Understanding Liquidity and Market Pullbacks

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Old Feb 24, 2012, 2:00pm   #1
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Understanding Liquidity and Market Pullbacks

We've just published a new T2W article called "Understanding Liquidity and Market Pullbacks" by Peter Davies.

Quick Summary: Peter Davies explains how market pullbacks are strongly correlated to liquidity and uses examples to show how an understanding of this can present trading opportunities

PS. Don't forget to rate the article after you've read it and share your comments on this thread.
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Old Feb 24, 2012, 7:33pm   #2
 
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Re: Understanding Liquidity and Market Pullbacks

One of the best t2w articles I've ever read. A lot of time and thought have gone into it.
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Old Feb 25, 2012, 2:14am   #3
 
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Re: Understanding Liquidity and Market Pullbacks

The images didn't come out too well on the article.

Here are the full size images:

removed - links are in the article now (can click to enlarge) thx T2W

Cheers

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Old Feb 25, 2012, 3:42am   #4
 
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MONEY FLOW INDEX ;LIQUIDITY??

hi there peter, i would just like to say that you have touched on a amazing topic, thank you so much for this post.But what im trying to explore is could you gauge the liquidity of a pair,stock,futures, by using the money flow index...e.g. assuming that when the MFI line crosses the middle point from below, you would anticipate it to be a long movement...Then in terms of liquidity, you would assume that at this point you would determine if there are any orders to influence money to fill them?
If you would share your thoughts on this i would truely appreciate it...

Regards

Tradernopoly
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Old Feb 25, 2012, 7:14am   #5
 
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Re: Understanding Liquidity and Market Pullbacks

Great article! Kudos to you
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Old Feb 25, 2012, 5:47pm   #6
 
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Re: MONEY FLOW INDEX ;LIQUIDITY??

Quote:
Originally Posted by Tradernopoly View Post
hi there peter, i would just like to say that you have touched on a amazing topic, thank you so much for this post.But what im trying to explore is could you gauge the liquidity of a pair,stock,futures, by using the money flow index...e.g. assuming that when the MFI line crosses the middle point from below, you would anticipate it to be a long movement...Then in terms of liquidity, you would assume that at this point you would determine if there are any orders to influence money to fill them?
If you would share your thoughts on this i would truely appreciate it...

Regards

Tradernopoly
I use the Cumulative Delta (CD)...

Market Buys Orders - Market Sell Orders.

I use this because it is market buy & market sell orders that consume liquidity. So, when I see a pullback, I look at the CD to gauge participation. It is not an exact science:

Market moves down and CD doesn't - no participation of market sellers, it's a vacuum.
CD moves down and market doesn't - participation of market sellers BUT liquidity is absorbing the selling, it's a thick floor
CD & Price move down - a fairly regular down move.

I'm also a Tape Reader, so I see this happening over time, the mix of buy market/sell market orders and the impact those orders have.

The money flow index (MFI) I believe is based on price and volume which doesn't tell us anything about the side that the volume is on. It also doesn't tell you how much volume traded at any one point.

In my opinion, you'd get a lot more out of just using volume bars than the MFI. You'd certainly get much more from CD.
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Old Feb 25, 2012, 10:21pm   #7
 
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Vaidas

Thanks Peter! Enjoyed the reading very much! So as i far i understand lack of liquidity creates volatility in market, liquidity and volatility is kind of oposite things?
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Old Feb 25, 2012, 11:38pm   #8
 
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Re: Understanding Liquidity and Market Pullbacks

Thanks for the article, great description of what "market makers" do...
A terminology issue... if you call a sum of limit orders a liquidity I'm not sure this is a right definition of it. Of course there are those who professionally provide liquidity and they are "providing prices" for market price-takers, by limit orders, but price taker also provides liquidity - for the ones who are executing orders by limit orders, who are not "market makers".
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