Finding Liquidity

[isamel 10]

Hello guys,

 

Lately I have been very interested in how the market works (market microstructure) and been focusing on the essential stuff that move the market. And my idea is that market only moves in search of liquidity. Alas, my search is therefore on what liquidity is and how to find it. That is why I turn to my favourite forum in the world

 

I read a post around here a time ago (can't find it but doesn't matter) written by DionysusToast. He said (almost..) that the only way to know how a pullback is going to end is to find the liquidity. And as I think about it, that is true. But that works for every move in the market i.e. if it encounters enough liquidity and can't break thru it - it won't move up/down more.

 

So, I was thinking about the ways of recognizing liquidity. I am not thinking about if a market is liquid or not, I am talking about AREAS or CONCENTRATIONS of liquidity, and where to look for them. My main idea is to look at the DOM/T&S but since I am not very proficient in using it, this will take allot of time (obviously I am still going to do it). My questions are really; what tools do you think I should use? How should (with what idea) I look at this problem?

 

Thanks lads

[tradingdummy 10]

Seriously, sit down and read time of sales and the ladder. Depending on how long you plan on studying it, you can learn alot in a week or 2.

[joshdance 10]

And my idea is that market only moves in search of liquidity. Alas, my search is therefore on what liquidity is and how to find it.

 

But that works for every move in the market i.e. if it encounters enough liquidity and can't break thru it - it won't move up/down more.

 

My main idea is to look at the DOM/T&S but since I am not very proficient in using it, this will take allot of time (obviously I am still going to do it). My questions are really; what tools do you think I should use? How should (with what idea) I look at this problem?

 

I subscribe to the basic principle of auction market theory, namely that the market moves up and down in search of buyers and sellers; the job of a market is to involve as many buyers and sellers as possible, and it will move higher or lower to facilitate the most trade. This basically agrees with your idea.

 

There is only one real way to identify liquidity, and that is in retrospect, using volume. The order book may give short-term clues, but what you see on the DOM is not liquidity. It's available or potential volume, but until the deal is done, those orders are not commitments. Volume is the only thing we can objectively look at and observe that at a particular price or over a particular period of time, there was an increase in activity, and thus we can conclude that there was liquidity available.

 

But also consider that when directional movement of the market is clear, that not all pullbacks end with an increase in liquidity at the point of the turn. Sometimes we will see a sharp spike in activity near the turning point; other times we will see very little volume, and only when the original direction is resumed do we see activity pick up. So, it's not just to find liquidity (which would imply an increase in volume), but it can also be to recognize a lack of interest. Many reversal points consist of a big display of discovered liquidity (volume), followed one or two consecutive probes further with far less liquidity observed.

 

From a practical point of view, many people use "support" and "resistance" to identify past areas of observed liquidity, to potentially indicate current and futures areas. Since many people watch this and buy and sell the same areas, it can be said that an observation of past liquidity can lead to potential identification of future liquidity; though of course, many reasons exist to enter the market and thus it can be said that anything can lead to an increase of available liquidity at any price. As I mentioned above, the only real way to determine it is to observe it first, allowing others whose size is observable in the market to engage in price discovery, and then follow them, never leading ourselves.

 

I would love to hear others' thoughts on this, as it's at the heart of market movement.

[asasoma 10]

I am metals trader, I make good money by using financial and technical analysis but I struggle to find time for this, am looking to explore automated system in gold. I have searched the following 2 sites

[BlueHorseshoe 10]

This could be a really interesting thread to follow.

 

My understanding, quite different to Joshdance's above, is that a market gravitates towards liquidity pools, and not away from them. So I expect areas of support and resistance to occur where there is little interest (or widespread agreement) from buyers and sellers. From a historical perspective, I would expect support or resistance to be accompanied by low volume. The absolute S/R point (one tick above the high/low) has zero volume of executed orders.

 

If you look at volume within a trading day, the above is exemplified by the gaussian distribution that MP traders pay so much attention to - the closer you move towards the high or low of the day, the less volume is typically executed at those levels. Ironically, of course, a lot of volume is often executed at the prior day's high/low.

 

However this is all just my understanding (and doesn't actually guide my trading in any concrete way), and I have had price action traders who spend a lot of time watching the DOM tell me that my understanding is misguided in other threads - so my word clearly isn't gospel!

 

Hope that at least provokes further discussion on this topic.

 

Bluehorseshoe

[joshdance 10]

My understanding, quite different to Joshdance's above, is that a market gravitates towards liquidity pools, and not away from them.

 

BH, I didn't say that at all. See below for more.

 

So I expect areas of support and resistance to occur where there is little interest (or widespread agreement) from buyers and sellers. From a historical perspective, I would expect support or resistance to be accompanied by low volume. The absolute S/R point (one tick above the high/low) has zero volume of executed orders.

 

I think it's this simple: it can be both. Look at the major lows from last year in the August time frame. Heavy accumulation, heavy volume. Again in October there is a final push lower, again on heavy volume but less than before. Heavy heavy market buying on that early October day in the afternoon that started the current bull market.

 

Sure, there is a low tick and a high tick, and unlikely that that high or low has lots of volume transacted. But typically there will be an area around where there is high volume. But not always. Sometimes the buying or selling on the way up or down just dries up... currently it seems we may have a drying up of buying before a significant move down, or we could have a spike of distribution first. The point is that it's not just one way. Observation tells us there's more than one way.

 

If you look at volume within a trading day, the above is exemplified by the gaussian distribution that MP traders pay so much attention to - the closer you move towards the high or low of the day, the less volume is typically executed at those levels. Ironically, of course, a lot of volume is often executed at the prior day's high/low.

 

This is a whole other subject, but you're talking about a specific case--when a market is in balance. Even then, it's not so common to have a textbook bell curve. When the market is in balance in a particular range, awaiting information to determine the next direction, then yes, you will see this distribution.

[BlueHorseshoe 10]

Hi Joshdance,

 

Reading back through your post it seems that I have probably misunderstood you and mis-represented what you were saying. Sorry about that!

 

I think that my statement relating to volume distributions is perhaps also unclear. By no means was I trying to imply that anything like a textbook bell-curve occurs with any regularity. I was suggesting that volume typically diminishes as the point of support or resistance is approached. There is a (slightly perverse) sense in which this is definitionally true: there is always less volume one tick below the low tick than there is at it. I am not claiming that this really occurs according to any ideal model. The 'bell curve' may well end up looking like a whale's silouette, but even a whale has a nose!

 

Rationally, I cannot find any reasons why a market trading at ask would cease rising other than because no buyer will consent to buy at one tick above the high, or because sellers start offering below it; in either case, there is insufficient liquidity at higher prices, and the market will trade towards where there is liquidity.

 

"Sure, there is a low tick and a high tick, and unlikely that that high or low has lots of volume transacted. But typically there will be an area around where there is high volume."

 

The point I am making is that the area won't just be "around" - it will always be above the low or below the high, and the market will have traded back towards that liquidity leaving the high or low tick as the tidemark we call support or resistance. The support or resistance occurs because the market has encountered a lack of liquidity, and has headed back the way it came to areas of higher liquidity.

Edited February 27, 2012 by BlueHorseshoe

[T2CTrading 10]

In my opinion volume is important but it is more about who is providing the volume and when in the move the volume is being applied.

 

I subscribe to the theory that the "market moves with the least number of participants as possible". I use volume/lack of volume to signal the end of a trend not the start of a trend.

 

I think most new traders look at the market differently than what is actually happening, and as a result creates the "why am I always buying top's and selling bottoms?"

 

Most new traders see a pop in the S&P and say "look at the market going up I need to buy", but do not realize that the pop is a result of early entrants, the early entrants (read institutionals) push up the price with their demand, new traders enter at the end of the flury, and buy what the institutionals are selling, when the new trader money has dried up then the market pulls back, new traders feel pain and unload to the waiting instutions, and the market goes back up.

 

Same on the way down just reversed.

 

Markets go down on volume and up on absence of volume.

 

Look at the size of the "snap backs" in the S&P there is no coincidence that they are usually the average stop size of a new trader (retail trader).

 

We are all human and feel greed and pain the same way, there is no conspiracy to see our stops and pick them off, human nature does that for us!

[joshdance 10]

Markets go down on volume and up on absence of volume.

 

:hmmmm:

...............

[joshdance 10]

Rationally, I cannot find any reasons why a market trading at ask would cease rising other than because no buyer will consent to buy at one tick above the high, or because sellers start offering below it; in either case, there is insufficient liquidity at higher prices, and the market will trade towards where there is liquidity.

 

I see where you're coming from now, I think.

 

We could define "liquidity" generally as limit orders and market orders resting above and below the market, also orders that are not resting on the book for a long time that are placed quickly.

 

It could be the case that a tick below the low of the day, there were many buy limit orders that were not filled. In this case, there was quite a lot of available liquidity; perhaps more than at any other price in the vicinity. However, there were not enough sell market orders to push the market there, so in that sense there is a lack of liquidity.

 

I use the auction model generally; that is, the market auctions to where the most volume business (volume) can be facilitated. This generally matches what you are saying, I think.

 

Would you agree with the above, generally speaking?

[Predictor 11]

Josh... I kinda see what you're saying but think you're not thinking about this properly. I am generally looking only at actionable liquidity because the rest is just hypothetical.

 

In your case there is a lack of ability to BUY at that PRICE. You have to factor in the price. There is always the ability to transact in the market but you have to know the price. In other words, there is no ability at all to buy 10% below the market. Obviously, there is unlimited demand to buy 10% below the market and zero supply.

 

I don't think the market only moves because of liquidity though. Its certainly a big part but I don't think its the only answer. Obviously, there is buy and sell liquidity (or buy/sell pressure).

 

Firms talk about finding liquidity because they need to transact large blocks of trades so they much that they can't get market price. HFT firms try to exploit this by using nefarious practices that involved posting and pulling offers. This is something a bit different.

 

 

Curtis

The Market Predictor

 

 

I see where you're coming from now, I think.

 

We could define "liquidity" generally as limit orders and market orders resting above and below the market, also orders that are not resting on the book for a long time that are placed quickly.

 

It could be the case that a tick below the low of the day, there were many buy limit orders that were not filled. In this case, there was quite a lot of available liquidity; perhaps more than at any other price in the vicinity. However, there were not enough sell market orders to push the market there, so in that sense there is a lack of liquidity.

 

I use the auction model generally; that is, the market auctions to where the most volume business (volume) can be facilitated. This generally matches what you are saying, I think.

 

Would you agree with the above, generally speaking?

[MightyMouse 11]

The market will go down as long as sellers are able to overwhelm weak buyers and will go up as long as buyers can overwhelm weak sellers.

 

If the market is declining, there are likely lots of short sellers who need liquidity at lower prices. Which means they need to buy from sellers. So, if demand is perceived to be real and large at the tick below the low, the shorts are in a difficult position if they have large needs for liquidity at low prices. A typical scenario that occurs is that price will rise from the level of perceived demand because of both weak buyers, defined as impatient and noncommittal (small stop), jumping in not to miss the move, and panicked sellers covering. The freshly created liquidity, in the form of weak buyer sell stops, then, is usually enough to provide the short sellers the liquidity to exit safely or perhaps even push through the level of previously perceived demand.

[SunTrader 10]

Low tick/high tick data points are not for the most part support and resistance levels. Stop running locations probably.

 

S/R are zones and not exact points on a chart.

[smmatrix 11]

S/R are zones and not exact points on a chart.

 

That's an opinion, but S&R levels can often be pinpointed to exact levels. This is often proven by successful scalping of the S&P e-minis at S&R levels using limit orders and 4 tick stops losses. Placing a buy order under current market price is often akin to jumping in front of a train, but I know several traders, including myself, that do it successfully more often than not.

[SunTrader 10]

That's an opinion, but S&R levels can often be pinpointed to exact levels. This is often proven by successful scalping of the S&P e-minis at S&R levels using limit orders and 4 tick stops losses. Placing a buy order under current market price is often akin to jumping in front of a train, but I know several traders, including myself, that do it successfully more often than not.

Ok so I should not have said literally every freakin' time to a zone and not tick.

 

Yes sometimes it can be to the tick. But how do you determine which it will be, IN ADVANCE, when it matters.

[smmatrix 11]

Ok so I should not have said literally every freakin' time to a zone and not tick.

 

Yes sometimes it can be to the tick. But how do you determine which it will be, IN ADVANCE, when it matters.

 

It comes down to how you are identifying S&R levels. If you're using standard trendlines, recent highs/lows, then of course, you will only identify zones as you put it.

 

However, there are more accurate methods in locating S&R levels via Impulse Wave and/or Fib Clusters and others which can be used to locate the reversal point at the exact tick. It can be so accurate, that you have to fade your entry by an extra tick just so that you can get filled as price will often come to the exact level and reverse. If you put your entry at that exact tick, you will miss the fill.

 

How often are these methods accurate? During strong trending momentum moves, you'll have high failure rates, but markets only trade in this fashion about 15% of the time. The other 85% of price action is typically stair-stepping and ranging, and these are ideal conditions where pinpointing reversal points to the exact tick happen accurately 60-65% of the time.

[SunTrader 10]

It comes down to how you are identifying S&R levels. If you're using standard trendlines, recent highs/lows, then of course, you will only identify zones as you put it.....

Now I see from your pic and screen name - Steve, right.

 

I realized years ago it is not necessary to watch for exact tick moves to be successful.

 

Or take multiple trades in a day, Not my style.

 

And for the most part for most traders not realistic.

 

Up early on a west coast saturday morning.

 

Good trading.

[smmatrix 11]

Now I see from your pic and screen name - Steve, right.

 

I realized years ago it is not necessary to watch for exact tick moves to be successful.

 

Or take multiple trades in a day, Not my style.

 

And for the most part for most traders not realistic.

 

Up early on a west coast saturday morning.

 

Good trading.

 

Yes, correct. I'm Steve

 

Indeed, I was referring to intra-day scalping, taking multiple trades per day off these S&R levels using tick charts. My apologies, I did not mean to suggest exact tick reversals on longer time frames.

 

Up early, well not really. I'm usually up all night during the week as my primary market is the German Dax and into the first 2-3 hours of the U.S. session trading ES & CL.

[joshdance 10]

Yes sometimes it can be to the tick. But how do you determine which it will be, IN ADVANCE, when it matters.

 

Impossible, and the perpetual loser's quest, to determine reversals in advance, and the consistent promise of the trading vendor, to.provide the secret answer.

[smmatrix 11]

Impossible, and the perpetual loser's quest, to determine reversals in advance, and the consistent promise of the trading vendor, to.provide the secret answer.

 

Hello, look at your charts. The proof is quite obvious. Traders sell tops and buy bottoms all the time. Check your time and sales record and see all those sells at the high tick. Seriously, those are NOT phantom trades.

 

Still... impossible? Even with the proof in front of your eyes? That's the smart money.

[Deusomega 10]

Indeed so easy...:haha::haha:

[joshdance 10]

Hello, look at your charts. The proof is quite obvious. Traders sell tops and buy bottoms all the time. Check your time and sales record and see all those sells at the high tick. Seriously, those are NOT phantom trades.

 

Still... impossible? Even with the proof in front of your eyes? That's the smart money.

 

For every person who sells the high tick or buys the low tick, there are 100 others who try and fail. And the one who succeeds is probably just another losing guesser the next day.

 

Sell the "smart money" crap to the gullibles who think that the future can so easily be predicted.

[smmatrix 11]

For every person who sells the high tick or buys the low tick, there are 100 others who try and fail. And the one who succeeds is probably just another losing guesser the next day.

 

Sell the "smart money" crap to the gullibles who think that the future can so easily be predicted.

 

Profitable heh?

 

First you say "impossible", then you say 1 out of a 100. Which one is it?

 

Chill a little. Trading doesn't have to be that difficult. Its not impossible.

[Deusomega 10]

Time travel isnt impossible either... just that whole speed of light thing.

[MightyMouse 11]

Hello, look at your charts. The proof is quite obvious. Traders sell tops and buy bottoms all the time. Check your time and sales record and see all those sells at the high tick. Seriously, those are NOT phantom trades.

 

Still... impossible? Even with the proof in front of your eyes? That's the smart money.

 

I agree with you. All you have to do is say you bought at the about low tick and say you sold at almost at the high tick. Don't say you got the exact low and high. People might think you are bullshitting.