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Finessing the entry....
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Finessing the entry....

  #1 (permalink)
Market Wizard
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Finessing the entry....

I thought Iíd put some notes together on entries. Not so much on where to enter but rather on how to finesse your way into a position so that more often than not, you are a tick up pretty much straight away. In some circumstances, this will also gain you one extra tick profit.

So firs thing I guess is obvious, if you are a swing trader, you wonít find much of use of this. If you trade thin markets like CL,DAX, NQ nothing for you either. You forex guys? Nope Ė I have nothing to offer you as well.

So for the 5 of you that are left, that are trading thick stocks or futures markets with decent liquidity Ė ES, 6E, Bund, Bobl, US Treasuries, Corn, EuroStoxx Ė read on.

I think 3 things are worth discussing in this thread

- The merit of trying to get onside straight away
- The merit of an extra tick
- The merit of the techniques

OK Ė first of all, letís presume you want to go long. Letís also presume you are looking at the DOM or looking at the inside bid/offer on your L1 screen. Hereís what you see:

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First of all, is any of this fake? Well, quite possibly but the inside bid and offer are a bit more reliable than the other levels. Pulling will very often occur as soon as you get to the level when the fakers move out of the way. So after a few seconds, you have a decent picture of what people intend to trade at that point. As contracts trade into those levels, it will often become very apparent, with a fair degree of certainty (60-70%) which side is going to lose out. At that point, those on that side may pull out of the way or it might just trade to zero and move through. Pulling occurs at the start and at the end. They also add contracts but thatís for later.

Now letís say we get 300 sell market orders hit the bids and 1200 buy market orders lift the offer.

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We have 2 things that have occurred at this point. There have been more buy market orders than sell market orders and we a much smaller offer. With this in mind, we are now more likely to tick up from this level than to tick down. If you decide to practice this (exercises later), you will find that by waiting for the right imbalance (takes practice), you are able to put in a buy market order (or a limit order to buy @ the inside offer) just before it leaves the area. If it does leave the area, you are very quickly looking at this:

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A long at 1560.50, the current inside bid. Your trade is onside. If you sell now, you get out at break even.

So what? Letís compare this with what happens in this scenario. We now put in a buy market order. You buy the inside offer. You are now 1 tick offside. You brought 1560.50. You are now looking at this:

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A long position at the inside offer, if you exit this trade now you lose a tick.
OK Ė so this sounds fairly lame. Itís just a tick. Who cares? The thing is, a lot (if not most) of the time you go long, you will be doing so because the market has come down to your price. If you wait for a scenario where it looks like the offer will break, you also have a micro-confirmation that there is some upside pressure. If you just hit buy at your price or have a limit order there, you arenít waiting for a sign that there is upside pressure. It might come down to your price, then go down another tick and another and another.

By trying to get onside early on you will find that:

- You get more breathing room in your trades
- You donít get so many trades where you get in and it just totally runs against you to your stop
- You have more time to manage those first few crucial minutes of your trade, that time where you really need to decide to cut it or keep it.

There will still be trades that go against you and there of course be times where you hit into that offer too late and itís already left.

This is the first and simplest example. More complex scenarios shortly, along with skill acquisition...

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  #3 (permalink)
Market Wizard
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One point - I should just clarify that the above is an intentional over-simplification - call it baby step 1.

Just in case someone starts to buy every time the offers are much smaller than the bids....

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Market Wizard
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OK - so before we get into the nuance of actually doing the above, let's look at another finessing scenario...

If you aren't going to hit a market order before it leaves the level, then the alternative is to use a limit order. Now, you could just put in a limit order ahead of time at your price and let it fill. That is not finessing an entry. When you finesse an entry, your entry price becomes an entry area. You know roughly where you want to get in but you do not put in orders ahead of time because you know the market isn't that precise. Price moves into your zone and then you get into trying to work an entry.

Let's consider we are now here and we want to go long:

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At this point, putting in a limit order to buy 1560.25 would not be a good move. You'd be at the back of the queue. Also, there is no sign the offers will weaken. At the point you put the limit order in (say 10 contracts), you would need 1510 contracts to traded into the bid AND then for it to not trade any more because then it'll tick down. That's a very specific scenario, isn't it? You aren't just saying you need it to go up, you are saying you need it to trade 1510 at the bid and then go up. You want 1510 sellers and no more! You'd need crystal balls for that.

So - you need to see refreshing on the bid. Let's say you see roughly 1000 contracts trade into the bid and now you see this:

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1000 contracts traded into the bid but there are still 1200 contracts left. We originally had 1500 contracts there, so that means that 700 contracts have been added to the bid.

Now you have a different situation. Whilst there isn't much difference between the bid and offer quantities, you do know that orders are being added to the bid. That's an iceberg order.

At this point, you don't know if they will continue to add more contracts to the bid or not, you just know that bidders are stepping up and trying to accumulate a position.

You don't know if this is just one half of a stat arb trade being executed or if a buyer is trying to build a directional position. If it's half of a stat arb trade, the bidder doing the refreshing doesn't care where it goes next and that trader won't be involved in any follow through.

It's probably worth explaining at this point how queue positions work with these iceberg orders. Icebergs can be handled by a platform or submitted to the exchange. With exchange submitted icebergs, you submit the order saying how much you want to buy and how much you want to show.

So you might say "buy 5000 but show 500", so the 500 is visible and 4500 are invisible. Once 500 contracts trade, another 500 will become visible and you'll have 4000 invisible ones's left. The rules of the algorithms that do the refreshing are on the various exchange websites but for now just understand we have visible and invisible orders.

The visible orders are there on the DOM/L1 screen and if you join the bid, those orders will be ahead if you in the queue. The invisible orders do not appear on the DOM/L1 screen and if you submit a limit order, they will be BEHIND you in the queue. The plus side for the bidder is that he gets to hide his orders, the downside for the bidder is he's always at the back of the queue. Obviously, if the iceberg is being handled by the platform, additional orders will also be at the back of the queue.

So in this case, if your assessment is that someone has an iceberg order there, when you submit your order you will be ahead of those hidden orders in the queue. So you join the bid with a fair suspicion that you are ahead of a lot of refresing in the queue.

This is the other way in which you finesse an entry. You don't hit into the offer with a market order before it leaves, you join the bid when someone is refreshing their limit orders there. The end result is the same:

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You are long, with your buy price at the inside bid. You are onside. You also have some buy side strength supporting you, so it is much less likely that the trade will just run against you. You have a bit more time to assess that early part of your trade.

So that is the basics of finessing an entry. You either get in just as you are leaving a level or you join a bid/offer when you see that it is being refreshed.

This is obviously simplified and we need to go into more details but this is the basics of it.

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Last edited by DionysusToast; April 24th, 2013 at 07:06 AM.
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  #5 (permalink)
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OK - so let's get into actual execution of this.

First thing to take note of is time; specifically the amount of time before you start making any decisions. Again, this seems obvious but to some it won't be.

Time - to let a more 'true' picture of the bids/offers builds up

Let's say that on the way down we see this....

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And then those 200 contracts at the bid get traded against and we tick down again. We are likely to see something like this:

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So a bid of 1500 and an offer of 36, we should go long right?

There's a little dance that happens when we tick down...

- we are ticking down to an area where there's no offers and so we'll see a very small number there initially
- the bidders at 1560.00 now have no-one in front of them, they are now the inside bid and some of them might not be happy to be there

So - you leave it a few seconds (there is no hurry) and you see what the real picture look like. After a short while, you will probably see something like this...

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You can see that some bidders got out of the way and some offers added on.

So that's the first part - give it time for the bids/offers to build

Time - to let some contracts trade into it

The bids/offers will sort themselves out in a few seconds. A lot of the pulling/stacking is done then but there is a tendency to pull orders when a few contracts trade into a price. So someone might be sitting on the bid with 500 contracts and be happy to stay there unless people start trading into it. It may be that someone start stacking as soon as a few contracts trade into it.

Time - relative to time spent at other levels

Quite often, a pullback will form by it just chewing through 4 or 5 prices in a very short period of time. If it just spent 5 seconds at each level on the way down, you don't want to see a small offer after 3 seconds and decide to hit into it.

On top of that, very often you will see that it ticks down to a level and almost immediately ticks back up. It will do this repeatedly, it's type of iceberging and is very bullish.

So - there is nuance number 1. There is a process as you tick into a new level. Sometimes the process is to just move back out again. If this level is to hold and be worthy of analyzing and potentially entering, then you have to give a bit of time for a truer picture to form of what is occurring at the level.

Note - this is not full on order flow analysis. This is just using the inside bid/offer info to hit the button in an area your analysis tells you is worthy of entering.

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Great information @DionysusToast

Counting the days for your webinar

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My goddaughter sister is baptized on that day but I'll skip it early to watch the webinar live





Your webinar and @Private Banker 's are definitely the most expected ones so far this year

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Question.

We have a situation where bids are being hit or offers being taken, we have just ahead some area of interest, maybe we're still... 8 ticks away, and we decide to hit that bid or take that offer, looking at that 8 tick area as a "sure" target.

We get in and... nothing happens. 10 minutes passed and prices are still stuck where we got in.
Sure, we got in in favor of the trend and prices might indeed go to our target but prices just stopped moving precisely when we got in.

Which might be the signs that the DOM might give signaling some weakness in the move?
Volume on the bid/offer slows down?
You start to see the orders being added instead of being pulled and at the same time traders start not to be willing to hit/take them?

Thanks.

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arnie View Post
Question.

We have a situation where bids are being hit or offers being taken, we have just ahead some area of interest, maybe we're still... 8 ticks away, and we decide to hit that bid or take that offer, looking at that 8 tick area as a "sure" target.

We get in and... nothing happens. 10 minutes passed and prices are still stuck where we got in.
Sure, we got in in favor of the trend and prices might indeed go to our target but prices just stopped moving precisely when we got in.

Which might be the signs that the DOM might give signaling some weakness in the move?
Volume on the bid/offer slows down?
You start to see the orders being added instead of being pulled and at the same time traders start not to be willing to hit/take them?

Thanks.

If 10 minutes pass and you still haven't moved, I'd say your original premise for the trade is no longer valid.

In my experience, on the ES anyway - when the market gets into a small range it will generally break out in the direction of the market orders. So if you have more market sells than buys, it'll probably break to the downside. Cumulative delta is good for this - if delta keeps heading down when it's going nowhere, they will more than likely break it from what I have observed. I do understand the argument that this behavior shows that bidders are stepping up and absorbing sell market orders and so it's bullish but my observations (not hard statistics) tell me that the longer it goes on, the less likely it'll hold and the more likely it'll break downside.

There's probably an institutional trader somewhere that can explain that in regards to liquidity providers/stat arb.

Once the market does get into a range, you need to check how much volume trades there. Last Thursday, we held a range and traded something like 30k contracts in the middle (from memory), then we broke out above and traded a range and about 30k contracts in the middle of it, then we broke out above and 40k contracts in the middle of that range. So - if you were looking at that third range and the 40k contracts there, you have to see that as the market building value higher & higher up. That is price acceptance. You don't short that in my opinion - sure it won't go up forever but it's very bullish when it moves up and keeps trading more & more volume in ranges.

Bottom line is that going nowhere can mean not much interest or it can mean a lot of contracts traded in a tight range, I think you have to consider them differently.

In terms of how others are playing it - once the market gets into a range (or goes nowhere), people will fade the extremes. At some point it will fail. If you are long biased what you want to see is...

- a small break out to the downside which people jump on and are met by an iceberg on the bid - you see the range fail by 3-4 ticks and 3-4 contracts trade into the bid.
- a reversal at the top of the range, a lot of offers above (which will be normal) and then an iceberg on the bid absorbing the selling 2-4 ticks from the high, people are fading the range but someone steps in.

You might of course see nothing at all, sometimes there's a 'tell' and sometimes there isn't.

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Last edited by DionysusToast; April 28th, 2013 at 11:19 AM.
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Now to the nuance. At this point, I have to get market specific because otherwise itíll get too wordy. I think most of you will know which parts need adjusting for your market.

First of all, the refreshing. We will stay bid side for a long entry and we will stay with the ES. Before you get to your spot, youíd better have had an eye on this for a short while to see what sort of volume itís taking to tick through each level.

If this is a really thick day with 2-3000 or more on the bids & offers and itís taking 1500-2000 to eat through each level, then obviously you donít want to be going long because 500 contracts hit into the bid.

Things you need to watch for on the bid
- The amount of contracts bid after the first few seconds have passed
- The amount of contracts trading into that bid
- How the bid is getting refreshed

There will always be 2 sided trading, so donít expect 3000 contracts to hit the bid and only 20 hit the offer. Donít let the fact that contracts are trading into the offer & itís not moving up put you off. As I said, trading is always 2 sided and longer time at the bid means longer time at the offer too..

Obviously if there is a LOT more trading into the offer and not the bid and the offer is staying fir, Ė your chances of this market ticking up from here are diminished because whilst you might be seeing an iceberg on the bid Ė thereís also firm offers.

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Thereís 2 types of icebergs youíll see.

Small iceberg. When you see this, they refresh the bids but the total qty bid stays relatively small. About 3-500 contracts. What you also see is that price ticks down through the bid but then immediately ticks back up again, usually without a single trade hitting the bid price below. Iím not entirely sure why this is. I do know the inside bid qty gets down to 0 and so the price below is the new inside bid. Iím not sure if this is an exchange iceberg or not (not that it matters) but it is sort of odd when not a single contract trades below. You will often see this occur multiple times, it drops down, straight back up, over and over.

Remember, we do need to see the refreshing on the bid too - don't just jump in because it's moving up and down (although that sort of behavior is bullish), you want to see lots of contract hit into the bid and a small number keep on refreshing, if the bids break - even better.

When you see this setting up, you can join the bid. Chances are it'll keep refreshing, people will keep trading into it and it might even drop through a few more times. Joining the bid is pretty safe because there won't be that many people in front of you at any one time. You won't always get filled but unless the offers are low, there's no need to put in a market order.

As an aside - on thinner markets like CL, GC - people are telling me that they see a succession of icebergs on the bid at lower and lower prices when the markets about to turn. Not really relevant to the topic but I thought I'd slot it in here.

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