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Do black-box algorithms move the ES with excessive volume to make just a tick or two?
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Do black-box algorithms move the ES with excessive volume to make just a tick or two?

  #1 (permalink)
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Do black-box algorithms move the ES with excessive volume to make just a tick or two?

This is only my assumption, but I've noticed a particular occurrence trading the ES. In some range bound small movements I'll see a pattern emerge which looks promising. It looks like a high probability Japanese candle formation on the minute chart (lets say movement A). I can tell it would probably trigger some automated systems, but the over all long term price data from hours ago suggest to negate this move (lets say movement B). I can tell on the short term It looks like you could make a tick or two, but anyone manually trading looking at the chart would be hesitant to trade movement A based on variables outside of the 1 min chart. Then as the movement B goes against this formation of movement A I see a volume increase in large chunks till finally the trader or automated system move the market till they get just one or two ticks. Immediately after they 'seem' to pull out and it continues to go in Movement B direction.

Now, if you can program an automated system to use volume, which I assume a lot of trading firms or hedgefunds have the capitol to do so, that automation could work even better. It's a shame in a way that they can't crunch multi chart patterns and discern against a trade that looks promising short term based on a dozens of longer term and or fundamental variables. But then again why would the automated trading system care? I'd assume It certainly doesn't need a high win to loss or reward to risk ratio because even a small win to loss ratio with a large amount of trades would still result in a substantial return.

What do you guys think about including volume into Automation? Or, do you think this occurrence is just regular traders working off the same inclinations and thus pulling out at the same time?

I know there are a lot of factors that play a part in the ES, but I see this happen a lot. I was curious if you think its automation or large account participants calculating resistance volume and then unloading hundreds of contracts to counter balance any opposing volume.

I got this idea about a year ago from this article and It has been lingering in my head ever since
http://www.tradingmarkets.com/.site/eminis/how_to/articles/How-to-Successful-Trade-the-Russell-2000-E-mini-Fu-79729.cfm

Thank you for any insight or commentary on the issue

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  #2 (permalink)
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volume is only a variable within a trading model.... chart "patterns" are after the fact and lagging... if you want to understand better what a fund does for algo trading, lookup complex event processing ... and google esper..


sidney7g View Post
This is only my assumption, but I've noticed a particular occurrence trading the ES. In some range bound small movements I'll see a pattern emerge which looks promising. It looks like a high probability Japanese candle formation on the minute chart (lets say movement A). I can tell it would probably trigger some automated systems, but the over all long term price data from hours ago suggest to negate this move (lets say movement B). I can tell on the short term It looks like you could make a tick or two, but anyone manually trading looking at the chart would be hesitant to trade movement A based on variables outside of the 1 min chart. Then as the movement B goes against this formation of movement A I see a volume increase in large chunks till finally the trader or automated system move the market till they get just one or two ticks. Immediately after they 'seem' to pull out and it continues to go in Movement B direction.

Now, if you can program an automated system to use volume, which I assume a lot of trading firms or hedgefunds have the capitol to do so, that automation could work even better. It's a shame in a way that they can't crunch multi chart patterns and discern against a trade that looks promising short term based on a dozens of longer term and or fundamental variables. But then again why would the automated trading system care? I'd assume It certainly doesn't need a high win to loss or reward to risk ratio because even a small win to loss ratio with a large amount of trades would still result in a substantial return.

What do you guys think about including volume into Automation? Or, do you think this occurrence is just regular traders working off the same inclinations and thus pulling out at the same time?

I know there are a lot of factors that play a part in the ES, but I see this happen a lot. I was curious if you think its automation or large account participants calculating resistance volume and then unloading hundreds of contracts to counter balance any opposing volume.

I got this idea about a year ago from this article and It has been lingering in my head ever since
How to Successfully Trade the Russell 2000 E-mini Futures, Part 1 | TradingMarkets.com

Thank you for any insight or commentary on the issue


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  #3 (permalink)
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Basically in a nutshell what I am asking is - Do larger trading participants use algorithms to move the market with excessive volume to make a losing trade profitable by calculating the amount of resisting volume and upping the ante?

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  #4 (permalink)
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sidney7g View Post
Basically in a nutshell what I am asking is - Do larger trading participants use algorithms to move the market with excessive volume to make a losing trade profitable by calculating the amount of resisting volume and upping the ante?

Institutions can and do certainly "sweep" the market with orders designed to move price <x> levels deep. It's a calculated decision of the cost to absorb that volume vs. the outcome such a sweep will cause in market action.

Institutions also certainly defend their positions which using your word can case "excessive volume". Iceberg orders are where the true "volume" the institution is willing to buy/sell at <x> price remains hidden or undisclosed, they only break off small chunks of the iceberg as the orders offered @ bid/ask dry up, ensuring to "hold the line" at a certain price for example. You'll see this when the DOM indicates only a handful of orders @ the bid or ask, yet price won't move as more and more and more inventory is thrown at these levels from the original iceberg order.

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  #5 (permalink)
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Big Mike View Post
Institutions can and do certainly "sweep" the market with orders designed to move price <x> levels deep. It's a calculated decision of the cost to absorb that volume vs. the outcome such a sweep will cause in market action.

somewhat incorrect... depends on the algo being used to build a position... please note that "moving" the market is not a desired effect that institutions are after..

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  #6 (permalink)
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sysot1t View Post
somewhat incorrect... depends on the algo being used to build a position... please note that "moving" the market is not a desired effect that institutions are after..

Care to elaborate?

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  #7 (permalink)
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Big Mike View Post
Care to elaborate?

Mike

about which point in specific? algo being used? sweeping an order book? or about the fact that price movement when building a position is not a desired effect for a fund?

as to the algo, I only know about the ones I am exposed to and I cant really discuss them to be honest... as to sweeping an order book, that is merely a function of liquidity on the instrument being traded and the aggressiveness of the algo being used... as to price movement, there are variables of the algo that measure its success... again, depends on the firm and what they use...

institutions dont "defend" their positions, they are either buying or selling based on models that tells them to do so and their risk is always hedged... icebergs are basically for buying/selling large quantities of "it"(whatever has a price that moves and can be traded)... you will in fact come across an iceberg order or dark pool that might be willing to buy at a given price and find R/S at that specific level, but it is not because they are "defending" a position...

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sysot1t View Post
somewhat incorrect... depends on the algo being used to build a position... please note that "moving" the market is not a desired effect that institutions are after..

I would not say "incorrect".There are so many types of algos out there in the wild, and different algos act in different ways.

Some market making algos will trade into the market but once they get too much inventory one way or another, it will puke out and sweep the book, just because the cost of getting out is worth it to unload the risk.

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  #9 (permalink)
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We're describing the same thing it seems, just different words.

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  #10 (permalink)
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Big Mike View Post
We're describing the same thing it seems, just different words.

Mike


traderwerks View Post
I would not say "incorrect".There are so many types of algos out there in the wild, and different algos act in different ways.

Some market making algos will trade into the market but once they get too much inventory one way or another, it will puke out and sweep the book, just because the cost of getting out is worth it to unload the risk.


no, we are not describing the same thing... MM's can be found in equities... not futures... the OP was addressing ES, not any specific equities... also, MMs have to provide liquidity.. so they will be buyers when everyone is a seller and vice versa...that is their function... they dont defend anything either, but they do tend to "manage" the rise or fall of any equity given their parameters.. they also have to deal with order imbalances, but again, we are now talking equities, not futures which is what the ES is..

saying that we are describing the same things using different words would be like someone asking about how stops get hunted in futures and me talking about how the process of stop hunting takes place on the FX markets... which are two different functioning markets..

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