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Now that we know, based on repetition of how far an MM would take her SHORT RISK or LONG RISK before reversing, how do we then use DOM Analysis to determine Market Price direction? Or, to always stay ahead of the MM, do we just exit at the established COST BASIS?
Well, despite how proud I am of this idea, it falls into the category of "situational awareness" in the sense that if you know that on a significant Inventory evaluation timeframe, say 2, 3, 4 hours, that MM is carrying an estimated shyteload of unresolved contracts and, what's more, that She is an estimated 20 ticks under her Long Price Break even on those significant timeframes; well, then we know that Support points will generally hold.
Being underwater with Inventory, either what I call "Long Risk" or "Short Risk" is a very important thing to understand. Although MM enthusiastically takes on Risk, and in some Markets, what we would consider to be Huge Risk levels, it is not generally the case that this tells you when the market will turn.
However, on shorter timeframes, with Inventory intervals of say, the last 5 minutes or so; in "choppy" markets, you can predict that they will alternate between Long Risk and Short Risk fairly predictably. But, in general, this is more of a situational awareness factor.
What really tells you where the market is going? Well, as I've said before, the Holy Grail of technical analysis is evaluating the "chaos" which is the "dynamic Depth of Market" (aka DOM) where Quotes are placed, and MM's participate among themselves to see which one will be at the front of the FIFO execution queue in the matching engine which is the exchange.
Here we are looking for correlates to concepts like 1) "MM's interest in interacting with the Retail Market", 2) the concept of "spoofing" to confuse DOM "readers" and 3) a strong or weak interest in maintaining size quoted at particular Price levels, and so on. How well you can develop measures of MM's "interest" in transacting with the Retail traders, is generally speaking, how determined MM is to maintain size which will "pull" the Market into that size, with MM being at the front of that Price's FIFO queue for maximum advantage.
There is competition amongst MM's and it's a real "cat fight". You might evaluate variability of sizes as a possible correlate of that competition; but your real and most basic measure is the "minimum" size which you are observing at a specific Price. Why the minimum? Because if MM really wants to interact with the Retail Traders, in competition with her Sisters, then she will get there early, and she will not pull her quotes, lest She lose her FIFO positioning advantage.
Find a great correlate or "proxy" to measure that Level of interest; and you will know the Market is coming in that direction. SHE'S WAITING FOR YOU. LOL
DOM ANALYSIS requires some fast processing
Case in point, ES and some discussion of NQ futures
Just to give you a rough idea of how difficult Depth of Market Analysis can be,
from an implementation standpoint, on the ES contract, I'm seeing as high as
500 callback events PER SECOND coming in as Market Depth changes, in a
C# Indicator callback routine. So you got a couple of milliseconds on some of
the peak data rates to do something, anything to capture the data.
This is with an ATAS platform, and Rithmic feed and Order Routing; sitting on
a dedicated server in a data center. Just to give you an idea of the challenges
you would face. Basically, it's not achievable by traders, and I'd advise not
to even try; unless, of course, you are one of "those driven traders" who gets
his/her kicks out of trying to "tame the Beast". Just sayin'...
The Dynamic nature of the DOM should be apparent from just looking at it,
but in NQ in particular, the Spoofing activity reaches its peak to completely
confuse traders. I'd post a picture if I knew how... It's an eye-opener...
Entire sides of the DOM consist of "mega spoofing", the minimum values of which
are SINGLE CONTRACTS on the DOM. But, visually, you'd probably think there
was balanced size on both sides... don't be naive; of course you're not naive...
For me, the real prize as I've said before is to master NQ's "take no prisoners"
approach to Price movement. Quite insane, but certain fundamental aspects
of it are actually predictable. I just observed the "distant or far DOM bias" remain
elevated for 10 minutes prior to a 160 TICK Rally in NQ. So, as I said, and I
can't offer you software; but the concept involved maybe; if you can "tame the
DOM Beast" then there would be riches to be had... There's Gold in them thar Hills,
but to get it out may be near impossible, so don't take such a task lightly; and
in fact, don't even try it. Just sayin'... once again.
^That essay split into two line poems you wrote gave me a headache.
Anyways, I have been reading and following your comments here. What exactly are you trying to offer?
Any legit, concrete help or just loosely keep saying 'my code can do X,Y,Z', 'I am not sharing / selling secrets' and 'you guys should just stay away from being in reverse trends'.
That would be possibly an uncharitable observation. These forums are full of speculation and
so I just got hooked in on a couple of topics near and dear to my heart, since I've researched
and coded for a long time in this area. The first was Order Flow which, to me, specifically
is Tape Analysis or Trade Flow; what I call Inventory Analysis.
The other is literally Order Flow, in the sense of unfilled Orders, Bids and Offers which appear
on the Level 2 or Depth of Market. I feel that Inventory Analysis is not very well understood
or supported by platforms; but it is certainly the case that Order Flow, specifically the
Depth of Market or Level 2 Analysis is an absolute mystery; so why do the platforms even
present that data to traders.
Platforms make a token, half-hearted attempt to characterize the Time and Sales in chunks,
maybe inside a candle interval, they'll display some cumulative size. But, to me, all of that
really misses the Big Picture that Market Maker is trading over Inventories which are many
hours in accumulation, and that unless you make a stab at evaluating MM's "estimated position"
or "stance" in the market relative to the Retail players; then you don't really have a hope
of understanding the very dynamic Inventory (Time and Sales) impact.
And, as I said before, the area of "eyeballing the Level 2" or the Book, or Market Depth; again
it seems nobody really has a handle on how to do that effectively.
So, just because I ain't selling my own "rats nest of hacked software" to clients, or appear
to be pontificating on the possibly valid principles of both these areas Inventory and DOM
Analysis; doesn't mean that in a forum like this, it won't stimulate some of you to look
deeper, and we can at least discuss.
Forums are about discussions of concepts, in part at least, and so why not my discussion
of 2 areas I've spent over a decade working on? I don't have anything to gain from it,
and it quickly becomes a waste of my time; but why not at least dive into some of the
ideas... ? That's my story, and I'll stick to it for now... lol
[edit] It just occurs to me that, to avoid confusion, let's call them 1) filled orders flow
(the Tape or Time and Sales, Trade Flow),
and 2) unfilled orders flow (Depth of Market, pure MM Orders) which might make it clearer.
So when you say hours of accumulation, you mean those are iceberg orders?
Speaking of which, I have already asked about an iceberg order detector indicator in the other thread by Ninja Cators, but no one has experience with it yet it seems.
Orderflow is the heart of my trading strategy. I know some people dismiss it. It requires focus and learning. Once you learn how to read a chart correctly you can't unlearn it. However I understand that some traders find it confusing.
I'm a little confused. You can "once you learn how to read a chart" normally means looking at Price Action; unless you have a way of charting Order Flow.
And my main point above was to say that neither the Tape (Trade Flow) or The Book (Orders Flow) are able to be properly read by just looking at them...
I've been digging into it with the ATAS platform; hacking lots of C#. I found that with a Rithmic incoming feed, we could see 40 DOM levels both on the Offer side; and on the Bid side... Looking at "the near DOM" and the "far DOM" I think that market direction can be predicted.
Anyway, so ATAS turns out to be such an unsupported platform, and so I had to abandon it, in favor of Ninja Trader 8. It was a real nightmare to translate the Indicator code from ATAS' framework to NinjaTrader 8. Like 24 hours of constant hacking. But I did it.
Now I can push it further, and plan to stay with the Rithmic feed. We saw event frequencies (averaged over 1 minute) in the range of 500-800 DOM updates per second and, as I said, Rithmic provides at least 40 ticks of DOM tiers above, and also below the market.
Whereas ATAS was a constant guessing game with poor documentation; Ninja Trader has fabulous documentation, making things a whole lot easier.
I not only had to abandon the platform, but also the broker; in order to get Ninja Trader, which would be the only platform with any hope of hosting the C# code.
So, back on track again. Trading is a long, arduous journey with an uncertain destination
I think we have all been on the same journey. I used to believe that simply trading moving average crossovers would make me money. Today, I use a combination of Volume, price, orderflow and market profile. My results are fairly consistent, always looking to improve. I do find trying to read the DOM totally confusing the numbers are moving so fast, its tough making sense of what really going on.
to capture the data.