Eugene, you have provided both, supply and demand (econ 101 :)) and the contrarian point of view. I am not a big believer in "supply and demand" as price drivers in capital markets. That theory works well with physical commodities, where the supply is limited and demand is often forced by necessity to pay higher price: e.g. if you need oil and the supply is limited, you have no choice but to pay more and drive the price up. In capital markets, the supply often can be manufactured instantly, in any quantity at will and the demand can be deferred without any adverse consequence: e.g. there is no physical limitation on the number of ES contracts that can be written by the sellers and the buyers can easily forego the purchase if they believe the price is too high, no matter what the book imbalance is.
In any event, if the JBT sample strategies are anti-trend, then, I guess, you subscribe to the contrarian point of view. Just to make sure I understand it correctly: in velocity indicators, when the spread between the short-term and long-term averages gets larger than some "entry" value, a short position is taken? I.e. when there are more sellers than buyers and a cumulative ask size suddenly greatly exceeds the cumulative bid size, as in your example below, then the book balance velocity is high and a long position is entered? ________________________________ From: nonlinear5 <[email protected]> To: JBookTrader <[email protected]> Sent: Mon, November 29, 2010 9:57:15 AM Subject: [JBookTrader] Re: Indicators > 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. -- 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.
