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Enhance Your Trading with Market Depth: Strategies for 2011 and Beyond

Discover how to utilize market depth to enhance your trading strategies in the SPY market from June 15, 2011. Gain insights from a seasoned trader and engineer, as they explain the importance of knowing good deals by analyzing incoming quotes. Learn how to reduce slippage, improve entry and exit efficiency, and forecast price changes based on market depth. This presentation covers practical strategies for trading in range-bound markets, measuring the impact of new information, and leveraging indicators like VWAP. Join us for a comprehensive guide to trading smartly now.

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Enhance Your Trading with Market Depth: Strategies for 2011 and Beyond

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Presentation Transcript

  1. with Market Depth Velocity Trade in the Now

  2. Market Depth Velocity of SPY2011 June 15 until 12:22 PM ET

  3. Market Depth Velocity of SPY2011 June 15, 12:29 PM ET

  4. It has been said… • With the past, I have nothing to do; nor with the future. I live now. ~Ralph Waldo Emerson • Skate where the puck's going, not where it's been. ~Wayne Gretzky’s father

  5. Presenters background • Graduate of Georgia Tech • Professional Engineer • System trader since 1996 • Fund Manager • EasyLanguage Engineer • TradeStation Product Manager • And now Institutional Trading Consultant

  6. A problem trading Now • Smart trading is based on projections of reward relative to risk, over time. • Price = Established Value + Effects from Old & New Information • Old info can impact price cyclically with diminishing magnitude over time. • New info is key, especially as market efficiencies continue to improve. But new information is largely ignored.

  7. A Solution for Now • Market Depth is your best view of where an electronic market is Now. • Market Depth is both old and new. • Incoming quotes factor new information and can best forecast change. • (Caveat: Market Depth is only a portion of a market. Much can be unseen.)

  8. Improve trading Now • …where the transactions take place, with new information to know good deals • Improve entry & exit efficiency • And reduce slippage (knowing bad deals)

  9. Now, our trading experiences • How often have you bought before a quick drop or sold before a spike? • What percent of your average trade is lost to slippage? • Market orders: Part of Spread + Impact • Strategies: Paying beyond estimated fills • Strategies: Missing estimated fills • How much could your trading improve?

  10. Improve by knowing good deals • … when price nears newest quotes • Or newest quotes approach price • Watch the VWAP of incoming quotes • And reduce slippage knowing bad deals • Test: Is the incoming quote spread fair? • Can it help distinguish good and bad deals? • Is there central tendency? • Are trades, relative to incoming quotes, symmetrically distributed? (normally?) • Examples from Monday, 2011 May 13th

  11. Distribution of trades w.r.t. 1-min VWAP incoming quotes for SPY

  12. Distribution of trades w.r.t. Bollinger bands (20 bar, 1 sd)

  13. Distribution w.r.t. incoming quotes & Bollinger bands

  14. Distribution of trades w.r.t. 1-min VWAP incoming quotes for IWM

  15. Distribution of trades w.r.t. 1-min VWAP incoming quotes for QQQ

  16. Distribution of trades w.r.t. 1-min VWAP incoming quotes for DIA

  17. Distribution of trades w.r.t. 1-min VWAP incoming quotes for BAC

  18. Distribution of trades w.r.t. 1-min VWAP incoming quotes for C

  19. Apply to trading ranges • … when you feel a market is range bound • Buy relative to VWAP of incoming bids and Sell relative to VWAP of incoming asks. • Test: Do forward prices correlate with current prices relative to incoming quotes? • Graph y-axis forward prices versus x-axis current prices, relative to incoming quotes. • R-Squared for SPY 2011/06/13, 1-min bars: • 1 min forward = 0.000409 (i.e. uncorrelated) • 2 min forward = 0.004293 • 3 min forward = 0.002067 • However, relative to original incoming quotes, there is some correlation of forward prices to current prices. There is room for momentum trading too.

  20. SPY trades v. trades relative to incoming quotes, 1-min forward

  21. SPY trades v. trades w.r.t. original incoming quotes, 1-min forward

  22. SPY trades v. trades relative to incoming quotes, 2-min forward

  23. SPY trades v. trades w.r.t. original incoming quotes, 2-min forward

  24. SPY trades v. trades relative to incoming quotes, 3-min forward

  25. SPY trades v. trades w.r.t. original incoming quotes, 3-min forward

  26. Other ways to Trade in the Now • Deduce hidden market interests • Monitor scheduled impactful events • Measure propagation of impactful news • Dig for information fundamental to asset pricing, that is not widely known • Use weather projections for commodity markets and similarly affected markets • Etc.

  27. Summary • Use market depth, esp. as incoming • Know good prices for efficient trading • Trade range bound markets, etc. • In general with newest information • Improve price, volatility and time projections • And thus one can improve portfolio balance • Get in early on sector rotations: before profit opportunities decrease and risks increase

  28. What to do Now • Use Market Depth in TradeStation 9.0 • e.g. the Market Depth Velocity indicator • Collaborate with other traders • Find services on the Strategy Network • Join us at www.QCLsolutions.com • New products for Market Depth analysis • New tools for key economic & market data • New collaborations for institutional-level news sentiment analysis with TradeStation

  29. Improve each trade • … where the transactions take place

  30. …where the puck's going

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