Today I’ll be continuing with my series on classic orderbook setups. These are great spots to learn which can really add to your bottom line and boost your win rate.
Last week, I looked at the concept of the ‘Free Trade’, which is all about the value of gaining queue position.
This week, I’ll take a look at another classic piece of price action that you can only see on the orderbook.
The Lure
There’s been a fair bit of attention on traders who enter ‘spoof’ or fake orders. Despite the headlines and even legal action, this practice still goes on.
Quite often trading the DOM is all about trying to interpret whether a large order is real or fake.
If it’s real, you want to jump on board and go with it. If it’s fake, you will likely look to fade it.
At certain times of the day, orders are more likely to be real than fake. Take the close for example. If there is a big order on the DOM in the final minutes of a session, then to me, that would indicate there is a large trader trying to execute as quickly as possible. So we might look to front-run that order.
Conversely, if there are some big orders in the book, after the first hour, then to me that might be a place where we could see some spoofing. As liquidity dries up during the day, traders with size need to get a bit more creative to try and execute their orders. So putting up fake orders to try and entice action will likely occur.
That brings us to the idea of ‘The Lure’.
The Lure is a trade which like we’ve discussed, is more often than not a big trader who is trying to get filled in the opposite direction.
This big trader might not be pressed for time and their goal is likely to get a good fill, before pulling the initial order and covering on the other side.
This might be a spread trader trying to get a good price, a big scalper, or even a bigger investor trying to get set and the best possible price.
Looking at the DOM in the image above, what we would be looking for would likely be some bigger than average bids. Ideally, we would like to see one big bid that is maybe 2x the other bids. But it’s not always so black and white these days, unfortunately. A strong bid might just come in the form of an order that is just holding steady for a while.
Quite often on the DOM, we get the best bid and offer, being about half the size of the rest of the prices in the book. When that best bid or offer are a bit bigger, or it appears strong, that gets our attention.
So in the example here, the 3000 and 3300 bids are a bit bigger while a 2000 best bid is higher than normal. But still not huge by any stretch.
But as we know with the DOM, the size in the book is not often the full story.
The trick to the Lure Trade is to watch the best offer in the book. If we see size trading through that price and the offer refreshing, then we know that someone is trying to get a short position on.
When that seller is fully set, we would expect to see those bids all pull and price to break down a few ticks. That could be a quick scalp or it could be the start of more selling.
Some other things to look out for are to improve this trade even further:
- Big bids and selling at the offer after a short sharp push higher.
- Look out for this action around the highs of the session and key resistance levels.
- We certainly see this happening around key volume profile levels as well.
This trade can also work in the exact opposite direction, with big offers and size printing into the bid.
Like I said earlier, the name of the game is to try and tell whether the bigger orders are real or fake. While you don’t need to trade this as a setup as such, start thinking about what the bigger traders are doing and how they might be going about getting set in their trades.
For us, we can often execute in a single click of the mouse which is where our edge lies.
For big traders, they have a playbook of their own and different objectives. Our goal is always to try and work out what the big guys are doing so we can jump in before they can get fully set.
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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