> What is the hypothesis for the velocity-based indicators? Is it that body in > motion stays in motion, - i.e. momentum / trend following? Or, is it that the > departure from the long term averages is bound to revert back to the mean? > > For some reason I thought the JBT strategies were based on the latter, > reversion > to the long-term mean, view of the markets. >
The hypothesis is actually what they teach in Economics 101: when demand exceeds the supply, the prices go up, and when the supply exceeds the demand, the prices go down. In JBT, the demand/supply is measured by book balance. In a perfect, well-behaved world as described by the economic principles, the trading strategy would be straightforward: buy when book balance is high, and sell short when book balance is low. In the real world, there are complications: a) The limit book is noisy: in the ES market where about 2 million contracts trade every day, there are a lot of participants with their own agendas. Consequently, what should appear as clear relationships gets obscured in noise. b) The limit book is manipulated. Traders routinely "stuff" the limit book to create an impression that the order flow is coming in a certain direction while in fact they are taking positions in the opposite direction. c) There is a theory which postulates the principle that goes opposite what the supply/demand principle states. What is says is that the market will trade in the direction which will result into the greater liquidity. For example, let's say the cumulative bid size is 100 contracts and the cumulative ask size is 1000 contracts. The economic theory says, "sell, because supply outpaces the demand". The greater liquidity theory says, "buy, because you can move 10 times more contracts without moving the price". These factors, among others, make it complicated to decipher what goes on in terms of the relationship between the order book and the future price. However, despite of these, there seem to be definitive and persistent patters. If you look at any strategies which use Tension indicator, and bring up the charts showing the indicator and the price, it's unmistakable. Well, I had to give this long answer, but the short answer is, yes, all sample JBT strategies are effectively anti-trend. -- 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.
