How to Read the Depth of Market

[MarketMaster]

I have just written an article on reading the Depth Of Market and published it on my web site. You can read it and all my other articles by going to:

http://www.themasteryoftrading.com/articles/articles_main.htm

Malcolm Robinson

 

[Bankbuster]

Thanks Malcolm for the link. I found all of the articles useful and interesting. In particular I was interested to read your opinion on spreadbetting as opposed to trading futures. I currently only use a spreadbet account, however I'm contemplating moving on to trading options/futures, which appear to offer traders a fairer chance of turning a profit.

Regards, BB

 

[Naz]

I enjoyed reading the articles as well Malcolm.Thank you.

My way of using depth of Market is the following.First of all with respect you need a level 2 system that you can play chess with. Where better than on the Nasdaq.Part of trading there is not only with your normal trading skills but how good you are on the screen.

First of all you need a system that allows you to see all the players openly and not hidden behind anonymous orders.(Except for astute island players) Next you need a system which allows you to go anywhere and do anything on the screen.then you can add another dimension to your trading.

Take INTC this evening that depth at the whole number was important because you needed to know who was there and how they were playing it.As Goldman held that bid it gave you the confidence to take the trade.You knew who the players were and you knew that a stop of 7c was obtainable because you could see the depth of the market,which also included the island book and you said hey i'll take this at the whole number because i have all the orders i need to transact with anyone in this depth of market and i guarantee my stop will be within 7c.If i run this to the next whole number which INTC does with regularity i've got a 15/1 risk reward trade.I'll take it.But hey i need that depth of market in the beginning to use as my stop.Not to read the direction of the market but as my stop.If i want to get out i need to make sure its a cert and the bigger and stronger the depth the better.What i dont want is fresh air there.

Yes it ran to the next whole number and here was the level 2 screen showing the depth of market where an entry was possible with a 7c stop.Look not only at the depth on the level 2 screen but also the orders on the bid in the island book as well.

 

[MarketMaster]

Thanks BankBuster...

Naz, I agree that to be able to see what the market makers are doing adds a very valuable extra dimension. With futures there are no market makers, there are large and small players and it would be very interesting to see what the large players are doing, but that info is not available.

 

[Cigar]

excuse my ignorance, but what is the difference between market depth data and L2 data. I see I can receive both from my IB account (if I subscribe).

I follow the dax futures with a find the trend/ buy the dips strategy, which I'm pretty happy with. If I get caught, its usually finding the bottom of the dip... I watch for the short term o/s, watch for the next candle, and act. Most times this is fine, but sometimes there will be another downleg. And at 25 euros a point, I'm not long in exiting at a loss. I would love to find something to help in this situation.

I suppose what I am asking is, I'm pretty happy with my chart and couple of indicators, but would market data/L2 help, but without giving me info-overload. I don't want tio change my total approach but would be happy to compliment it with market data, if it would benefit me.

Nice articles Malcolm and compliments to Naz on your many articles.

 

[Naz]

Cigar.Level 2 data shows you the depth of the market.ie the orders that are available underneath the best bid and offer.Its how you view this information and make use of it that makes it beneficial.

Below i have shown Intels level 2 data on a pullback in the type of trade you like to take.Buying the pullbacks in an uptrend.In the market depth you can see that there is more support on the bid than the ask and the first green candle has appearded on the chart.

This support dosnt necessarily mean its going up.But it gives you the confidence to hit inca# on the ask and take his 1500 shares.At the same time take arca out and grab his 500shares. This does two things it gets you filled quick but adds to the momentum that you want by taking out the two best ask orders.At the same time it will also put another green candle on the chart to entice the chart readers to join the party.However before you bought you you can see on the island book that there are 12,100 shares between $17.14-$1716.This can be your stop.

If you realy panicked and wanted a realy tight stop you could always hit redibook at $17.19 where he's showing 4900 shares.Finaly if the ecns crumble there are enough market makers there to use a SOES order.And yes the next move was up.Please remember that this is the Nasdaq and you are not restricted to just dealing at best bid and offer you can go anywhere and do anything as long as your broker has given you the orders in which to do it.

 

[Morris]

Naz, interesting stuff. I've used level 2 on the UK stocks, but found it could be a distraction at times. Also the fact that a % of trades do not go through SETS (not sure of this % but GNI reckon it's significant).

Have you read "The Stock Trader" by Tony Oz ? This gives you a good feel for this type of Nasdaq trading.

Also, who do you use for your level 2 info ? Is it your broker, or a separate service ? (Excuse me if that last question sounds clueless)

mo

 

[Naz]

Mo yes i've read the book you mention.The level 2 info is normaly provided free by your US broker,Use your trading skills along with a fully transparent level 2 screen with direct access and realy satart flying.

 

[Cigar]

Nas thanks for your comments.

I see the potential support at 17.19 from Redi, but I also see potential resistance at 17.22 from Isld with some 5200 shares.

This suggests to me (in my innocence) a potential further downleg that might keep me out of taking a Long.

I go into info overload looking at much else, but the info gleaned from above would be very useful.

 

[Cigar]

I think I've found the spot on my chart, from Thursday.. yes, the price did pop up to 21/22, but then fell back a few points, before going up again.
I scalp the dax, and the 2nd pullback (not shown) of about 4 points would have probably broken my stop loss (borderline). It would have been annoying to see it turn and go up again..
This is exactly the situation I am trying to protect myself from.

thx