No BS daytrading by john grady talks about trading off the DOM, thats another good source. Imo the best way to learn
is to just watch the DOM several hours everyday and you will pick up stuff. This is where I learned the most. Pretty much
you are looking at the pace of the market, or "frenticness" of activity - lots of buy and sell market orders or "silence" and barely anything going on, and you are also looking for absorption, how much heat bids and offers take. And you can look at the way price moves up vs the way it moves down, in a strong directional market you have a lot participation moving with momentum and its kinda quiet on the way down, if you see it continue but its quite that usually means its temporarily out of momentum and will consolidate or pullback. Or it could reverse especially if it follows a break above an important level (getting into that now). All of this is put into context of location. E.g., you have a level break and then activity completely dies of, noone wants to buy it like I said before. On a chart this shows up as a volume divergence -higher high but with lower volume (with the dom you see it as it happens, chart is lagging) - the higher high isnt important the break above the level is. Or if I see a level break but there is a ton of absorption and also market orders in the opposing direction, that looks like a stop hunt, I also like to fade those, but sometimes these will fail and price will continue in the direction of the break with momentum, if its an obvious long term level. Absorption alone isnt enough you need the market orders, I use to fade everytime I saw icebergs come in above levels and they would get run over. Somtimes you will have an iceberg step in and just sit there, absorb a ton of contracts and refuse to budge, I dont see this much, but you can go with the iceberg and cover a few ticks below it. On example comes to mind perhaps 2 weeks back where around 300 contracts got absorbed at $50 and there was a nice 22 cent bounce following that, before it broke lower. I cannot emphasise enough how important experience is, you need to watch the DOM and gain an understanding of it and the market for yourself.
Another thing I have noticed that is very important when reading the DOM for me is my mindset. I know that my best trading happens when I am not "looking" for anything, rather I am simply watching and absorbing information. This happens when I am highly focused, but relaxed. If I "look" for trades often I will miss important information because I am coming in with a biased view. Sometimes the market will speak in whispers and you have to pay attention.
And I should mention, make sure you use a proper DOM. The best one you can get is the jigsaw DOM for ninjatrader and OEC trader, it splits the prints into bids and offers and will leave a trail of the prints. The default OEC trader and xtrader DOM are also decent, but they will not leave a trail of prints nor will they split prints into bids and offers. If you can only see bids and offers but not see orders hitting them, thats pretty useless.
Understanding yourself is just as important as understanding markets.
Last edited by TickedOff; March 6th, 2015 at 10:25 AM.
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