DOM interpretation

[grantx]

I'm trying to get a grip on the significance of price/volume and I need help and advice.

Please look at the attached Word file containing a snapshot Depth of Market of the DAX future (if it isn't visible scroll up or down).

What would be an initial assessment from the information presented?

Which are the most significant elements?

Is it bullish or bearish?

If I was looking to buy, does the information suggest predominantly upward (buying) pressure?

Or, if I was looking to sell, does the information suggest predominantly downward (selling) pressure?

Any suggestions greatly appreciated.

Grant.

 

[One Eyed Shark]

10 people responding to this thread will give you ten completely different answers.

From the DOM in isolation I do not think you can predict the direction of the market, but you can draw some minor conclusions from the total number of contracts on each side of the market.

Much more info comes from the prices at which the orders are grouped, providing obvious points for support and resistance.

If prices are to go down they have to take out the significant volume of orders (140) at 4560.00, if the charge down is only led by 10 contracts on the sell side it is going to take more than one or two bites before prices break down.

And the opposite applies if price is to break above 4564.00.

You can guess at where the next trade is to take place with 56 contracts on the buy side and 10 on the sell, the next price battle is likely to take place at 4563.00

For me reading P/V has its greatest benefit at placing entries/stops.

Would you place a sell order at 4560.5 when you can see that you have 140 contracts to break through before you see a profit or would a more sensible entry be 4559.50 when the volume is out the way.

Sorry if I am " teaching granny to ......" saw the post and thought it was a good point and since no one has made a comment thought I would add my thoughts , so much info regarding this subject it is impossible to cover in one post

 

[notouch]

Today on the mini DOW with price in 12480 - 12500 area the sell side consistently outweighed the buy side but this didn't stop the price breaking though 12500 on its way to 12514. On several occasions there were 1000 on the sell side compared to just over 500 on the buy side but the price kept going up. You can't read too much into DOM.

 

[dcraig1]

Today on the mini DOW with price in 12480 - 12500 area the sell side consistently outweighed the buy side but this didn't stop the price breaking though 12500 on its way to 12514. On several occasions there were 1000 on the sell side compared to just over 500 on the buy side but the price kept going up. You can't read too much into DOM.

This is normal behavior. In a rising market, buyers are more aggressive and tend to be submitting marketable orders. These orders are not visible in the book, but they are visible in the time and sales. On the other hand, sellers are more passive and tend to submit non-marketable limit orders, which are visible in the book. Hence the "excess" of visible asks.

I don't have the YM data, but here is chart of the ER2 for some of the session. Lower plot is a smoothed representation of the ratio of asks (all levels) to the total contracts ( bid and ask - all levels) in the book.

Chart has constant volume bars 750 contracts wide.

 

[notouch]

Good explanation, thanks for that. I wonder if you could use a massive excess of asks or bids as a contrarian indicator i.e. buying into a wall of asks or sellng into a wall of bids.

 

[dcraig1]

Good explanation, thanks for that. I wonder if you could use a massive excess of asks or bids as a contrarian indicator i.e. buying into a wall of asks or sellng into a wall of bids.

I doubt if that would get you too far as a general principle. It all depends on context. For example if a "wall" of asks is suddenly canceled, a long might be appropriate. I think you have to use the DOM in combination with whatever other techniques you think are effective. It also needs to be used in combination with time and sales. For example if you can see a "wall of asks" in the DOM, and there is a transition from trades transacted at the ask to trades transacted at the bid, then short might be appropriate.

Over on ET there is long thread called something like "Scalping my way with ACV". It is worth reading.

One of the posters suggests that all this should be considered as a question of supply and demand with four elements - long supply, long demand, short supply and short demand. Seems like a good conceptual framework to me. In a rising market long supply is visible as the asks in the book. I take the number of contracts transacted at the ask (as compared with those at the bid) as a measure of long demand - along with volume of course. I have my own charting software and I use very short period charts (eg just 5 IB ticks per bar on the DAX) to try to see the falling of of the at bid /at ask ratio (otherwise known as market delta) when the ratio in the DOM is getting extreme. Again I'll restate that I think this is best done in combo with conventional TA such as trendlines, market profile, S/R levels or whatever else rings your chimes.

 

[dcraig1]

Following on from the previous post, here is a chart of a piece of today's HSI, with some sloppy looking trendlines with the orderbook delta and market delta.

 

[grantx]

To everyone who has responded to my question, please accept my apologies for delay in acknowledgment. I was not informed (e-mailed) of responses. Just noticed, but very late.

Will come back.

Grant.

 

[grantx]

One Eyed, Notouch and DC,

Thanks for the replies. Before I ask further questions I need to clarify a point.

Looking at the offers, for example, do these represent positions what someone is looking to buy, or are they positions which someone is looking sell to buyers? If I was looking to buy 10 lots, could I buy 10 at 4562.50 (assuming they hadn’t been taken)?

In other words, is it supply or demand, ie hopeful buyers looking for willing sellers or hopeful sellers looking for willing buyers? I’d guess it’s the former (hopeful buyers) otherwise they would have been filled and gone from the screen.

Thank you in anticipation.

Grant.

 

[dcraig1]

One Eyed, Notouch and DC,

Thanks for the replies. Before I ask further questions I need to clarify a point.

Looking at the offers, for example, do these represent positions what someone is looking to buy, or are they positions which someone is looking sell to buyers? If I was looking to buy 10 lots, could I buy 10 at 4562.50 (assuming they hadn’t been taken)?

In other words, is it supply or demand, ie hopeful buyers looking for willing sellers or hopeful sellers looking for willing buyers? I’d guess it’s the former (hopeful buyers) otherwise they would have been filled and gone from the screen.

Thank you in anticipation.

Grant.

The offers are contracts that somebody is willing to sell. If you submit a Market order to buy, it will be matched to the lowest offer. If all of your order can't be filled at the lowest offer, the balance will be filled at the next lowest and so on.

If you submit a Limit order to buy, then it will be matched against any offers at or below your limit price. If no such offers exist, then it will appear as a bid in the book.

 

[notouch]

I think military strategists would appreciate how it works. Offers are the bears' last line of defence and it doesn't matter how many of them there are, if the bulls are quickly taking them out and have momentum behind them then that goes to show the strength of the bulls. A disproportionate number of offers just shows the bears are on the defensive fighting backwards against momentum.

 

[ammo]

Good explanation, thanks for that. I wonder if you could use a massive excess of asks or bids as a contrarian indicator i.e. buying into a wall of asks or sellng into a wall of bids.

if morgan had 10,000 futures to sell they wouldnt show 10,000 becuz the mrkt would go lower and they would get a lower price , they would work the order letting out 500 to 1000 at a time ,those dom numbers are mostly non decipherable dont waste your time,if the mrkts falling and you are selling ,dont sell on the offer if dom shows 3000 for sale and 250 to buy