Order book based trading

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Arbu

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I've never really used the order book to trade off, but is there a basic idea that, if the order book is very heavily weighted on one side, the price will tend to move away from it as those who want to buy (say) will be forced to up their prices?

And is trading like this what is meant when people refer to "scalping" and "jobbing"?

And do you just get a computer to tell you when the two sides of the book are out of balance to save you from having to look at the book all day long (similar to my other post today http://www.trade2win.com/boards/technical-analysis/107314-staring-graph.html)?
 
Arbu said:
I've never really used the order book to trade off, but is there a basic idea that, if the order book is very heavily weighted on one side, the price will tend to move away from it as those who want to buy (say) will be forced to up their prices?[/URL])?
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The only use I have successfully made of the order book is to help me develop trading ideas by watching the orders that were pending. Some of my credit spread ideas were made more robust with this process.
 
Arbu said:
I've never really used the order book to trade off, but is there a basic idea that, if the order book is very heavily weighted on one side, the price will tend to move away from it as those who want to buy (say) will be forced to up their prices?

And is trading like this what is meant when people refer to "scalping" and "jobbing"?

And do you just get a computer to tell you when the two sides of the book are out of balance to save you from having to look at the book all day long (similar to my other post today http://www.trade2win.com/boards/technical-analysis/107314-staring-graph.html)?
Click to expand...

From what i have gathered in my few months of learning to read level 2 for NASDAQ stocks, my answer would be "sort of"

Level 2 is full of all sorts of games that Market Makers, Big Players and Algos are playing and it can often be seen that someone, be it man or robot is messing around with the order book. You are "sort of" right in some instances, the bid will outnumber the ask by extreme amounts and then this may help to decide whether the trade should be taken but that snapshot of the orderbook could change without a single trade being made. Everyone could pull there orders before they were executed and the price never moves 1c or even goes in the oppostie direction to what you thought it would. Someone has faked support or resistance. Time and Sales data can help to show if the orders turned into trades or if they were withdrawn.

"Scalping" basically means entering and exiting a trade in very quick succession with a hope to gain small profits but frequently enough to make it pay. L2 would be a very useful tool to have for this and some use only this. Tick Charts are also used for scalping to some extent. L2 is also often used for tight entries into longer term day trades or even swing trades so to say it is for "scalping" is not 100% correct.

Don't say "just get a computer to do it" in a scalpers forum whatever you do!! The most common way to use L2 is to watch it with your own eyes to see how the orders go through. If they get pulled, if they appear on T&S and the rate at which it happens and what players are making those moves as some have more clout than others are all important and hard to program into a robot.

This needs to be combined with other information based on charts and what the sectors, Futures and Indices are currently doing, as well as pending news and even currency and Oil prices all in real time. Because every trade is different and the order book is moving at an extreme pace. Most people don't "just use a computer" to help them. They spend the hours in front of the screen.

Hope that helps if you're still interested!

Coop
 
Order book is useless, its trades that have gone throughwhich offers some value to a trader
 
Not saying your experience is invalid, but basing your market movements and dealings over what are only indicative intentions of potential market participants isn't something that i would consdier valuable to my strategy. Bids and offers get pulled all the time, some of the mid cap stocks are littered with bots whipping bids and offers in and again having them pulled just as quickly. To me trades that have been executed shows me when there is a big buyer/seller around and this is concrete and far more valuable to a trader IMO
 
Very much agree t&s far more important than nonsense in the book, 98% of orders are pulled iirc...
 
i agree with arabian but wouldnt say orderbook is totally useless... as a starting position i would say whatever looks like common sense from the orderbook (i.e. more bids so it should going up) should be reversed - like do the opposite (more bids so it should go DOWN).

but obviously no hard and fast rules like that, level 2 stuff can be useful if you can see a trader trying to work an order by doing tricks in the book.
 
Very rare to see a trader doing tricks while working an order, most big business is done through algos and dark pools. You may get some bots throwing bids and offers in and out. IMO the time consumed studying level 2 is better utilised in other areas of ones trading strategy
 
alloy said:
Very rare to see a trader doing tricks while working an order, most big business is done through algos and dark pools. You may get some bots throwing bids and offers in and out. IMO the time consumed studying level 2 is better utilised in other areas of ones trading strategy
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You're a bright guy, be good if you posted more..
 
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