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Order Imbalance and Change Point Detection█ Order Imbalance and Change Point Detection Trading might sometimes seem like magic, but at its core, the market operates on simple principles, supply and demand, and the flow of information. Recent academic work shows that retail traders can gain an edge even without expensive data feeds by understanding some fundamental ideas, like order imbalance and change point detection. In this article, we break down key concepts such as order imbalance, sudden volume shifts, change point detection, and the CUSUM algorithm. We also explain how retail traders can apply these ideas to improve their strategies. █ What Is the Order Book and Order Imbalance? ⚪ The Order Book Every market has an order book, simply a list of all buy orders (bids) and sell orders (asks) for an asset. ⚪ Order Imbalance – A Key Indicator Order imbalance measures the difference between the total buying and selling orders for the order book. Definition: Order imbalance is the difference in volume between buy orders and sell orders. Why It Matters: A strong imbalance means one side (buyers or sellers) is dominating. For example, if there are significantly more buy orders than sell orders, the market may be gearing up for a price increase. ⚪ How It’s Detected in Research: Researchers calculate a volume-weighted average price (VWAP) across multiple price levels in the order book (typically the top 20 levels) and compare it to the mid-market price. A positive imbalance indicates aggressive buying, while a negative imbalance suggests selling pressure. █ Sudden Volume Shifts and Change Point Detection ⚪ Sudden Volume Shifts What It Means: Sometimes, there is an abrupt and noticeable change in the number of orders placed. This sudden shift in volume can signal a big move on the horizon. Example: In a trading context, this might be seen when volume bars spike unexpectedly on a price chart, often accompanying rapid price moves or breakouts. ⚪ Why They Are Crucial: Sudden volume increases often coincide with significant order flow events. For instance, if a large number of buy orders hit the market at once, this could indicate a rapid shift in trader sentiment and serve as a precursor to a sustained price move. █ Change Point Detection – Spotting the Shift Definition: Change point detection is a statistical technique used to identify the exact moment when the properties of a data series change significantly. Purpose: In trading, it helps distinguish meaningful shifts in market behavior from random noise. How It’s Used: Researchers apply this to order imbalance data to flag moments when the market’s buying or selling pressure changes abruptly. These flagged moments (or “change points”) can then be used to forecast short-term price movements. █ Meet CUSUM: The Cumulative Sum Algorithm CUSUM stands for Cumulative Sum. It’s a simple yet powerful algorithm that detects changes in a data series over time. ⚪ How CUSUM Works: Tracking Deviations: The algorithm continuously adds up minor differences (or deviations) from an expected value (like a running average). Signal for Change: When the cumulative sum exceeds a predetermined threshold, it signals that a significant change has occurred. In Trading: CUSUM can be applied to measure the order imbalance. When the cumulative deviation is high enough, it indicates a strong change in market pressure, an early warning signal for a potential price move. For example, a rising cumulative sum based on increasing buy-side pressure might indicate that the price will likely move upward. █ How Can Retail Traders Benefit Without Full LOB Data? Full access to the order book (all price levels and orders) can be expensive and is usually reserved for institutional traders. However, retail traders can still gain valuable insights by: ⚪ Using Proxies for Order Imbalance: Many trading platforms offer basic volume indicators. Look for volume spikes or unusual shifts in trading volume as a sign that order imbalance might occur. ⚪ Leveraging Simplified Change Detection: Even if you don’t have complex LOB data, you can set up simple alerts on your trading platform. For instance, you might create a custom indicator that watches for rapid increases in volume or price moves, similar to a basic version of the CUSUM algorithm. ⚪ Focusing on Key Price Levels: Even with limited data, monitor support and resistance levels. A sudden break (accompanied by high volume) can serve as a proxy for a change in market dynamics. ⚪ Adopting a Data-Driven Mindset: Integrate these concepts into your routine analysis. When you see a significant volume shift or a sudden spike in activity, consider it a potential “change point” and adjust your strategy accordingly. █ In Summary Order Imbalance measures the difference between buying and selling volumes in the order book, offering insights into market direction. Sudden Volume Shifts are significant changes in trading volume that can signal a shift in market sentiment. Change Point Detection helps identify the precise moments when these shifts occur, filtering out noise and highlighting actionable signals. CUSUM is a powerful tool that continuously tracks cumulative deviations in market data, alerting traders when the market undergoes a significant change. For retail traders, these methods underscore the importance of watching price and understanding the underlying order flow. While you might not have access to full-depth order book data, using volume indicators and setting up alert systems can help you capture the essence of these insights, providing a valuable edge in your trading decisions. ----------------- Disclaimer The content provided in my scripts, indicators, ideas, algorithms, and systems is for educational and informational purposes only. It does not constitute financial advice, investment recommendations, or a solicitation to buy or sell any financial instruments. I will not accept liability for any loss or damage, including without limitation any loss of profit, which may arise directly or indirectly from the use of or reliance on such information. All investments involve risk, and the past performance of a security, industry, sector, market, financial product, trading strategy, backtest, or individual's trading does not guarantee future results or returns. Investors are fully responsible for any investment decisions they make. Such decisions should be based solely on an evaluation of their financial circumstances, investment objectives, risk tolerance, and liquidity needs.
COINBASE:BTCUSDEducation
by Zeiierman
2
EURUSD could turn bearishWith last week behind us, week 22, hopefully next week will be a little more volatile. Last week was quite unimpressive, to be honest, with only one day of actual volatility. Wednesday was a nice day for profitability and really one of my most profitable in some time. There are signs from Thursday and Friday, that the Bulls are going to push for the next session to drive prices higher. However, when you look at the order book on the buy side and see where the bulls have set up their levels of support for the upcoming week, there is a clear sign of uncertainty within their movement and they are actually planning for a lower than expected region. I suspect that next week's upcoming news events are going to play a major role in the decision making process they have done as they have moved their lowest support outside the their previous methodologies. With more than a 10 pip distance between a second and third level support, I think they are concerned that a good portion of next week is going to drive prices lower. The Bears aren't going quietly either or sitting by idly. They have already established a rough 10% resistance level in the orderbook. though it is only one level, I suspect this is going to change as the news events unfold. Time will tell, but I expect this week to be just as profitable, if not more so than a previous weeks considering the expected volatility.
Short
by RobertD7723
EUR/USD week 15 analysis/outlookLast week, the EUR/USD market was a whirlwind of activity, marked by heightened volatility and significant price swings. The week began with bullish momentum, as buyers took charge and pushed prices higher. However, by midweek, the market experienced a dramatic shift, with increased selling pressure leading to sharp declines in the EUR/USD pair. Despite the tumultuous nature of the market, traders were presented with ample opportunities to capitalize on the volatility. Profit levels soared during periods of heightened activity, particularly on Wednesday, when profit levels far exceeded expectations. However, the increased volatility also posed significant challenges, with rapid price movements catching many traders off guard. Looking ahead to next week, I anticipate continued volatility in the EUR/USD market. While there may be some attempts at recovery, the overall sentiment remains uncertain, with the potential for further downside pressure. Traders should remain cautious and vigilant, closely monitoring market conditions and adjusting their strategies accordingly.
by RobertD7723
EUR/USD Week 14 Analysys/OutlookTime dive into the whirlwind that was Week 14 in the EUR/USD market. Last week was nothing short of intense, with each trading day bringing its own set of surprises and challenges. Despite the rollercoaster ride, the overall price range remained relatively stable compared to the previous week. It's fascinating to see how the market dynamics played out amidst the volatility. When we look at the order book, it's clear that both buyers and sellers were actively engaged. Buyers were eager for lower prices, while sellers seemed content with slightly lower values for profits, compare to initial volume levels. Now, let's talk about resistance levels. Bears had set up some formidable resistance in the order book, but as history has shown, Bulls have a knack for breaking through even the toughest barriers. Looking ahead, while we may not see significant changes in the overall price range, I anticipate some fluctuations within that range. It's all part of the ebb and flow of the market. On a longer-term basis, the market has shown remarkable stability since January 15th. It's a testament to the underlying trends that have been driving the market. So, what does this mean for traders? Well, there's no one-size-fits-all answer, but strategies like grid trading and trend-following could prove fruitful. Of course, proper risk management and strategy testing are crucial. So, while last week may have been exciting, the name of the game is slow and steady profits. It's all about consistency in the trading world.
by RobertD7723
Trade like the pros in dark pools█ Trade like the pros in dark pools If you're accustomed to trading on the stock exchange, you know that an exchange operates like a digitalized marketplace. Buyers and sellers gather around a stock and indicate what they're willing to trade for, hoping that two orders will match. Before you decide at what price you're willing to trade, you likely look at the order book depth. There, we see how many shares are seeking buyers or sellers at a specific price. For a trade to be completed, the so-called spread needs to be crossed. The spread is the difference between the buying and selling price, in the example above 20 cents (226.40 – 226.20). In stocks that are traded very frequently, the spread is smaller and it's seldom a problem to execute very large volumes on the open market. █ Dark pools simplify trading in small companies Many stocks have too small a turnover to place a larger order without significantly affecting the price. Therefore, professionals have used dark pools for many years. Leading brokers are now making this flow available to all their customers. The advantage of a dark pool is that you don't need to show your order to other market participants until a trade has been completed. This facilitates, especially, trading in larger volumes. Another advantage of dark pools is that trades are made at so-called midprice. Returning to the example above, a trade would occur when someone is willing to pay the full spread of 20 cents. Had the order book been a dark pool, the midprice would have been 226.30 SEK. In this way, it results in a better price for both buyers and sellers. For those trading in larger volumes, this can mean a lot of money. █ All orders pass through dark pools The fact that dark pools are now available to everyone does not mean that all orders should be placed there. In fact, there are several barriers to how much trading can be routed this way before the dark pool is temporarily limited. When you place a regular order, thanks to so-called smart order routing, it will check if a better completion can be achieved via this dark pool than on the open market. So, whether you choose to actively place an order in the dark pool or not, you can benefit from the characteristics of the dark pool. █ Shouldn't the exchange be completely open? A criticism of dark pools is that they are exactly as they sound, hidden. But all trades made in Nasdaq Stockholm's dark pool are visible under completions. Stocks with low turnover can be difficult to trade without significantly affecting the price. ⚪ Let's take another example. Here we have a stock where the entire buy side corresponds to just over 130,000 SEK. That's a lot of money, but not an unreasonable holding for a private individual. This is also an order book from a company with a market value of about 1.6 billion. Thus, a small company, but not so small that trading for a couple of hundred thousand SEK should be unreasonable. Here, the spread is also 30 cents. Which is over one (1) percent on this stock price. Being able to halve this cost can save a lot of money both directly and over time. It is also possible to hide parts of an order today. In the advanced order placement on the open market, there is actually a tool for that problem as well. There, you can set the visible number of shares to be shown in the order book. █ When you should use the dark pool If you have never had problems with your order placement, you probably don't even need to consider placing an order in the dark pool. But if you trade stocks where you need to split your orders to not swallow too large a part of the order book, it might be valuable to try. ----------------- Disclaimer This is an educational study for entertainment purposes only. The information in my Scripts/Indicators/Ideas/Algos/Systems does not constitute financial advice or a solicitation to buy or sell securities. I will not accept liability for any loss or damage, including without limitation any loss of profit, which may arise directly or indirectly from the use of or reliance on such information. All investments involve risk, and the past performance of a security, industry, sector, market, financial product, trading strategy, backtest, or individual's trading does not guarantee future results or returns. Investors are fully responsible for any investment decisions they make. Such decisions should be based solely on evaluating their financial circumstances, investment objectives, risk tolerance, and liquidity needs. My Scripts/Indicators/Ideas/Algos/Systems are only for educational purposes!
OMXSTO:ERIC_AEducation
by Zeiierman
3
EUR/USD near lower rangeChart legend: Yellow lines: These line represent the lower and upper boundary of the range that has been tracked for the last 30+ days. Orange lines: Buy and sell side volume in the order book. These areas are where the buying and selling volume are the highest. Note that multiple zone could exist, these are just the strongest ones. Purple lines: This is the combination of order book volume and frequency counting of prices. The combined weight shows where the market actually is in relation to current price of what the buyers and sellers want. Outlook: I believe the market is going to re-test the support area around 1.079. The order book suppport levels are considerably weak compared to the resistance levels and bearish pressure, so we could have prices set a new lower range over the week. It should be taken into consideration though, that the bulls have had several weaker support level and still managed to fend off bearish pressure. While the frequency weighted support zone does look quite weak, the order book does have a substantial amount of orders placed below the area that could stave off the bears. While a new lower range is possible, I don't believe there is going to be any major changes in the current market direction for the first half of the week at a minimum. I think the bears will need more of a show to really move the market lower for a substantially longer period of time.
by RobertD7723
Ok BITCOIN, STOP RIGHT HERE!The reason that the recent movement did not have much volume on the chart is that there were no sell orders on the order book on the way up so most of the market orders were filled by soaking higher limit orders. According to the Binance's Order Book, two things to notice here is that: 1- There are more sell orders above 24900 which were not that much along the way. 2- The next major buy orders after 24600 are at 22800 When the price goes up, it fills all the buy orders and there will be a huge gap between the price and the major buy orders until the price is stabled. That is why a lot of big bullish movements have a bearish one after that. If you have Bitcoin, my exit signal is crossing down 24500. And if you do not have any, PLEASE CONTROL YOUR FOMO AND DO NOT ENTER FOR LONG HERE!
Short
by NoaTrader
Q&As: order bookThere are people who trade based in order book exclusively & promote these so called orderflow trading platforms, even these days. Surely, it's a great deed to learn this interesting, exotic & unusual skill, but the thing is it's completely unnecessary. The real use cases for DOM aka LOB aka order book aka Level 2 data are mitigating adverse selection, reducing market impact & spotting potential counter agents. If you think deeper, all these issues are really all about position sizing and nothing else, you can operate as big as it's possible (depending how much diminishing returns you can let go), and the only thing that can help you figure it all out is order book. The one & only principle of orderbook analysis is to understand where's us (operators), and where's them (ones who just need to be filled), be nice with yours & be a nice counter agent for them. It's very simple, clients place big orders that immediately stand out. Everything else is us, we're spreading our orders equally all around the book. For some reason not many think about it, but as a maker it's good to not only provide liquidity aka make the market, but also to consume these huge limit orders if it lets you to offload some risk or to open a position if the prices are good. By doing so you always make the market better, the faster and in more clear fashion the market activity is unwinding - better for all of us. If you look at order book histogram and imagine it turned horizontally, you'll see peaks & valleys. So being inside a loading range (past a level) or nearby risk offloading areas (predetermined exit areas), you spread your limit orders the way they kinda fill these valleys, and you can also use market orders to kinda smooth the sharp peaks in order book. That's how you reduce your market impact.Your impact will start being too high when by filling the valleys you'll be creating new peaks, and by smoothing peaks you'll be creating new valleys. Easy enough? All the wise-ass reinforced learning & stochastic control models will output the same behavior, just a bit worse because they'll never defeat your "feel". They way you can process a feedback loop, as an organic, is DOPE. By monitoring your position in the queue you can decide to replace some limit orders that sit deep to somewhere where probabilities won't be your enemies. If you're not in the first 5% of the queue at these places, your're prone to adverse selection. Closer you are to the front of the level, the worse position in the queue is ok. Negligible but stable adverse selection has a huge negative long term impact, should be taken very srsly. In theory, it makes sense to care about order book as soon as you start trading more than 1 lot or if 1 lot is already a serious size on a given instrument. In practice, when you notice a statistically significant drop in revenue per lot on a given instrument, minding all other factors are equal, it's time to open dem books.
LSE:DOMEducation
by gorx1
⚡️ #BTCLIVE - 29.07 ⚡️⚡️ #BTCLIVE - 29.07 60:40 Bearish:Bullish I promise I am not a bear!!! The price smashed through the last point I was expecting a retracement. Amazingly it looks like BTC is finally doing what it was born to do and be a store of value and a safe haven during torrid times like these!!! We are coming up no to the key resistance of the longer term range and it is definitely the business end of the deal. I feel going into the weekend with alot of bearish TA on the cards will likely result in a retracement of pretty epic proportions. I am usually pretty bearish on weekends simply due to lower volume and generally more retail heavy traders being active. A lot of folks might be getting a little nervous too now they have made some nice and unexpected gains this week so might be happy to take the profit and chill for a bit. We are looking at a big bearish divergence on the 1 hour which is overbought too along with an exhaustion signal. The POC line is sitting very low along with the Future Pivot which carries more weight as the week nears the close. Orderbooks are looking a little bearish too. I am thinking that we will be seeing $22.9k in the pretty short-term with a more max pain target of $21k and possibly lower. There is a bullish scenario, there is ALWAYS a bullish scenario - but if we break $24.8k or more reliably $25k then it is likely we will see the tracking up to the CME gap at $27k+ Volatility is not over I feel so stay safe!
by Kryptochristian
5
⚡️ #BTC OUTLOOK - 18/07 ⚡️⚡️ #BTC OUTLOOK - 18/07⚡️ 50:50 Bearish:Bullish Challenging top of range and key resistance, oversold but with a bullish divergence in play. Key notes are flipping the 200EMA - which is an incredibly bullish sentiment. We have a very recent bullish Divergence on the RSI although coming into Oversold territory. There is a significant resistance to break through although the orderbooks are looking like there are a lot of bulls support the $22k support. Bullish Play - Breaking price resistance and trendline resistance of $23.4k could open up a target of the CME gap at $27.3k Bearish Play - Failing to break can form double top and send us back to $20k
INDEX:BTCUSD
by Kryptochristian
S&P500 Taking A Breather Pricing In Inflation And Tapering The higher US CPI read of 6.2 % YoY lead to a spike in US10Y and a small sell off in the ES. As of now the uptrend remains intact and as long as we do not get a close below 4300 I am looking for long entries. Buy at or around 4552 if support holds or buy break and close above 4713 resistance. Looking at the order book we can see a lot more sell orders between 4662 up to 4675 vs much less buying orders below 4659 down towards 4612. CME_MINI:ES1!
CME_MINI:ES1!Long
by TradingPit