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Depth of Market


While watching the DOM I have noticed that the market will move in the direction that has the least amount of contracts, just the opposite of what you would think.

For example if the total number of contracts on the buy side add up to 5000 and the total number of contracts on the sell side add up to 9000, the market will go up. The side with the lesser contracts will win.

I have a friend that uses this religiously and I have used it to keep me out of many a losing trade.

Can anyone explain this phenomenom?

Also, I understand there are platforms that will calculate the total number of contracts per side. Does anyone know which platforms they are?
I ran some tests on that theory using tick data and discovered that the size on either side bid or offered did not have any effect over the long run.

It was a difficult test to run because I had to determine what was "size" and so I ran it across all sizes in increments of 500 contracts. I also varied the number of ticks the market had to move after size was "seen" and after all the tests I discovered that the market had a 50/50 chance of moving in either direction.

What you are probably seeing is an "obvious anomaly." i.e. because the market moves in the direction which it should not logically move in then your mind takes note of this fact and discounts obvious moves. For that reason it appears to move in the counter-intuitive direction more often.

The phenomenon that you talk about is that of faking, flipping or bluffing. i.e. Showing a strong hand to "scare" the market in one direction but pulling the orders before they get hit.

NinjaTrader shows the total on either side which is a useful tool for viewing this. I am sure that most other trading platforms also show this but that is the only one that I am aware of.
myptofvu: Have you tried using this strategy? Have you made any money out of it?