Please Review My Bid/Ask Strategy

[carltonp]

Hello Traders,

Would some of you experienced traders please provide comments on my bid ask strategy that I have compiled using Excel.

Let me give you a brief explanation.

The strategies goal is to help me determine who the major players are at any given moment by looking at the bid/ask price and bid/ask size for the stocks of the DJIA.

The following caption was taken from www.tradetrek.com

Bid/ask prices are always posted with corresponding bid and ask sizes, which serve as measures of the strength and depth of the bid/ask prices. They tell us about the supply/demand pressures on a stock at a given moment. We can summarize important Bid/Ask size concerns as follows:

A large bid size indicates a strong demand for the stock.
A large ask size shows that there’s a large supply of the stock.
If the bid size is significantly larger than the ask size, then the demand for the stock is larger than the supply of the stock; therefore, the stock price is likely to go up.
If the ask size is significantly larger than the bid size, then the supply of the stock is larger than the demand for the stock; therefore, the stock price is likely to drop.

Because bid/ask prices and sizes change quickly in real-time, supply and demand also change quickly in real-time. Experienced traders always pay very close attention to the bid/ask sizes of a stock to monitor the supply-demand dynamic. Short-term traders usually buy a stock only when the demand is higher and sell a stock if demand suddenly becomes lower relative to supply.


With that said I have compiled a spreadsheet which does the following for each stock and makes a tally of the numbers.

The formula is as follows:

If bid prices for the majority of the stocks of the DJIA are greater than ask price and bid size is greater than ask size and the current prices are greater than previous prices for the majority of the stocks then the underlying sentiment is bullish.

For bearish sentiment the formula is as follows:

If the ask price for the majority of stocks of the DJIA are greater than the bid price and ask size is greater than the bid size and the current price is less than the previous price then the general sentiment is bearish.

The overall aim is to assess the bid/ask prices/sizes of the stocks of the DJIA to trade the mini-dow. So if I see large bidding in for the 30 stocks I will go long YM (mini-dow).

But there is one thing I haven't included in the formula which is volume.

Can someone please first comment on the strategy, secondly let me know if I should take volume into account (I think not because I'm already looking at bid / ask sizes, but would like you're suggestions.

Cheers

Carlton

P.S.
Sorry for the bad grammar.

 

[DionysusToast]

There's a couple of issues with what you are trying to do.

1 - Bidders & Offers should not be confused with buyers & sellers.
2 - Large size on the bid does NOT mean price will go up. In fact, if I had to go one way or the other, I'd go short on large bid size below
3 - using order flow/order book is not a snapshot activity - you should be looking at movement & changes over time
4 - Bots flash up bids/offers for very short periods of time to 'sniff out' other algos - you could have a normal level of 1500 on the ES and 8000 flashes up for less than a second. I am sure this occurs on stocks too and you'd need to avoid jumping in when it does.

 

[timsk]

The overall aim is to assess the bid/ask prices/sizes of the stocks of the DJIA to trade the mini-dow. So if I see large bidding in for the 30 stocks I will go long YM (mini-dow).

Hi Carlton,
It all sounds jolly clever stuff and, subject to DT's comments, hopefully it will work well for you. That said, it sounds complicated to me: I prefer to watch the cumulative delta in conjunction with $Tick - nice 'n simple!

Tim.

 

[carltonp]

There's a couple of issues with what you are trying to do.

1 - Bidders & Offers should not be confused with buyers & sellers.
2 - Large size on the bid does NOT mean price will go up. In fact, if I had to go one way or the other, I'd go short on large bid size below
3 - using order flow/order book is not a snapshot activity - you should be looking at movement & changes over time
4 - Bots flash up bids/offers for very short periods of time to 'sniff out' other algos - you could have a normal level of 1500 on the ES and 8000 flashes up for less than a second. I am sure this occurs on stocks too and you'd need to avoid jumping in when it does.

Uhmmmmmm, very interesting. Its funny you should mention that, because when I see large orders the price goes in total opposite direction.

 

[DionysusToast]

Calrton

If you are watching US stocks on L2, the MM id is more likely to make the stock move in the opposite direction than the size.

If someone shows size on L2, what do you think their motivation is?

1 - They want to buy a lot of shares, they put in a bid for 50,000 shares but then price moves up and they never get filled on their 50,000 anyway. They scratch their heads and wonder why it is they never get filled on their multi-million dollar orders which they display so brazenly.

2 - They are showing 50,000 on the bid, patsies start buying because of all this demand. The same person with 50,000 on the bid has an iceberg order on the offer selling his shares to all the patsies. What happens next depends on whether Mr 50,000 shares was building a short position or closing a long one.

3 - They are showing 50,000 bid because they are short, want to exit and they think that liquidity will attract sellers they can buy from.They show a 50,000 bid because they think people are long and will sell to them to exit their long positions.

You can add 4,5 & 6 - the thing is - you have a 'mechanical' idea.Thus far, you haven't given any suggestion as to why anyone that wants to buy a lot would show a large bid.

Of course, if we were talking about Wheat, then of course a commercial hedger could well show his hand because he just wants a damn fill and that market works in such a way that he'll get it if he shows his hand.

Stocks though - bidders != buyers. So what is your theory on why someone would put in a large bid if they outcome is they don't get filled because it scares the market up?

Cheers

DT

 

[carltonp]

DionysusToast

Very interesting indeed. And while I may understand the motivation of bidders in your scenario, my strategy is to watch the overall attitude of bidders to get a short-term feel of the market to gauge my entry in trading the mini-dow (DJIA) or emini (S&P).

So, I've compiled a excel spreadsheet which takes the data from esignal and the excel formula tells me of the 30 stocks (if looking at DJIA) if there are more demand at bid or ask. Once I get the answer to that question, I will feel more comfortable entering into a trade with YM (mini-dow)

I was wondering what others thought of the idea??

Cheers

 

[rawrschach]

I plus one DT fwiw

 

[DionysusToast]

Carlton

The question you need to answer to yourself (and I gave some options).

What would motivate somebody to put in a large bid?

My understanding of your theory is this:

1 - People put in large bids because they want to buy
2 - Price moves upwards, AWAY from a large bid
3 - People that put in large bids end up not getting filled because price moves away from them
4 - People that put in large bids, fail to get filled, repeat this behaviour, even though it is counterproductive

Does that sum it up?

DT

 

[iigis]

DionysusToast

Hi, this is just my first post here. Im just on the demo right now (becaouse my age) but i am looking for live trading. I was thinking that VSA (volume spread analysis) is good enaught for me but things change. Often i found myself in situation when i define S/R zone to enter right bud the entry was poor. Week or two i started with orderflow DOM + T&S. Today i found here on trade2win your posts. Great reading thanks for that. If you can please answer me some questions:

1. Suppouse that market is ticking down and is on my S/R zone. I think that bigger bids on zone are better (but things which you wrote about iceberg orders sounds logical). Clue to this "problem" for me is looking to T&S if i see that these larger orders "eat" offers i can say that, the S/R zone was true (not just iceberg). So i can go long there.

2. how to correctly read dom i think that dom (level2) is just part of the story. You need to look at T&S and see the "consummation" of orders. But if i go long it is better to me if bids are larger no?
and decline of offers (that means agresive buyers comming in) with positive feedback from T&S.

If you can correct me i will be really gratefull. thanks