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Understanding Liquidity and Market Pullbacks
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Understanding Liquidity and Market Pullbacks

  #21 (permalink)
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RM99 View Post
I guess I'm going to be the naysayer

Although I get the semantical concept, liquidity (or lackthereof) doesn't move the market, buying and selling move the market. A lack of liquidity will allow the market to move further and faster, but make no mistake, without someone there to buy or sell, all the dead space in the world isn't going to move the price.

I agree. A lack of liquidity if more likely to widen spreads rather than move the price. A good example is the Flash Crash of 2010. As the bots went into feedback loop the actual trades were few but the bid/ask spread was huge which then further feeds back into the bots and such forth.

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  #22 (permalink)
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Traderji View Post
I agree. A lack of liquidity if more likely to widen spreads rather than move the price. A good example is the Flash Crash of 2010. As the bots went into feedback loop the actual trades were few but the bid/ask spread was huge which then further feeds back into the bots and such forth.

I hear you, this vacuum is not an all or nothing thing though. It's a relative lack on one side. An imbalance that ends up getting corrected.

Take the ES - any time that it ticks up, algos are immediately populating the inside bid. Watch it tick up - you'll see straight away that 90ish goes in, then 120, 150, 200 etc as the algos fill in the bid. It's not the 1000+ you see below the inside bid.

Different players have different horizons and different reaction times. You won't see the spread widen on most liquid markets because market makers are always stepping up first. The thing is - these market makers are just part of the picture and their liquidity alone is not enough to prop up the market.

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  #23 (permalink)
Fortitudo et Honor
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DionysusToast View Post
I hear you, this vacuum is not an all or nothing thing though. It's a relative lack on one side. An imbalance that ends up getting corrected.

Take the ES - any time that it ticks up, algos are immediately populating the inside bid. Watch it tick up - you'll see straight away that 90ish goes in, then 120, 150, 200 etc as the algos fill in the bid. It's not the 1000+ you see below the inside bid.

Different players have different horizons and different reaction times. You won't see the spread widen on most liquid markets because market makers are always stepping up first. The thing is - these market makers are just part of the picture and their liquidity alone is not enough to prop up the market.

This is part of the reason that I've abandoned lower time frame approaches. I don't have the skill or the time required to keep up with all the shenanigans required for scalping or even swinging. That and indicators or any metric tends to reduce in correlation by leaps and bounds the more you decrease timeframe/scope....essentially, the more you zoom in, the more randomized the market becomes. I've opted to simply dial out and take advantage of more market structure that presents itself at higher time frames and inter-day trading. I get exposed to more fundamentals and news events, and it takes more capital, but for me, it's easier to find an edge at higher time frames and skip all the warring and tricks that go on zoomed in. That and my edges seem to maintain longer....if you're gonna scalp, you have to remain vigilant and Johnny on the spot as the current rules/paradigm could shift quickly depending on how the block trades and algos shift. It's hard for someone to push me out of my position in crude if my stop is 300 ticks...if I get stopped out, it's rarely because of some manipulation and more because my edge failed (or I was unlucky enough to catch a moving news event).

I picture the market as a giant battlefield full of tiny combatants all the way to giants and I'd rather sit on the fringe and pick my spots than try to duke it out in the weeds and get run over by some bigger player. In essence, it's safer to snipe from far than to try to win the knife fight in a phone booth.

"A dumb man never learns. A smart man learns from his own failure and success. But a wise man learns from the failure and success of others."
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  #24 (permalink)
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Battles all over the place that's for sure. Fact, limit orders are filled by market orders, someone busting a move, buying and selling must occur to move the market into and/or through a void/vacuum. I once read measure the aggressor, the active traders, not the passive traders (limit/booked orders). Booked orders can be pulled, active trades are real - thus sellers at the bid, buyers at the ask (really just semantics in the end). I view a pull back (up or down) as a potential trap. Someone believes the move has ended or wants the move to end. They counter. The market responds. More importantly their entry is allowed because of profit taking - after all you need some to take the other side in order for you to book profit. The question then becomes do others feel the move is over? - is the overall sentiment the same - this is very hard to measure/gauge (maybe seeing it twice adds to my opinion). I believe you can learn to see/feel/experience it but building confidence in reading this is exceptionally tough, yet mostly mentally tough. If it is the same (sentiment in agreement), the pull back will formulate into a reversal or lead to sideways trading but the move has/will end. If sentiment is absolutely not the same... the trend majority for what ever reasons - most likely protecting their investment - re-enforces their position/direction to push the market, for the purpose of allowing them to bank even more profits(greed), perhaps they are also considering those tic measuring traders are in this move too - can we push it to that tic? This added pressure then moves the market back with the trend... and if/when the counter traders (trapped traders now) stops are hit (fear), their exits add momentum to the resumed trend. Then and only then (after the fact) the indicators fall into line showing the in-hind-sight obvious pull back entry points to which we all say in our daily review - I shoulda-coulda entered there.

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  #25 (permalink)
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tulanch View Post
I once read measure the aggressor, the active traders, not the passive traders (limit/booked orders). Booked orders can be pulled, active trades are real - thus sellers at the bid, buyers at the ask (really just semantics in the end).

Sure, an order on the book can be pulled, but volume traded is volume traded, no matter who the aggressor is. Sellers at the bid are "real," just as the buyer they are matched to is just as "real," only difference is that one demanded a limit on an acceptable price, and one did not.


tulanch View Post
I believe you can learn to see/feel/experience it

I agree, and this is what it comes down to IMO. It's kind of silly, IMO, to formulate hard and fast ideas about the way it's supposed to work, because it just isn't that clear cut.

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  #26 (permalink)
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I hear what you saying, but it is easy to accept that the aggressor at the bid is the seller, they initiated the move for what ever reason verses a limit at the bid that is waiting for the market to come to them. And sitting sell orders below the bid must turn into market orders before the are filled. As it was explained to me, this is how the futures market works. What price do you get if you use a sell market order? You typically get the bid, you want to sell aggressively right now.

When you make a trading decision, what quantifiable data do you have to form your opinion - high, low, open and close come to mind.

Knowing the aggressor is another bit of quantifiable information.

For example, aggressive sellers at the bid, that cannot sustain a downward price move could be categorized as what type of traders? Weak or strong? What is likely to happen if price comes back on them a couple of tics?

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  #27 (permalink)
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tulanch View Post
I hear what you saying, but it is easy to accept that the aggressor at the bid is the seller, they initiated the move for what ever reason verses a limit at the bid that is waiting for the market to come to them.

What if there is no move?

What if sellers sell but price holds?

If you move down and it takes more & more contracts to push through each level, that is the sort of thing that tells you the bidders behaviour is starting to change and that they are becoming more aggressive. It's the sort of nuance that aids your read of the market.

Not that the OP is about reading the order book in any way. Just a way to interpret the overall action.

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  #28 (permalink)
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Perhaps the term aggressive is a misnomer - perhaps it should be "who initiated" the trade.

If I see there is no move yet I see what I call aggressive selling (trades at bid), I read it as there is strength below and the sellers are weak. Someone is buying everything being sold. When price comes back on these sellers there is a good chance they will bail, thus I would look for an upward movement - given the correct context back to the left.

I think we are saying the same thing, but what this approach offers is a consistent way to classify a trade. Sellers initiate trades at the bid, Buyers initiate trades as the ask.

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  #29 (permalink)
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Big Mike View Post

Mike,
Maybe a dummy question but: Is the GomTecorder indicator is available for Multicharts?

Martin

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  #30 (permalink)
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arjfca View Post
Mike,
Maybe a dummy question but: Is the GomTecorder indicator is available for Multicharts?

Martin

No.

Mike

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