Orderbook trading course

4.Order book trading (1)

Now we finally come to the much-desired part of the course, namely trading.
Für mich geht es im Orderbuch Trading um nichts anderes als gute Einstiegspunkte zu lokalisieren. Wenn man das Orderbuch verwendet um Einstiegspukte im Markt zu finden, kann man häufig eine Position im Markt haben, ohne dass der Markt überhaupt gegen einen tickt. Aber wie geht das?
Well, the first thing you have to do is go through the process of actually reading the order book. And that's not easy.

The first time you see the order book it will likely be very confusing at first. I still remember when I started using the order book, I couldn't even stare at it for more than 30 minutes because I just couldn't concentrate. It takes time, first, to condition the eye on what you are seeing and, second, to actually identify the points where buying and selling take place.

I would say that as a beginner you definitely have to work with the orderbook for a month to develop the mental conditions at all.

So I created this course to familiarize you with reading the order book before we can move on to the advanced one.

Part 1

The first part is used to get your eyes used to reading the order book. There are the bids (blue column) on the left and the offers (red column) on the right. What interests us more, however, is the column on the far right, which shows all contracts that are traded either as bid or offer.

Imagine for a moment that you want to buy 5000 contracts. Do you hit a Market Order directly? Probably not. Would you just put 5000 contracts as a limit order on the bid side? Probably not.

Realistically speaking, you would slowly bring the order into the market and try to disguise your activity in order to get the best possible price yourself.

If you know that, keep in mind that as a future trader it is your job to discover all the signs that someone with lots of contracts is trying to buy or sell. And that is effectively your advantage as a short-term trader.

For this exercise, I would like to ask you to focus on the cumulative contracts. They are the ones shown on the far right of our order book. If you see one to three times the size of the bid or offer that is being traded at the current price, place a corresponding limit order.

As an an example:
Let's say we have 1000 contracts on the bid side (125.65).
If 1000+ contracts are traded at the bid price, but there are still contracts at the bid price, this means that someone is trying to buy at that price.

Place a limit order and try to get a fill. see if you can make 1-2 ticks of profit.

If the market runs 1-2 ticks against you, just step out of position and wait for the next setup.

These targets are based on slower, thicker markets (ZN, FESX). You can set your own profit targets for faster, thinner markets (GC, FDAX). I personally prefer to trade in bigger markets. The goal of this exercise is not to make money, just to look for setups and trade them. The more trades you make, the better. Don't worry if you're right or wrong. This is one of the most important habits you have to break.

Try this exercise for 1-2 hours every day in your favorite market.

If you don't know which market to take, I recommend the ZN for afternoons and the FESX, FGBL for mornings.

If you can't manage to stay focused for the full two hours, don't worry. When I first started I had a hard time doing it for 30 minutes.  

In the example above, there were 200 contracts in the offer (139,040). But 448 were bought and there are still 171 orders in the offer (iceberg order). This shows that a seller is defending the price.

If you are not completely clear about the exercises or you need some help, just write me a message.