Visualization in Trading
Today it is common knowledge that each person has different learning styles and techniques. Learning styles group together to form common ways that people learn. Everyone has a mix of learning styles. Some people may find that they have a dominant style of learning with far less use of the other styles. Others may find that they comprehend information better under different circumstances. There is no right mix, nor are your styles set. You have the ability to master less dominant styles, as well as further develop styles that you already use well.
There are seven learning sytles defined:
- Visual (spatial):You prefer using pictures, images, and spatial understanding.
- Aural (auditory-musical): You prefer using sound and music.
- Verbal (linguistic): You prefer using words, both in speech and writing.
- Physical (kinesthetic): You prefer using your body, hands and sense of touch.
- Logical (mathematical): You prefer using logic, reasoning and systems.
- Social (interpersonal): You prefer to learn in groups or with other people.
- Solitary (intrapersonal): You prefer to work alone and use self-study.
What does this have to do with Trading?
In trading we are all searching for the best and most reliable information in order to feel comfortable when taking risk on a trade which hopefully works in our favor.
Some of us use charts loaded with indicators, others seek for trading groups. Radio squawks are aimed to satisfy aural people. Some prefer physical actions like coding their own indicator code.
We are in the lucky position today to be offered several learning channels by a majority of trading service providers.
In my blog I am going to describe my experiences and my way. As said there is no right or wrong. Everyone must find their own way which matches their learning style, experiences and risk-taking willingness.
Limit Order Book (LOB)
When I started with Order Book reading it was disturbing, chaotic and demanding at the beginning. Watching fast changing numbers all day long was exhausting. No doubt it was absolutely crucial to learn order flow and Jigsaw Trader was my entrance to understand order flow and order book but, as said, it brought me to exhaustion because I couldn't keep concentration all day.
In general: the limit order book is the place where all buyers and sellers meet and where the auction takes place. It is basically the entire supply and demand. When we look at the order book, we see decisions from all market participants and the strategies they employ. In contrast to looking at the volume traded, the order book provides an insight into the intention of traders. This information can be used when forecasting short-term price action.
Here are few examples of the type of information that can be gained by following and analyzing the order book:
- Find price levels with liquidity. Certain price levels attract large numbers of orders. These clusters can be identified only when looking at a depth of market.
- Watch the spread which can provide clues about what might happen in the immediate future.
- Identify intraday shifts in momentum. For example, a shift from strong buying to strong selling.
- Price changes due to order book activity. Study the relationship between market price movements and the order book.
When using the depth of market, we can also observe strategies in action, for example:
- Price triggered strategies that automatically reverse based on the price change.
- Validation of breaks in key technical analysis levels and better assess if the breakout is real or false.
- Identifying big players when they step in.
- Identifying retail activities.
There are a variety of ways to use the order book. Scalpers may use the information from the order book to decide whether to go long or short. Swing traders or traders driven by technical analysis may use it to confirm their macro buy or sell decisions.
Visualization Helps to Make Better Decisions in Trading(*)
Visualization plays a key role in understanding what is really happening. It encourages making better and more educated decisions. Looking at data in a pictorial or graphical format enables us to grasp difficult concepts with great ease or identify patterns that are otherwise unobservable. It also helps us to ask questions we have not thought to ask before.
As a result of technological advancement, visualization of big data is now possible. With current CPUs & GPUs visualization that could only be done offline in the past, now can be achieved in real time. This in return enables faster, more relevant and beneficial decision making.
When dealing with market data, I use visualization in the following scenarios:
- At an early stage when cleaning and ‘checking’ the market data. In many cases, wrong decisions are made because the market data is not accurate. Therefore, accurate and real-time data is very important.
- When developing a new strategy or refining an existing one. In other words, when ‘teaching the computer’ what to do. Looking at visualized market data can also be beneficial in generating new trade ideas.
- When trading live and facing the need to take immediate decisions.
- When monitoring the market in real time and taking the following decisions: whether to trade or not in certain market conditions or even see that your strategy is ‘not aligned’ and needs to be stopped. In the above scenarios having the right tools is vital.
In the above scenarios having the right tools is vital.
Visualization help me see pattern where numbers are too abstract for me. (wtl)
The heatmap gives us a clear view of how the entire limit order book and volume traded evolves. This enables us to have profound insights into market dynamics at a greater speed. To explain with more detail regular charts, such as bar chart, are two dimensional (price and time). When you use a heatmap, you add another dimension. In this case, it also let’s you see the historical size at each price/time. Besides, by updating the chart very frequently (40 updates/second), you get a video which allows you to examine the frequency of the changes, giving you a ‘feel’ of market accelerations.
Visualization lets you see patterns that cannot be seen or understood without it. Below are few questions that can be answered with a visualization platform like Bookmap:
- How did the size at each price level change over time?
- What happened to a certain level when the price moved toward it?
- Are there additional strong levels below or above that level?
- What was the volume traded around these levels?
- What is the activity on the other side of the book? Are there areas where the order book is not symmetric?
The above image shows a significant concentration of limit buy orders and limit sell orders at several neighboring bid and ask levels. Typically in real-time, we would hypothesize that the price will bounce back (at least for a while) if it reaches such level. Here are some factors that can vote in favor of that hypothesis:
When the price approaches that level, the amount of sellers
- Do they remain the same?
- Do more seller jump in? (in this case price may bounce even before trades occur at that level)
When trades start occuring at that level
- Do more sellers join and/or we observe hidden sell orders (“Iceberg Orders”) being executed against market buy orders?
- We observe hidden sell orders being executed there against market buy orders.
We can see a real time price manipulation of market makers who want the price higher in order to sell their inventories into other hands.
We are looking for the following levels:
Support and Resistance Volume, Point-of-Control. Other "magic" levels, on one compressed heatmap chart in real time.
Click to enlarge above shown screenshots for more details:
Looking forward to your comments.
(*) Excerpt from https://bookmap.com/bookmap-ceo-explains-the-key-feature-of-the-trading-platform/
Thanks for proofreading by @DetroitBrad