At the Brisbane 3 (B3) event I was asked by 'Streamline' (great meeting you guys by BTW) in regards to "trading the depth" and how I used depth to find a lower risk/profitable position. I've been thining about that question ever since and I wanted to expand on it to allow a proper answer, but this MAY get a tad confusing! There is more I want to say, but I either forget or you 'just have to be there'.
Key Points:
1. I don't just look at the depth in the first level of the bid/sell. I am more concerned about the depth in the first five levels of the bid/sell (total volume and each level volume). Particularly a stock that has quickly fallen from grace during the day and is moving towards the close of auction at it's daily low. What I find is that often dummy sell bids at level 3 to 5 of the sell depth are being pulled at close leaving obvious gaps or they simply want out and move to clear their position at the closing low. For me this is an opportunity to grab a share for a small bounce of three levels (particualrly if the buy bids are outweighing the sells at close)or clear for same if the DOW dumps.
2. Watching the depth through the day on a share of key interest. Seeing a LARGE order flick in and out would indicate that the share is being propped (either bid/sell) and I use this sometimes to my advantage because they often try it more than once and it's entirely possible to buy on the push down only to see it being bid back on the prop return.
3. There was quite a bit of discussion in Brisbane about bot trading and it's deficits, but I can see a benefit in regards to the depth. If a bot is clearly taking a position in the sell depth, I would be inclined to join the bid depth and watch to see if if it moves to the next sell depth level. As quick as I could I'd be taking/moving a position myself in the belief that I could buy stock from under the bot and sell it at the next level to the same bot buyer.
4. Market depth manipulation. Legal? No. Advantageous? It can be. A large sell will push the buy depth down with obvious intent. I'd look carefully at the bid side for a position in the belief that the large sell will be removed or swallowed and take advantage of the sale opportunity.
5. Trading the gap. High volume, liquid stocks (particularly those that trade in the 15-20 levels) often present gaps up (around 3 levels) and I see this as an opportunity to buy a stock and fill the gap on rebound (usually works when a stock has fallen five depth levels quickly). HTX was an example I gave in B3.
These are just a few points. I'm sure I could think of more but at the end of the day it's all about educating yourself in the psychology of the trader, the mechanisms employed by the funds/individuals. Humans have charactistic behavious that are reflected in history (hence the appeal of TA). Being able to see through this will benefit you in short term trading opportunities.
