MARKET DEPTH INDICATOR
The Capstone Market Depth Indicator is an indicator that keeps track of the total bids and offers as well as their ratios. It can be used to find short squeezes in the E-mini S&P and other markets. In the video example we show a live trade from January 29 in the E-mini S&P, going long at 2632.25 and exiting at 2643.00. The turning points based on the bids and offers were very clear. There are additional training videos below.
This indicator is ideal for traders who like to consolidate information in the order book and Super DOM and keep track of the order flow. It provides a trading tool to keep track of the total bids and offers throughout the trading session. This indicator requires Level II data and is ideal for the Tradestation and NinjaTrader platform.
TRAINING VIDEOS FOR THE MARKET DEPTH INDICATOR
NinjaTrader 8 Trade
We take a look at a persistent trend in the evening session on February 19, 2019 in NinjaTrader 8. After the offers lead the bids for an hour, price popped to the upside. We give a detailed analysis on how this trade could have been taken and potential exit strategies. NinjaTrader 8 Trade is the Most successful Trader in the Market.
Tradestation 9.5 Trade
We look at the same trade in Tradestation 9.5 on February 19, 2019. The formatting for the indicator between the two platforms is different but can be easily adjusting when you format the indicator settings. We also discuss “order book bust” in this as can be seen at the end of a trade.
Looking at the order book is more of an “insiders view” as it shows the market participants intentions. Many HFT’s use order book information to take trades and in this market environment, there is no greater insider than HFT’s. I want to be looking at the same information that the HFT’s are looking at.
On February 5, we use the Market Depth Indicator along with the Advance Decline line to detect a possible short signal in the stock index futures. We go over the live trade in stages, 45 minutes into the open and 2 hours later as we disect this short trade. Post video observations are related to the State of the Union address tonight being a potential catalyst for the “bids to take a break” until after the address and for the market to then move higher, if the President says what the market wants him to say, or to move lower if there are any “surprises” that reate uncertainty.
If you are an experienced professional trader, you have probably had your fair share of short trades blow up in your face. Even if we have a strategy that is profitable overall, the losing trades are the ones we remember the most and the ones that keep us up at night.
We review the E-mini S&P on August 23, 2019 and the short trades that were taken for our strategies in the Stock Index Portfolio. The Market Depth Indicator was bearish all the way into the close. If you watch the market all day, knowing the order book bias can help you stay in the trade.
You can use this indicator to call turning points or you can use it to give you confidence that you are on the right side of the trade. It adds an extra dimension to your trading to use an indicator solely based on the order book, rather than on the actual price action.
Using Level II Order Book to Stay Short
When to Buy the Dip on August 5, 2019
The Market Depth Indicator is my favorite indicator because it gives a unique perspective of activity in the order book vs. price based indicators. This is what traders are doing and gives me more confidence in my own trading.
The China Trade War has set a very bearish tone but there is typically a counter trend rally at some point, regardless of how bearish the news is, as mean reversion has become the norm. It can be some of the biggest and fastest money trades.
On May 13, 2019, stock index futures had the largest down day of 2019. Several of our top strategies including Cobra III E-mini Nasdaq did well shorting the market. The Market Depth Count Indicators were bearish most of the day. The Market Depth Difference and Market Depth Cumulative revealed the downtrend in the order book throughout the day as the market kept hitting the bid.
The insight of the day is to watch the trend of the day with the Market Depth Cumulative Indicator while looking for divergences in the Market Depth Count Indicator. We saw two short signals using this method towards the end of the day. The goal of this methodology is to find turning points so that we can use “tighter stop losses” with the goal of reducing risk. We prefer to use these indicators on markets with a liquid order book such as the E-mini S&P.
Level II Short Setups on May 13, 2019
Two Shorts, One Long, May 2, 2019
With the FOMC disappointing Wall Street yesterday by not giving consideration to a rate cut, the overheated ADX and rally back from the December 24, 2018 lows, and the seasonality of the stock market, there are some nice two sided trading opportunities.
With this market depth indicator, we took two short trades and one long trade on May 2, 2019. While I am not looking for a bear to re-emerge, I see more two sided price action from now and through the summer. The market depth indicator is a great way to see the bias in the market and combine it with other indicators and price patterns such as pivot points and market internals such as the Advance Decline Line and NYSE TICK. Paying attention to the time of day patters is also beneficial as we saw the market begin to recover from the early sell off right at noon EST today.
On March 19, 2019, we highlight a potential short signal based on the divergence between price and the Advance Decline line ($ADD) as well as the Market Depth indicator, which is bearish. Tomorrow is the FOMC at 2 pm EST and there is a tendency for the market to move higher 24 hours before the FOMC statement. The market is very strong and shorting it here would be a contrary trade.
Picking a good entry point and managing this trade with a reasonable stop loss is the best way to take this short trade.
The last couple of weeks the market has been more efficient and there have not been as many trading signals using the order book. The signals started showing up again yesterday and are highlighted in the video below for March 18, 2019.
Order Book and $ADD Short Signal
Order Book Trades Long and Shorts
The market has been more efficient the last couple of weeks as the bulls and volatility shorts seemed to have regained control of the market. An efficient market can be more difficult to day trade as we have not seen as many order book signals. Today, they started to show up again as the market has been up 6 of the last 7 days.
On March 18, 2019, there were opportunities to short early and go long in the afternoon. The purple pulses represent selling and came in advance of the early dip while the blue pulses represent buying and came in advance of the small afternoon advance.
The video also shows a new and additional indicator which is the Market Depth Cumulative and Market Depth Cumulative Difference. It keeps track of the total bids and offers and the difference based on a closed bar basis.
Order Book with $ADD Line Feb 5, 2019
On February 5, we use the Market Depth Indicator along with the Advance Decline line to detect a possible short signal in the stock index futures. We go over the live trade in stages, 45 minutes into the open and 2 hours later as we disect this short trade. Post video observations are related to the State of the Union address tonight being a potential catalyst for the “bids to take a break” until after the address and for the market to then move higher, if the President says what the market wants him to say, or to move lower if there are any “surprises” that reate uncertainty.
Trading Crude with Market Depth
On January 28, we see how Crude Oil was down for the day and shortly after 11:30 am EST, it makes its low for the day. The order book flips strongly to “press” on the offers and the market grinds higher for the rest of the day. The Volume Sum Day Indicator is also shown in the video below to show the net selling and the opportunity to capture a reversal in a mean reversion market.
E-mini S&P Market Depth Trade
On January 24, the order book started to show a sustained press against the offers and there was a slow grinding rally higher as we captured five E-mini S&P points using this setup. We go over the potential short trade that could have also been take as the market trended lower.