Faster Markets – Trading the Chop vs Trading Moves

Earlier, when discussing order placement in faster markets I explained the technique
of placing orders a few ticks away. We should use this technique after value has
moved. For faster contracts though, it is important to differentiate between moves and
just the normal ‘chop’ that takes place.
Faster/thinner markets (Dax etc) often chop around. For example, 15…18..16…18..15
etc This type of action is not a move it is what I call the chop; just chopping around.
More aggressive market making style scalpers can decide to trade this chop by
placing bids around 15/16 or offer around 18/17 (depending on which way you want
to enter the trade from) and looking to make around 2 ticks per trade. On the face of it
these can appear to be easy trades and at first they can be.
Typically this action might be accompanied by no discernable movement in the
correlations that we are using. So with nothing much happening we can decide to
trade in and out of the chop order flow using the spread. Note, that even though the
‘real’ spread might be 16b/17o, the market might continually trade 15 and 18 due to
the thinner nature of these markets. The ‘effective trading’ spread is really 15b/18o.
The problem with this is that in these types of markets (Dax, NQ etc) we know at
some point there will be a move; it won’t stay chopping here for ever. Now, if for
example, we have a 15b in the market and the next move is a jump higher, we won’t
get filled. However, if the next move is a drop we will get filled but of course we
won’t like this trade. So, if, when trading the chop, the market moves, you can only
get bad fills. The loss might be 5 or more ticks. So you have to weigh this possibility
up against how many times you think you can scalp the chop.
Even trading the chop though, we should still be pulling orders if not filled very
quickly so this discipline may help us to avoid getting caught. But it is still
reasonably inevitable that we will get caught sometimes. So it is up to each trader to
decide if he wants to trade the chop.
The alternative is to leave the chop alone and only trade after a ‘move’. Having
traded 15…18…16…18…15 when we finally get a move, say to 10, if this is backed
by similar moves in our correlations, we would look to place a sell order around
14/15 looking to short any sweep higher. Of course, we may not get filled, but this is
the situation we want to try for when markets move.
So, trading after moves is more defensive way to trade whereas trading the chop is
usually more aggressive. However, on less volatile days, we may look to trade thechop more as the lower volatility will mean there are less moves to trade and the
possibility of getting badly hurt trading the chop are reduced. Conversely, on more
volatile days we should not trade the chop and look instead to trade the moves.

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