The liquidity and queue position analysis that I have explained in the previous
chapters is more related to slower moving markets. So we now need to look at how
we approach faster/thinner/more volatile markets.
The first point that I will make here is that whether a market is thin or thick is a
relative term; it depends on the average trade size that goes through the market.
While, clearly markets with 20 or less contracts on each bid and offer would be
classified as being thin, a market with 150 on each might be considered thin if that
market trades 500+ every few seconds. In reality many if not most equity index
futures have insufficient liquidity on each bid and offer when their underlying market
When this is the case, the market can move 2/3/4 or more ticks very quickly because
the liquidity per price is not enough relative to the volumes coming through.
For markets that move several ticks at a time, while we could examine the volume
per time period, there is an easier way for us to examine where to place our orders. In
fact, because the market, moves through several prices at a time, queue position is no
longer of such importance; if the market goes to the price where your order is, you
are more likely now to get filled (it may even go a tick or so through you).
So rather than work out a queue position per se, we adjust that to something that is
still linked to queue position but which is easier to measure at the speed these markets
What we now do is to look at how much the market moved and we want to place our
orders just above (for longs) or below (for shorts) where the market was just trading
before the move.
So if our market was trading 15b/16o and it jumps to 19b/20o and other information
confirmed that going long was the trade, we should look to place a bid around 16. We
are expecting (if filled) to be able to sell at 19 or 20. If filled, we should look to exit
immediately on any bounce. So while I expect to sell 19 or 20 if the market just
jumps to 18, I will sell there. In fast markets, profits can be lost just as quickly as they
came so take what the market gives you and move on. In a slower market that only
moves 1 tick at a time, it is only possible to scalp for 1 tick. Holding any more would
essentially be position trading.You may ask here, ‘but how will we get filled at 16 if the market just traded 19/20?’
The answer is, that for the market to move several ticks all the offers (in this case)
must have been taken out. For a short time there could be an effective vacuum in the
spread and some traders could still be trying to execute on the old price. I explain the
mechanics of how and why this happens in greater depth in my one-to-one tuition but
it is too complex to explain fully here. However, these tend to be times when retail
traders complain of ‘slippage’. Remember that when they get hurt by slippage,
someone is profiting; I have made it part of my business to be the trader who is
profiting from retail traders’ slippage.
What this means is that sometimes the market will quickly ‘sweep’ back towards the
previous price which provide a good opportunity to trade. I’m not saying this happens
every time but it does happen sometimes and when these occur they can be good
trades. One reason why they tend to be good is that we should be trading against
slower traders who are still trading the previous price using slower platforms.
There is one golden rule here though which must be obeyed in faster markets. That is
we must only accept a trade on the very first sweep. If we are not filled on the first
sweep we MUST cancel the trade. If you trade the first sweep you might be picking
someone off but if you trade the second or third, you might be being picked off.
For example, if the market jumps from 15b/16o to 19b/20o and we decide to place a
buy order at 16. If the market sweeps down straight away and trades 17 we are not
filled so must cancel the order. If it sweeps down and trades 16 but doesn’t fill us we
must also cancel the order.
In fast markets we want to get filled first time or not at all.
This keeps to the belief that we want a quick fill but in faster markets, a quick fill is
even quicker than in a normal or slower market. In very slow markets we might be
prepared to wait 60 seconds or more for a fill (if that market trades slowly and
infrequently). But fast markets are always trading, so we want a fill within seconds.
Two important points to make about order placement. First, place your order close to
where the previous two way action was. Don’t place your order in the vacuum area
(the prices in between where it was and where it now is). We should not expect the
market to go back through the area where there was two-way flow previously so this
acts as a good way to know if we are wrong.
Example, market was 15b/16o and jumps to 20b/21o. We should place our bid at 16
looking for a sweep back. If filled we can exit wherever the next up print is. I take
whatever it gives me so if the next print after my entry is 18, I’ll try to exit there. Wehope to sell at 20 but that isn’t always possible. We don’t expect the market to trade
back to 15 so if we see 15 trading that is our cue to exit, in this case for a 1 tick loss.
Sometimes it will print 15 immediately after we are filled (we don’t get the bottom of
the sweep); I give these trades a second or two to expect it to bounce. If that doesn’t
happen I exit immediately.
Second, don’t be afraid to place your orders far away from the last print. If the market
is moving 6,7,8 ticks at a time then you will need to place your orders accordingly a
similar distance away. In the same way that we must constantly analyse liquidity and
queue position, we should constantly adjust our order placement depending on how
much the market is moving. In a contract like the Dax it is not uncommon for me to
adjust my order placement 3 or 4 times an hour at least.
Example, market drops from 19b/20o to 10b/11o. Here I would place my sell order
around 18 or maximum 17. A market that can drop 9 ticks can bounce that much too.
Again we set up a good risk/reward on this trade with 19 or even 20 being our stop
(but scratch being our preferred bad exit). We expect a maximum profit of 6 to 8 ticks
with exits at 10 or 11 but we will take less if that’s what the market provides.
I see too many new scalpers keeping their orders too close in these faster markets.
They want to take too many trades and are scared of missing trades. It means that the
market often trades a few ticks through them giving them a poor risk reward profile.
It also means their losses can be 3 or 4 ticks. If you are trading a faster/thinner market
and you find your profits are only 1 or 2 ticks but your losses are 3 or 4 or more then
your orders are likely to be too close.
Don’t be afraid to miss trades – particularly in the early days when you are still
Remember too, that we don’t get all of these types of trades or even most of them. We
are likely to cancel more than we get filled. But when we do get filled they tend to
offer good risk/reward and high percentage win rate.
One other point, if you market is just continuing to jump higher (or push lower) in
wave after wave – don’t chase it. This is one way business and you either won’t get
filled or we get long at the top (short at the bottom).
Example, market was 15b/16o and jumps to 20b/21o. We place a 16 bid but there is
no sweep. Market then jumps again to 25b/26o and then jumps again to 30b/31o. It is
dangerous to chase these one way moves. If/when you get filled it will likely be bad.
If I chase the second move by placing say a 20bid, I will leave this in for only a veryshort space of time before pulling it. Sometimes we just have to leave markets alone;
this is one time to sit out until business goes two-way again.
I must add, that in all these recent examples, we only place a bid or offer after a move
IF we see other evidence from correlations etc. Just chasing each and every move
when there is no other supporting information is just a form of gambling. If you chase
each move and each sweep you will overtrade and have a much lower win rate. We
want higher probability set ups.
The liquidity and queue position analysis that I have explained in the previous