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Random Line Theory
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Random Line Theory

  #171 (permalink)
Market Wizard
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Fat Tails View Post
Value has always been relative. Your salary is high, if you earn more than your wife's sister's husband.

Noise is created by smaller time frame traders, as seen by large time frame traders. Larger time frame traders need smaller time frame traders, as they provide for liquidity.



You are right, price is driven by nothing else than order flow. Technical Analysis is a pseudo-science trying to figure out, when feedback kicks in. Feedback is the behavior of other traders reacting to price by using Technical Analysis, LOL.

If you remove noise altogether, the market will be illiquid and you need market makers which engage in making two-sided quotes. That is the reason that trading in the good old times was much more expensive.

The DOM has been invented by the brokers to make it easier to place orders, so it is indeed increasing temptation. The devil likes it and laughs.

I agree with a lot of this.

At some point, most people realise that TA is mostly a sham OR they run out of money/patience. The search for 'value' is one way you can go post-TA but value is also totally irrelevant. In fact, there is no true value of any financial instrument except perhaps for a stock that has had a buyout announced. Look how well those stocks move in the weeks after the announcement.

When a news report comes out, the price moves that follow are NOT the result of a lot of very smart people that are quickly re-calculating the value of the market. It's the result of a lot of gambling.

It is true that there are a lot of longer term players but it's also true that quite often they are barely moving the market and at other times they are trading heavily.

Order flow is king - but you can't just trade by following the order flow as it comes through on the tape. The DOM only shows the other half of the auction and so can't be used in isolation either. The thing about Time & Sales and DOM is that it will show you weakness but that is seen in the absence of information. So, if you only consider what you are seeing (as opposed to not seeing), then you won't be able to use it for longer term day trades in my opinion.

Anything you see on a chart is effect. It is what happened. You have to be looking for the cause of these effects. If you can put your feet in the shoes of trader that are getting run over and you can back this up with Time & Sales/DOM at the points you think these traders will puke, then you have the makings of a valid approach.

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  #172 (permalink)
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DionysusToast View Post
...
I can explain these reasons - but I'll presume people don't want to be bored with it....

Go ahead, we're here to be bored with it. I want to learn to do the same thing if it works.

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  #173 (permalink)
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fluxsmith View Post
Go ahead, we're here to be bored with it. I want to learn to do the same thing if it works.

I already invested my money , time with the flashy, exciting, stuff that has not worked for me and 95% of traders. My charts have lines, retracements , colors, etc, powered by a big Intel processor with more memory then my brain has, on big screens, does everything but make money, but boy sure is flashy!!

Think there must be an untapped market for boring stuff, I'm in!

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  #174 (permalink)
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I could cry - I wrote a post of epic proportions here yesterday.

Now it's gone.... I shall return later & make a 2nd attempt.

Dang...

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  #175 (permalink)
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DionysusToast View Post
I could cry - I wrote a post of epic proportions here yesterday.

Now it's gone.... I shall return later & make a 2nd attempt.

Dang...

Nothing has been deleted. Maybe you previewed instead of submitted. No known problems with our database or server.

Mike

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  #176 (permalink)
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Big Mike View Post
Nothing has been deleted. Maybe you previewed instead of submitted. No known problems with our database or server.

Mike

I have no doubt my fingers are to blame. Thanks for checking Mike...

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  #177 (permalink)
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Before the gym then...

What makes a market act the way it does? Let's consider C (Citigroup), CL and ES.

C - On Friday had a volume of 308,811,254 and a price range of 5 ticks
CL - On Friday had a volume of 219,777 and a price range of 145 ticks
ES - On Friday had a volume of 1,651,653 and a price range of 42 ticks.

C is ULTRA thick and it is people playing a very specific game. Namely HFT algos playing the spread and capturing rebates. On L2, you can see 3 million each side.
CL is a much thinner market and can move very quickly. On the DOM, we typically see levels of about 10-50 contracts. There's plenty of retail traders playing it and my belief is there's a high percentage of legitimate hedgers on there.
ES is very thick, we can see a few thousand on each level which thins out to hundreds prior to the news. This is the market with the most novice traders.

My belief is that the way these markets move intraday is down to:
1 - Thickness, which is reflected in the DOM
2 - The fact that they have regular players, who trade in a consistent way
3 - The number of newbies swimming in the waters, which attracts sharks
4 - The fact that people react in a predictable manner when getting run over in a position

I will post more after the gym. For now, does this sound like it might make sense? Does it make sense that an instrument can have a personality and not behave in the same way as another because of these things?

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  #178 (permalink)
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DionysusToast View Post
I have no doubt my fingers are to blame. Thanks for checking Mike...

I am so annoyed by this f...... Microsoft Windows. There are some shortcuts, which close your application immediately without saving anything.

One of these shortcuts is Ctrl-W. In German language all nouns have capital letters, and there are lot of nouns starting with "W". So, after having written some stuff for about 30 minutes, I will type a word with a capital "W" and miss the shift key with my little finger and hit the Ctrl key instead, which is located just below.

Windows will close the browser immediately and all my work of the prior 30 minutes is lost.

The engineers who have designed those shortcuts must be really stupid.

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  #179 (permalink)
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Moving away from random lines toward random designs, are we?

vvhg

Hic Rhodos, hic salta.
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  #180 (permalink)
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DionysusToast View Post
Before the gym then...

What makes a market act the way it does? Let's consider C (Citigroup), CL and ES.

C - On Friday had a volume of 308,811,254 and a price range of 5 ticks
CL - On Friday had a volume of 219,777 and a price range of 145 ticks
ES - On Friday had a volume of 1,651,653 and a price range of 42 ticks.

C is ULTRA thick and it is people playing a very specific game. Namely HFT algos playing the spread and capturing rebates. On L2, you can see 3 million each side.
CL is a much thinner market and can move very quickly. On the DOM, we typically see levels of about 10-50 contracts. There's plenty of retail traders playing it and my belief is there's a high percentage of legitimate hedgers on there.
ES is very thick, we can see a few thousand on each level which thins out to hundreds prior to the news. This is the market with the most novice traders.

My belief is that the way these markets move intraday is down to:
1 - Thickness, which is reflected in the DOM
2 - The fact that they have regular players, who trade in a consistent way
3 - The number of newbies swimming in the waters, which attracts sharks
4 - The fact that people react in a predictable manner when getting run over in a position

I will post more after the gym. For now, does this sound like it might make sense? Does it make sense that an instrument can have a personality and not behave in the same way as another because of these things?

Moving on. The above simply is my personal 'justification' for looking at individual markets as individual 'entities' with different personalities. This is just my theory about the markets. I could of course be totally wrong. Still I'd rather have a theory that attempt to trade without one.

A market with a large percentage of legitimate hedgers will be different from one with a large percentage of day traders which in turn will be different from one that has 300 million HTF transactions a day.

The ES, in my opinion is mostly day traders. Market auction theory has a concept called "Other Time Frame" traders. Basically, these are people putting on longer term positions. They can certainly move the market and we see the market moving in one direction. Of course, also day traders may be more active on one day than another.

Some days though, mostly it's just the lowly day trader plying his trade.

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Fig 1.1. Scmucceleration

This is 14th March, 2011. Average volume and both price & delta ending up pretty much where they started - a good indication that everyone that got in, also got out. Day traders mostly.

Now these day traders aren't all one and two lot traders. There are some seriously big players on this market. We also have algos in there arbing between large S&P and the mini as well as people arbing the index vs the futures. Still - I don't think those program traders matter too much. They take away the inefficiencies pretty quickly and then what's left for them to do? (my theory only).

So - with all these big day traders presumably making money, who are they making money from? Other day traders of course, and maybe some hedgers.

How would a large day trader consistently take money off smaller traders? Well, first of all there's a steady flow of fresh meat into the market and that helps. There's no secret to how most of these people trade the market is there Mr Elder?

So - with a lot of smart big money around and a fair amount of dumb small money around, the big money can and does make money by enticing people into positions and then running them over. So - there are a lot of traps in the ES, it is very thick and so it is very spoofy. If there's 5000 contracts in front of you, you can spoof with no worry, unlike say CL where there may be 50 contracts in front of you.

Still the spoofy guys that move the market very short term can't move the market for long. Their spoofing activities may cause reactions that end up in a longer term move. Sometimes there's no spoofing at all, just some behemoth with a lot of supply holding price down.

Anyway - this adds to the personality of the ES and I didn't even talk about lines yet but I did say why I thought the ES and the CL would honor different levels and work in different ways...

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