Very interesting guys, many thanks for the great explanation. I have observed the same issues you rightly noted and as a result I only look at price action - which is the outcome of any trading decision.
Is there a strategy that looks at price action, then use depth balance to support the direction. With our naked eyes, we can sometimes see a sudden push to the upside or to the downside - is there a way to detect the first one or two ticks of the move and join the party as early as possible? On Jun 9, 2:40 pm, nonlinear5 <[email protected]> wrote: > > Depth balance is a number between 100 and -100. At one extreme, all the > > orders would be on the bid side, on the other extreme they are all on the > > ask side, and at 0 there are equal numbers of bids and asks (adding each of > > 10 levels on the bid side, and the ask side). > > Just to expand on this a little. The idea with tracking depth balance > and its changes (known as velocity of balance in JBT) is that the > Level2 sizes and prices represent the current demand and supply > (buyers and sellers) in a particular market. Depth balance in JBT > measures exactly that. Of course, if things were as pure and linear as > the classical economics prescribes it, your strategy would buy when > the demand exceeds the supply, and sell short otherwise. In reality, > things are much more complicated. > > First, there is a lot of noise which obscures the patterns. > > Second, there is a lot of game playing in the L2 where players flash > bids with the real intention to sell, and flash offers with the real > intention to buy. > > Third, there is a powerful factor which works against the classical > theory. This factor states that the market will move to the point of > the highest liquidity. That is, the price will move in the direction > where the highest number of shares/contracts can be traded. If you > think about this, it makes sense. The large players moving a lot of > money in the market don't care where the price moves. They only care > how they can make the largest amount of money with as least risk as > possible. They will go long as easily as they would go short, > especially in the futures markets. So, let's consider a classical > case. The demand is 10000 (that is, the cumulative bid is 10,000 > contracts), the supply is 1000 (that is, the cumulative offer is 1,000 > contracts). Clearly, the demand far exceeds the supply, so by all the > scientific economic principles, the price should go up. Now imagine > that you are a big guy, and the way that you make money is move 10,000 > of contracts at a time. In this particular situation, there is not > enough liquidity on the supply side to move your size, but enough on > the demand side. That is to say, it's easier for you to actually sell > 10,000 than to buy 10,000 contracts. As a result, while everything is > telling us that the price is about to go up, it may in fact move down, > as a result of you "selling into liquidity". > > So, all of these factors complicate things. Ultimately, it comes down > to whether you can somehow take them into account and come up with a > strategy to take advantage of them. -- You received this message because you are subscribed to the Google Groups "JBookTrader" group. To post to this group, send email to [email protected]. To unsubscribe from this group, send email to [email protected]. For more options, visit this group at http://groups.google.com/group/jbooktrader?hl=en.
