Day Trading Is Not Dead...

[SanMiguel]

sigh....

Nope - this doesn't include me and doesn't need to.

Let's say price comes up to a level and there's 3000 contracts on the offer. As price moves to that level, the 3000 stays there, 30 or 40 contracts print and price starts to move down. 10 minutes later, price comes back to that level. At that point how would you react to each of the following scenarios?

A - There's still over 3000 contracts at that level but it gets pulled after just a few trades print.
B - There's still over 3000 contracts at that level, a thousand contracts go through at the offer and there's 2000 remaining
C - There's still over 3000 contracts at that level, Price reaches that level but there's no buying, just 30 or 40 contracts hit that offer and then a bunch of market sell orders come in.
D - The 3000 is no longer there, there's just 500 which start to disappear when orders print.

Now - you could add in a bunch of other scenarios but the above all tell you things that candles cannot tell you.

It's not about being faster than an HFT - they are playing a different game. It's all about how much buying/how much selling & what the reaction is to that buying and selling.

I'll bite:
A - Probably a buy signal...at least it might draw in some longs - would have to see what would happen after that.
B - Pretty large amount of contracts going through - some serious buying is being done if the 1000 flashed up at the offer price. I'd wait for the the bid/ask price to move, if it went down a tick then the buying is not strong enough, if it went up and more contracts traded through that level then strong momentum for a buy?
C - No buying momentum so get short.
D - Similar to A but less likely to be a trick to draw in longs, less volume may be a safer entry for a long.

Well even though I seem to disagree with DT on many things, I have to say he has got me more interested in using L2. It makes sense that there is value in using it.

One thing I have observed though, looking at some of the trades DT posted recently on his trading, was that the entries were excellent, but the exits were not. DT, is this a symptom of L2/DOM? You can tell where there is big selling or buying, and if you go with that, that will give you a good entry. But once it moves your way and maybe you take half off, price can turn around and come back and take your stop out on the second half without showing a reversal on L2/DOM at all. Sure someone sold a lot there, but you don't know when/where they are covering.

It depends on your rules for exiting doesn't it?
Consider a short:
The DOM is simply not going to tell you to hold short until the next support level because a lot can happen in between. Perhaps you could short, exit, then reshort but that's much more of a scalpers game. IMO, if you short a resistance level based on a chart and the DOM then you are entering as a scalper but exiting could be based on RR, leave 30-50% open for the level you think it might get to. You may very well get taken out at break even on the rest as anyone with money will look to drive it back into that level if they can and then get short again. If the volume is high this is less likely to happen IMO as there might be too many sellers there.

 

[DionysusToast]

For the A,B,C,D above - there's no right or wrong answers but for me, any long would only be for 4 ticks on the ES in this scenario and I wouldn't bother. I'd wait for that 4 tick or so push through the high and then see if there's any serious follow through. If not, I'd be looking to get short.

In terms of exits, you could try to get in & out all day but I prefer to do a few trades a day. As for the rest - you have to base your decisions on a couple of things.

1 - How that market behaves
2 - How the lessons from your prior trades tells you how to trade.

If you watch the ES, on days other than the occasional really thin ones we've been having of late, you'll see that maybe 6 out of 7 days have certain characteristics which make holding to the other end of the range an attractive proposition.

 

[Liquid validity]

I totally agree with DionysusToast on L2 and T&S.
The advantage it gives is probably most clearly illustrated with AIM swing trading.
Due to the wide spreads skewing charting TA, T&S in particular is a vital tool.
I've timed entries and exits on big transactions (IB trades, yup they do trade AIM).
Its surprisingly good at picking very good entry & exits...

I think the reason it gets overlooked with more liquid instruments is due to chart TA not lagging L2 and T&S anywhere near as much, nevertheless they are still an important tool for daytrading, in particular short term trading, giving you an advantage over others not using it. You can get away without out it, but you will get more TA chart failures, which is why the argument over relevance arises.