Scalping

[EulerFourier]

The same thing goes on on the computer screen as goes on in the pit. People put up bids and offers and trades take place. It is fundamentally NO different, even the computers have to put up bids and offers. When I look at a DOM I picture 10,000 or 100,000 people doing exactly what I'm doing. It's harder because of the speed of the computers and a lot of the advantage that guys in the pit had is gone, but the underlying mechanics of the market are exactly the same. I frankly don't think the computers are that smart to begin with and feel like they're going to create new and different inefficiencies to be exploited. Should the computers be given a priority in the queue and be able to front run my trades I'll probably be done with it. Not really interested in playing a rigged game.

Look I don't think reading the DOM is only good for scalping for ticks. I think it's necessary for any type of day trading. If you're not watching every tick your competition is. What good is widening my stop to 2 points if I know I'm wrong after 3 ticks? Why should I let a winner turn into a loser when I see momentum changing direction against me? If it turns out that that kind of strategy doesn't work in the future then I'll just figure I'm reading the market wrong and look to change my premises on market behaviour.

By the way, that top pic is the NYSE floor. I see lots of computer screens in the second one but not one chart on them.

 

[EulerFourier]

:clap:

Is it not still forcing you to take the spread?

If you wait till you are down to 200 to join the bid, you need 200+ contracts to get a fill.

Doesn't this virtually guarantee it ticks against you, at least momentarily? Or do you expect others to join behind you to prop it up?

Serious question.

Yeah the hope is that the bids pile in behind you to give you a cushion. It was a pretty safe bet since the depth was almost never less than 1000. Also I wouldn't join if the last trade was on that side of the book. Tough to work as well due to latency. I don't have X_Trader so I never really knew where I was in the queue, so I watched the T&S and if any amount of size traded over where I thought I was without me being hit I was out.

 

[Liquid validity]

It's harder because of the speed of the computers and a lot of the advantage that guys in the pit had is gone, but the underlying mechanics of the market are exactly the same. I frankly don't think the computers are that smart to begin with and feel like they're going to create new and different inefficiencies to be exploited. Should the computers be given a priority in the queue and be able to front run my trades I'll probably be done with it. Not really interested in playing a rigged game.

By the way, that top pic is the NYSE floor. I see lots of computer screens in the second one but not one chart on them.

Agree on the computer issue, yeah the 1st pic is wrong as well :innocent:
Cheers for your honest insight.

 

[darkcider]

It doesn't really work that way....the whole point of watching every trade on the tape go by is so that when you finally pull the trigger, you take the lowest risk possible and it usually works.


So what's going on when it doesn't work? Would you care to explain a losing trade in detail? I suppose it would start off similar to a winning trade

You can't read the market, you can only get good at guessing.

 

[DionysusToast]

It doesn't really work that way....the whole point of watching every trade on the tape go by is so that when you finally pull the trigger, you take the lowest risk possible and it usually works.


So what's going on when it doesn't work? Would you care to explain a losing trade in detail? I suppose it would start off similar to a winning trade

You can't read the market, you can only get good at guessing.

This is not true.

You can't read the market all the time but you can read the market at times.

There are times when you can see someone building a position. You never know if they will be successful in making that position profitable. You can tag along for the ride in the hope that they are successful.

Of course, it isn't 100%, so it is a guess, but it is readable.

Readable does not mean certainty.

 

[Cornix]

The problem with a market order is you are paying the spread. Not a particularly good idea if you are scalping in the TSY's for a tick or two, since you've got to first overcome the spread and then have the market move in your favour. The inside bid/offer is often times several thousand contracts deep aswell, so getting a good placement in the queue can make or break a trade.

I managed a few ticks today doing the following in GBL/GBM: GBM was in a very tight range of three ticks and GBL was range bound (5-6 ticks). I waited for the market to go offered on the top side of the range in GBM, while GBL was trading in the middle of it's range or towards the bottom. If and only if I saw the offer drop to <200 hundred contracts (it was normally 1000-2500) I got in the queue. If I got hit on my offer I bid out a tick lower. On the other side of the range I hit into the bid if it was <200 and GBL was in the middle of the range or towards the top. The key was that I was getting a good spot in the queue, the trade would not have worked if I placed a market order. It was a pretty safe trade....won't make you rich but a couple bucks is a couple bucks.

Sounds like a solid approach, somewhat similar to Rotter's style, with the exception of flipping the orders if I understood it correctly.

 

[Mike Kshemaraja]

This is not true.

You can't read the market all the time but you can read the market at times.

There are times when you can see someone building a position. You never know if they will be successful in making that position profitable. You can tag along for the ride in the hope that they are successful.

Of course, it isn't 100%, so it is a guess, but it is readable.

Readable does not mean certainty.

Wise post.

Nothing is certain. Being ready for uncertainty in a compose manner is a prerogative.

 

[darkcider]

This is not true.

You can't read the market all the time but you can read the market at times.

There are times when you can see someone building a position. You never know if they will be successful in making that position profitable. You can tag along for the ride in the hope that they are successful.

Of course, it isn't 100%, so it is a guess, but it is readable.

Readable does not mean certainty.

:smart:Some people are very sneaky with the impression they like to give. Historical market events can be narrated in such a detailed way, but do not confuse narrating historical events with reading into the future.

 

[darkcider]

Wise post.

Nothing is certain. Being ready for uncertainty in a compose manner is a prerogative.

Precisely! Attitude is what makes or breaks a trader. I wonder how much George Soros ever made by reading the DOM.:?:

 

[DionysusToast]

:smart:Some people are very sneaky with the impression they like to give. Historical market events can be narrated in such a detailed way, but do not confuse narrating historical events with reading into the future.

Quite true.

You can only read the current. Hence, you can only react to what people are currently doing.

If you look at Order Book, Delta Studies, Footprint Charts, Time & Sales, Volume Profiles - they all give you information that is different from price. Sure - there is a lot of useless information but it's a different dimension of data. None can see into the future but I do think they have their uses.

 

[Mike Kshemaraja]

Trying to predict direction, is very common way to look at the market, traders love to be right

But really what is point in that?

A smart scalper is an observant more than a participant, paying equal attention to the force that oppose his potential trade as to those in favor of it.:whistling

 

[Liquid validity]

I don't know about anyone else, but my motive for being here is to honestly
assess the longterm viability of retail scalping given the likely changes to
operating conditions already outlined.
Knocking another method for the sake of it is pointless...
You can always learn something even if you never end up scalping :idea:

There are a couple of very knowledgeable scalpers in this thread.
I for one would like to hear possible potential alternatives if CME go the same route
as NASDAQ and NYSE in opening co-located front running data centres.

DT or EF, what are your thoughts on SGX contracts for instance, as an alternative?
Obviously the timezone is an issue for some. Could you adapt your methods to
to suit U.S. equities - after all AMIT and mr charts on this forum do that.
Their solution seems to be scalping with a willingness to let it turn into a runner if needs be.

 

[DionysusToast]

What I do isn't a million miles from what you described - get in with a scalpers entry but try to hold it.

I did the Mr C course a few years back, it's what got me into Tape/Order book in the first place. I don't trade stocks though - not any more. The difference with futures is that it's a single, centralised exchange. It's a bit more level a playing field in many respects.

I don't scalp outright but I use the same analysis techniques.

In terms of SGX - never looked at it - it comes down to:

- daily range in ticks
- daily volume
- typical depth

Someone asked me about day trading the FTSE 100 a few months ago - I took a look and it's way too illiquid. Maybe some people could do it but I would not know where to start. Thicker markets are better IMO.

 

[Liquid validity]

Cheers DT, sounds like your method wouldn't be affected much by any future
CME changes.
TBH, thats why I am here, you know what I am currently working on, all is well so far
but I'm under no illusion that its a surefire longterm prospect at the moment.
If things didn't pan out at a later date, letting scalp entries run when appropriate or
going back to swing trading would be my choices in that order

 

[EulerFourier]

Lots of things to respond to, I will probably have to get to most of it later....

So what's going on when it doesn't work? Would you care to explain a losing trade in detail? I suppose it would start off similar to a winning trade

You can't read the market, you can only get good at guessing.

Here is an example:
The ES has been going back and forth in a 7 tick range at the highs (let's say the HOD is 1350.25) for the last 10 min. It tests the highs with 1500 offered at .25 . Market goes offered at 1350.25 and 250 prints. Then it backs off 3 ticks before again going offered at 1350.25 but this time only 50 prints. Meanwhile the NQ and YM are off the highs. I decided that there is no momentum to break the highs just yet so I enter short with a market order at 1350 looking to scalp a few ticks.

Scenario 1: The market indeed does not have the momentum to break the highs and pulls back three ticks. I take my profits.
Scenario 2: Mr. Bigshot at Goldman Sachs decides he wants to buy 3000 contracts at the market because he knows what will happen if he breaks those highs. So he buys 3000 and scoops up everything offered at 1350.25 and 1350.50. All the shorts that are scalping puke, all the shorts from the last 10 mins or so puke, all the breakout players buy and the next thing you know we are bid for 1351.50 and Mr. Bigshot has used that liquidity to liquidate his position.

In both instances I read the market as best as possible. If I was working in the pit perhaps I would have seen Mr. Bigshot walking towards me and I knew every time he steps in he buys big. Maybe he's my best friend and he lets me know before hand what he's about to do. I don't know, I've never worked in any pit but I know some of them had that kind of advantage.

Note that I did not predict the future, they are not the same. I never said the point of reading the DOM was to predict the future, it is to take the lowest risk possible on a trade.

 

[EulerFourier]

Some people are very sneaky with the impression they like to give. Historical market events can be narrated in such a detailed way, but do not confuse narrating historical events with reading into the future.

The market depth is not historical though, it's forward looking unless you start talking about latency issues. It shows you where the liquidity is and at times you can read intent. For example if you see a large volume trade through on a small offer, you know someone is hiding something.

Precisely! Attitude is what makes or breaks a trader. I wonder how much George Soros ever made by reading the DOM.

George Soros is not a day trader. However, Mr. Paul 5-mil-a-month Rotter is: http://www.trading-naked.com/library/paul-rotter-trader-monthly.pdf

The following is a question once asked to him:

Traders Magazine: what has one to do if he wants to become a scalper?
Rotter: he has to watch the order book for a very long time.

DT or EF, what are your thoughts on SGX contracts for instance, as an alternative?
Obviously the timezone is an issue for some. Could you adapt your methods to
to suit U.S. equities - after all AMIT and mr charts on this forum do that.
Their solution seems to be scalping with a willingness to let it turn into a runner if needs be.

Well, I can tell you that Rotter has moved to Singapour. That alone should be enough. The only really liquid future on the SGX is the Nikkei 225 I believe. Some of the others might have a decently deep book I'm not really sure but all the stats are on their website. The Hang Seng futures on the HKFE are very liquid but VERY volatile. I got my ass handed to me last week trying to scalp them. If you knew what you were doing though you could make a killing. I intend to try again in due time.

Scalping is something I believe can't truly be done the way a Paul Rotter does it unless you are a member of the exchange, get the absolute lowest commissions and can afford thousands (maybe tens of thousands) a month in overhead. That said, the retail guy who is skilled at reading the order book is miles and miles ahead of all the momo chart readers looking at the TA nonsense. If you really want to make it in this business I believe you have to be good enough to break through the retail barrier.

 

[brasil2000]

The market depth is not historical though, it's forward looking unless you start talking about latency issues. It shows you where the liquidity is and at times you can read intent. For example if you see a large volume trade through on a small offer, you know someone is hiding something.



George Soros is not a day trader. However, Mr. Paul 5-mil-a-month Rotter is: http://www.trading-naked.com/library/paul-rotter-trader-monthly.pdf

The following is a question once asked to him:

Traders Magazine: what has one to do if he wants to become a scalper?
Rotter: he has to watch the order book for a very long time.



Well, I can tell you that Rotter has moved to Singapour. That alone should be enough. The only really liquid future on the SGX is the Nikkei 225 I believe. Some of the others might have a decently deep book I'm not really sure but all the stats are on their website. The Hang Seng futures on the HKFE are very liquid but VERY volatile. I got my ass handed to me last week trying to scalp them. If you knew what you were doing though you could make a killing. I intend to try again in due time.

Scalping is something I believe can't truly be done the way a Paul Rotter does it unless you are a member of the exchange, get the absolute lowest commissions and can afford thousands (maybe tens of thousands) a month in overhead. That said, the retail guy who is skilled at reading the order book is miles and miles ahead of all the momo chart readers looking at the TA nonsense. If you really want to make it in this business I believe you have to be good enough to break through the retail barrier.

Don't be silly and keep your mind open to the many other ways of trading.There are many traders who are making an good living using technical analysis only,with no order book reading skills,take Forex.

 

[EulerFourier]

Don't be silly and keep your mind open to other ways of trading.There are many traders who are making an good living using technical analysis only,with no order book reading skills,take Forex.

I spent quite a long time reading TA books and looking at charts. As my knowledge grew however I realized that none of it has anything to do with the market. If you can make it work for yourself then I think that's great. I do not believe you will go anywhere big with it though. Unless of course you sell your market "analysis" services. As for Forex, let me repost yet another quote from Paul Rotter. Excuse my obsession with him, but this IS a thread about scalping:

TraderDaily: How helpful are $250 forex mini-accounts and products like the CFD (Certificates For Difference) to individuals who hope to parlay a small amount of capital into a fortune? Are these valuable tools or just the malt liquor of the financial world?

Rotter: In my opinion, this is just a kind of gambling similar to online poker. I know some smart guys who consistently make money in online poker, just taking it from all the gamblers. If you are not just a gambler, you need some professional equipment like news feeds, etc., and then, with the right strategy, you might turn even a small amount into a fortune. The biggest problem with these products is that you do not trade on an exchange and it is not regulated. That means your counterparty is the broker who probably doesn’t even hedge your position. So, if you are too successful, the broker won’t like you, and kick you out or just not give you good fills. I’ve heard many stories like that. The broker is your counterparty; you must accept his prices and his fills. So, basically it is “malt liquor” for these brokers and not for the financial world. You definitely have much better chances playing online poker, as this is level playing field

Really, "keep your mind open to other ways of trading" is a load of bull. Trading is about taking your opponents money away from him, it's not a hobby or a fan club. Just about everyone loses everything they come to it with because it is cut throat and someone else playing the game is most likely smarter than you are. I should become a Forex broker to be honest, it's the easiest money in the business.

It's a good thing that 99% of the people reading this thread will not understand, or care, or they'll think you can't do any better then a few price derivatives plastered on a time series.

 

[Liquid validity]

In terms of scalping he is 100% correct, no argument.
If you want to be a scalper that is the best way and pretty much only way.
Debating that isn't an issue.
This is a scalping thread after all

 

[Liquid validity]

It would appear CME co-location is now live,
first heads up was here, slating early 2012:
CME Group Opens Chicago Trading Hub » Data Center Knowledge

From the horses mouth:
CME Co-Location Services: Lowest Latency Connection to CME Globex
http://www.cmegroup.com/globex/images/RTT.png