I’m going to be starting a new series on classic orderbook setups. Trading the orderbook has changed over the years and these days it is a little harder to trade pure DOM setups as such. But these are a great starting to point to build on.
The best way to use this type of trade is to add it in with other factors that also support your trade thesis. The most obvious examples would be by combining the DOM action/setup with volume profile and then market sentiment on the day.
That way you are able to really layer multiple ‘indicators’ and that adds to the probability of the trade going your way, which is what we are all about in this business.
The Free Trade
The first setup that I want to talk about is the Free Trade. Now, this is a trade in and of itself, but it is also a demonstration as to the value of trading the orderbook over charts alone. If you trade only off charts you wouldn’t even be able to see this opportunity unfold.
The idea off the Free Trade is all around your position in the queue. For those of you who have traded thicker products like the ZN for example, you would understand the value of being at the front of the queue.
It’s not always the case as it depends on exchange rules, but generally, those who put their order in first are at the front of the queue, while those that enter their orders later, end up at the back. Those at the front of the queue, get filled first.
So it stands to reason that if you are at the front and there is a lot of size behind then you will benefit.
The Free Trade is a way that we can kind of jump the queue and take front position.
Looking at the DOM below we can see that there are 1381 contracts on the bid and only 47 on the offer.
If our goal here is to go long, then we can either join the bid at the back of the queue or lift the offer. If we buy more contracts then are on the offer, then our bid is front of queue.
Now we are not all going to be buying 100’s of contracts, but this just demonstrates the concept of thinking about how you can sneak a few ticks here and there. Quite often this could be less than 10 contracts.
The strategy works best when you have a bias and you are looking at a way to get long already. Perhaps there has been buying at the bid and a reloader in the past and you don’t want to miss the move? Or price is looking like it is getting set to breakout.
By taking this free trade, you are effectively queue jumping and you might even start the buying pressure and others will jump in behind, which will only strengthen your position.
In this age of algo trading, you have to be fast and have a good connection, but these opportunities do come along.
Again, this by itself isn’t a pure trade as such, but it’s important to start thinking about ways you can fight for every single tick and improving queue position is certainly one of them.
For those of you looking to improve your overall win rate then don’t forget to take a look at the Advanced Course, where I outline how to use the orderbook to find the highest probability setups.
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