent the whole market activity and so you will not find all the answers or explanations for your questions about Mr. Market by only staring at the numbers. The DOM represents only the LIMIT ORDERS and if you have a more advanced DOM in use you can also see the incoming MARKET ORDERS in exactly the current moment. You do not know how many market orders "wait" on each price level until they will be sent to the exchange and eventually show up in the DOM and T&S. It is a ever changin dance of incoming market orders, triggered limit orders and also cancelled limit orders out of the dom that can immediately show up as incoming market orders when traders see their limit order has a low chance to get hit, so they cancel it and get in market. In my understanding, as in almost everything in trading, everything that you see is in a gray fog. You can interpret the DOM activity and can get an edge with a lot of practice as you can see the patterns occur like canceled limit orders or in the example I posted last week, the cumulative sell limit orders outweigh the limit buy because buyers cancel their orders and go in market. Even this simple explanation will not give you a 100% truth as you will never know how many market orders wait as synthetic orders to be sent to the exchange or even other situations take place in the background as ice berg orders and so on. But what the DOM can tell you is, with practice, you can read the market activity "indirectly" from the behaviour of limit orders in the dom and if you use an advanced dom, by watching the incoming market orders as well.

This is what I've learned here, the numbers in the dom, even the whole activity in an advanced dom like jigsaw, will only tell you indirectly what is going on trough their behaviour in the order flow with a high accuracy if you are very well trained in reading the dom.

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SpeculatorSeth
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It is important to note that this behavior is very much an equity index thing. I see this behavior very consistently in ES, but it is not like this in the treasuries. Because the equity index futures are ultimately tied to the price of the underlying index you're probably getting a lot more following. I have my own histograms that show cumulative depths with a few of my own filters and enhancements on it. You can see how sensitive the ES can be with the cumualtive depth flipping back and forth quickly as price changes. You can also see the depth behave different on the different treasury futures due to spreading.







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August 17, 2020


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