depth of market liquidity disappeared..

last week the indexes went into extreme volatility and i did not trade much and if so, it was kind of a testing mode..

this environment is dangerous for order flow trading because the limit side is really shaky.

when you see dom liquidity like this, you immediately have to know there is something wrong with the market.

this is something people who don´t see the market depth never realize - the change of the quoting limits.

trading in this environment is extremely dangerous, the laws that normally works and that i use for trading, does not work in this environment.

it is basically caused by market makers who are no longer interested in opening trades and thus, the short-term price action is much more unpredictable

dow jones sell off speculation on friday night

yesterday i took these two trades on dow jones futures. the first short after open was taken with 6 contracts, the second one with two only. the first trade had a runner with was planned to be closed somewhere near the low of the day,

unfortunately, the market filled my trailing stop precisely and dropped significantly afterward.

what was interesting at the second trade was waiting liquidity of the huge buy limit orders at the closing time.

here is the prinscreen, the white line on depth of market shows huge limit orders waiting to be filled. at first the price rebounds couple of time from this level.

at the end it went through filling all the waiting limits (cca 230 on one level). as these limits were filled, i closed the trade, because i expected the price to move higher. anyway, it didn´t. the market closed somewhere around near this level. 

here is how the footprint chart looks at that particular place. you can see higher ammoung of sell market order paired up withthe waiting buy limit side (te low of the bar at 14:58)

here is the slower timeframe (30 min). the trade looks good, pity it was with a small position only

result +720 usd

speculation on thin dom liquidity

an example of relative absence of buy limit orders on depth of market. this time i opened a trade speculating of overturn of liquidity and fall of price.

this is the intermarket state - not very clean but visible .. 

the price should move sharply into the liquidity vacuum, penetrating the relatively smaller limits and hitting the first target. 

in this case only the first target of 10 ticks was hit.. the price is extremely slow in these times..

depth of market - thin vs. thick offered liquidity

here is an interesting situation on depth of market (dom) in intermarket state. it is easily visible that the offered liquidity on the bid side is much thinner that on the ask side.

the presumption is that the price should move into the side of thinner liquidity - it is going to be easier, as there are no "walls" of waiting limit orders. 

it is just a presumption now - no data have been collected to prove this idea.

what we have to take into account in such a situation is the intermarket state and the predictability of retail market orders. here we have ym under the daily low, all other markets are above.

it gives the (stupid) retail traders feeling that ym is cheap and that they should buy it. they start buying.

limit side with quoting market maker´s orders builds thicker layers of sell limit order to retard the movement up and sell in a bigger quantity against the retail public. the movement down is much easier because the quoting buy limit side is weaker.

this is how the situatuion looks at market orders with depth of market. the offered liquidity on dom overtuns and the price sinks into it

what happened next was that the price dropped down against the buying public. in this particular case it would have hit o the first target only but it doesn´t matter - there was a strong buying sentiment on nyse tick at that time and even thought the price went down to hit the stops of public..

here is the footprint chart of this situation

more in depth study of this phenomena needs to be done before taking these situation as a tradable edge