Saturday, July 22, 2006

What Every Short-Term Trader Should Know

The one thing short-term traders should know is that size matters. It is of vital importance at all times to know whether the traders in size are leaning to the buy or sell side. Because volatility is intimately connected to volume, the presence or absence of large traders will determine the amount of movement in the market. The degree to which large traders are hitting bids or lifting offers will determine the market's tendency to sustain directional moves (i.e., trend).

(IMO, understanding--really understanding--those last two sentences will keep many traders out of bad trades and bad markets).

Let's take the opening period of Friday's trade as an example. I'm looking at the time period just before the NYSE open to the end of the first half hour of trade (9:25 AM - 10:00 AM ET) in the S&P 500 e-mini (ES) market. During that period, we had 13,954 trades that included 212,684 contracts.

Of these trades, 5148--almost 40%--were one-lots. Those one-lots accounted for about 2-1/2% of all market volume during the opening period.

Conversely, 431 trades--only about 3% of the total--were trades of 100 contracts or more. This group of large traders, however, accounted for 82,127 contracts traded, or nearly 40% of the total.

So there you have it. Give or take a bit, the smallest 40% of trades account for 3% of the volume, and the 3% of largest trades control 40% of the volume.

A number of excellent short-term trading guides can arise from these observations. For instance, we can compare the number of large trades occuring during a time period and compare it to the average number of large trades that occur during that time period, and we'll have a rough idea of the degree to which large players are dominant and volatility can be expected.

We can also parcel out the large trades that occur at the bid price (meaning a large seller is anxious to exit the market) vs. the large trades that occur at the offer (a large buyer is eager to get into the market) as a way of tracking the moment-to-moment sentiment of large traders.

Trade by trade analyses of market action that capture the sequencing of large trades at market tops and bottoms are also quite revealing, as they display how one-sided markets (those dominated by buyers or sellers) become two-sided when other timeframe participants perceive that the market has moved too far from value. That period on Friday from just before the open to the end of the first half-hour of trade neatly caught such a sequence.

There's value in looking at charts of markets that cover many days. That's viewing the market through a telescope. The short-term trader, however, can also benefit from observing the teeming life under the microscope. What moves the market in the short run is not what fundamentally moves the market over the long haul. Taking advantage of the data appropriate for your timeframe is all-important.

Tonight, I'll post a chart to the Trading Psychology Weblog that illustrates some of these ideas.


yinTrader said...

Hi Brett

I just managed to read your whole week of posts, and they come close to benefiting me as a novice trader.

I quote:
The degree to which large traders are hitting bids or lifting offers will determine the market's tendency to sustain directional moves (i.e., trend).

Often I watched the bid and ask prices on my trading platform and I get the feeling the frequencies of each bid/ask prices are not genuine representations.

Are such fictitious figures allowed?

Thank you.

Brett Steenbarger, Ph.D. said...


Thanks for your note. I think you're referring to the actual bids and offers in the market order book, as they show up on a depth of market (DOM) display. Those indeed are often entered and pulled, so are not necessarily a genuine representation of supply and demand. Not only is this allowed; it's a common strategy among market makers to disguise their intentions--a lot like the bluffing of poker players.

In my article and in my trading, however, I'm looking at actual trades that are placed and whether those occur at the market's bid price or at the ask. Because this is true volume, it is more representative of whether buyers are aggressive (transacting at the offer price) or sellers (hitting bids).


johnsimon said...

Hi Brett
Great post, I totally agree with what you have said. Six weeks ago I started Learning to read the tape with a guy by the name of Tom henderson of after a long and drawn out search, one of the only professionals willing to teach this art, and has also developed software to help and understand whether the large traders are hitting the bid or hitting the offer and where they are leaning.
My trading and ability to read the tape has improved a thousand fold and into profitability in the last six weeks, and this is after 3 years of being unprofitable using Technical Analysis

Thank you

Brett Steenbarger, Ph.D. said...

Hi John,

Thanks for your post and congratulations on finding good mentoring. Reading the tape is indeed different from technical analysis as it's often applied. It's not just about price and volume, but *who* is doing volume and at what prices.


Bill Thomas said...

Hi Brett,

Are you able to identify the big lot traders utilizing Market Delta? I too am a client of Trevor and fing Market Delta most helpful. He lives in Aurora, by the way. I'm in Naperville.

Brett Steenbarger, Ph.D. said...

Hi Bill,

You can track the big traders on Market Delta by putting the display on 1-tick reversal.

Nice to hear from a fellow Naperville trader. We'll have to grab Trevor and hold our own trading conference at Centennial Beach... :-)


Alan said...

Hi Brett
Where can I get the info to be able to tell who is hitting the bid or ask and what size?

Brett Steenbarger, Ph.D. said...

Hi Alan,

I use the Market Delta program ( to track volume at the bid and ask. The data can be saved for future reference.


David said...

Hi Brett

I appreciate your great blog.

I have the Real Time 'Time and Sales' data checked intraday. Can I identify those big lot of bid or offer by the color shown on the Real Time 'Time and Sales' in which Red represent the order is filled by hitting the Bid price and Green represent the order is filled by hitting the Offer price?



Brett Steenbarger, Ph.D. said...

Hi David,

Great question; thanks. Without my being familiar with your data feed/trading platform, it's hard for me to know what the color coding is based upon. To determine quickly volume at bid vs offer, I need a tool such as Market Delta ( or similar features in CQG or Investor/RT. I find the information invaluable in managing short-term trades.


dctommy said...

hello brett:

question: market delta & investor/rt seem very similar. what is the difference between these? on the surface it seems both will show the volume bid/ask footprint & market profile.

Brett Steenbarger, Ph.D. said...

Hi DCTommy,

There is a co-branding between Market Delta and Investor/RT, with a specific MD version of Investor/RT. Check out their announcement:

As to details, such as backtesting features, etc, you'll need to contact Linn.


George said...

Dear Brett,

For quite a long time I am striving to find historical data for the scope of your post, in order to visualize them firstly and then come up with a trading strategy regarding bid and ask data.

I have tested intuitively, while trading, bid and ask analysis in the Greek stock market, like 7 years ago and I must say that it worked. However, I changed my career path and did not have the time to further experiment on this. I found your article, by googling "bid and ask analysis" and I must say that woke old memories.

I have been to all necessary sites that most forums mention, marketdelta, opentick esignal etc. but I am not sure that they can provide me with the data that I am looking for.

I am looking for bid and ask historical tick Futures data (price, volume and Open Interest volume when the buyers and the sellers met the market). It is more appropriate to test a strategy first and then, invest in Esignal's cost along with MarketDelta. As they are tick data, one year history in a few, but higly liquid, asset classes would be perfect, I think.

Do you know where I can find this kind of data? I have not seen Open Interest in OpenTick's Level II data, and I think that Open Interest fluctuation while analysing bid and ask would be helpful, in order to see what the big players are doing, whether closing or opening a position. And lastly, is Level II the data that I am looking for? I googled Level II tick data but I can not understand the difference between Level I and Level II data.

My email is

Thank you


Brett Steenbarger, Ph.D. said...

Hi George,

My experience is that, for all but the most sophisticated trading houses with in-house programming and IT expertise, collecting bid/offer data and depth of market data is a quagmire. I don't recommend that level of granularity for the vast, vast majority of individual traders. There are simply too many automated programs trading those data that can outperform an individual trader.

As a result, I only use one minute data and let programs such as Market Delta aggregate the volume at bid/offer for me. Those data from Market Delta can be archived and studied for system development.


Panama said...

Hi Brett
I have a couple of questions about reading the market intent through the bid:ask trade ratio. First to what extent are the larger players breaking their trades into small lots to disguise their identity as large players - using trade bots and programs to do so? And further to that, to what extent may they be playing both the bid and ask side at/near turning points (at some small cost) to efectively reduce other traders abilities to read their intent to reverse market direction?

The answers to these questions lead to my second question. CAn you read the market intent by only tracking large orders (say >99 es mini contracts)? ...or perhaps small orders (say less than 10) assuming small players will be wrong more often than right? .. or some other category? I'm looking for a way to see around the game playing and masking actions that larger players use to mask their intentions.

Cheers and thanks in advance for any insights you may offer.

Richard said...

@Panama: I can't speak for Brett but at we've been doing this kind of analysis on ES for quite a while. In our live room we routinely show off charts of small trader volume and how completely wrong-headed they are. We even invert the graph to show how well the anti-small traders follow price.

You know, our members often ask about iceberg orders and other methods by which the big traders can "hide." In the end, the point is that they frequently DON'T hide, as evidenced by our indicators and ones like Brett is showing off. And when they are in too much of a hurry to hide, it's a good bet they are going to take the market with them. We love to follow the big traders.

Fundamental Investor said...

It is very insightful and helpful. Could you please tell me where I can find information/data that you have mentioned:

1) Of these trades, 5148--almost 40%--were one-lots. Those one-lots accounted for about 2-1/2% of all market volume during the opening period.

2) We can also parcel out the large trades that occur at the bid price (meaning a large seller is anxious to exit the market) vs. the large trades that occur at the offer

Brett Steenbarger, Ph.D. said...

Hi Fundamental Investor,

I pulled the data from the exchange's time and sales data stream and analyzed in Excel. The volume at bid vs offer comes from Market Delta: