Spotting Optimal Trade
Entry Opportunities
“The Where”
Presented by: Thor Young
1
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2
Objectives
1.
Introduction
•
•
•
2.
Meet the Author
Introduction of Topic
Table of Contents
7.
Pivot Cheat Sheet Deep Dive
8.
Develop a Bias based on the Pivot Ranges
•
•
•
•
Redefining Value
•
•
•
•
3.
What is Value? ”Each Tick”
Main Principal Behind Camarilla
We play acceptance and rejection of value
The “Grey” Area
The Mirrors
•
•
4.
Must have the Volume
Always check the L2
Behind the PIVOTS
•
•
•
•
•
5.
The History of the Camarilla Pivots
Nick Scott “NOT"
Setting up Camarilla Pivots in DAS
Color Coding your Pivot Points
Calculating the Cams
Inside Day
•
•
6.
Defining and Identifying Inside Days
Examples on a charts
Outside Day
•
•
Defining and Identifying Outside Days
Examples on a charts
9.
Bullish Bias
Bearish Bias
No Bias
Harmonious Charts “Shoutout William”
Confirm the Bias “Must wait for open”
• Price opens above or under S4
• Price opens above or under R4
10. Judge Potential for Trades Range
• Inside Day
• Outside Day
• Where’s Value
11. Order Book
12. Examples
13. Conclusion and Q&A
• Conclusion
• Honorable Mentions
3
Thor Young
History prior to Trading: Over a decade in the IT Industry.
Specializing in migrating older server systems to newer systems
focusing on small to medium business. Worked for an options
trading platform as a server technician and customer support
specialist.
Trading History: 5 Years Trading and consistently profitable for
near 4 of them. I am a full time Day Trader and use it as my
primary source of income. I specialize in growing small accounts
and developing new and advanced traders. I’m excited to have
recently published a book titled, “A Complete Day Trading
System” which is now available on Amazon.
Trading Edges: Well versed at reading market movement, and
order flow. Focusing heavily on Order Book Reading, VPA, and
Pivots. I employ a Where, When, and How trading methodology.
Hobbies: I am a season pass holder for the Jaguars. Absolutely
love taking my gorgeous wife to games and enjoying some good
sport. I have two beautiful children and enjoy taking them to the
beach as often as possible.
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Introduction of Concept
In this webinar I am going to be bridging two major components. Camarilla
Pivots with the Order Book. Although each represents a different aspect of the
total trading system. I thought it would be beneficial to show how the two
elements can pair together to help add context to your charts. In this regards, I
would like to continue thinking of this as part of the “Where” not the when. The
Where is most notably where we go to find great trade opportunities. But we
can also use this for identifying profit targets.
By combining the order book with our pivots. It is possible to look for where we
can expect to see transactional volume and then we can watch the institutional
players line up to highlight the critical pivot. To do this I utilize a fairly new tool
call BookMap which I will talk a lot about in the up coming pages.
If a market maker is motivated by transactions, then orders will steer the price
as long as we have volume. The order book allows us to read this process and
more.
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Introduction of Concept
“Every trading system needs three things. Where to look for a trade. When to
take the trade. How to manage the trade. Taking a trade with anything less is,
at best, gambling. – Thor Young
In this webinar we are going to be focused on the where. Like a surfer we
can’t just jump up on any wave. We need to catch a good wave and catch
it in a place that gives us a good distance back to shore so we can enjoy
the ride. To far away and you won’t catch the wave. To close and you
won’t get a long enough ride.
This is part of what makes momentum trading very difficult for novice
traders. You have to be very good a reading tape and the order flow to be
successful at momentum trading consistently. Momentum traders are
often trying to surf waves that have already exhausted or trying to get up
on their boards before the wave breaks. This is due to a lack of awareness
to the daily ranges where Bulls have bought and sold, and where bears
have shorted, and covered.
Like surfing, to make money in the market position is extremely
important. To get good risk verses reward you need to have a tight stop
and a wider target. Catching the wave isn’t just about timing. You got to
know where to wait first.
Let’s start at the basics.
6
Introduction of Concept
Large Orders near extremes
Price can not go higher due to lack of buyers
Price can not go Lower due to lack of sellers
7
Introduction of Concept
Selling Zones
Buying Zones
8
Introduction of Concept
R4
Selling Zones
R3
S3
S4
Buying Zones
9
Always Value
This leads us back to the principal theory that drives the Camarilla Pivot System. That
theory is that because the market is made up of participants and that the participants are
people or systems programmed by people. That the market will inherently overreact to
value. You see people by design overreact to almost everything. It’s a physiological reality.
Have you ever noticed that certain stocks seem to have a personality? You can trade them
over and over again and it seems like they always behave in a similar way. That is because
the psychology of the participants carry over to the stock. This is what drives auction
theory.
As we’ve talked about in prior webinars the idea here isn’t fancy. We have no idea of which
way the price is going to go until we can figure out where the broader market is establishing
value. Anything else is just gambling. There are some good strategies out there for taking
advantage of the quick auction periods. But those often get you stuck in choppy price action
as larger participants make decisions. But auction periods are very volatile and can be very
difficult to manage risk. Waiting for value to be accepted and then rejected gives you the
ability to sit back and plan very detailed and conditionally based trades with great RVR.
Think about trying to trade the first minute. There is no value and although you make
money it’s really more of just a short in the dark. The market always take a few minutes to
shake out weak participants before the real auction begins.
As the market tries to establish value the largest participants will have the biggest impact.
As they set value other participants will make decisions based upon that price action. This
causes the ebb and flow that the camarilla pivots attempt to quantify. As people overreact
to value as the larger participants make decisions the price will constantly accept and reject
that perception of value.
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Accepting and Rejecting Value
Since value is based on perception it can be very difficult to find. We have covered before many technical way to
find value. VPOC, Levels, L2, etc. Once value is set it needs to be accepted by the market.
Value is accepted over time. You can see large participants with big orders trying to set value but until everyone
else agrees this is the spot nothing is written in stone. Often you will see the market rally after large orders on
lower volume. This is because the retail traders haven’t accepted the new value and continue trying to push the
price. Eventually the price returns and we establish Value. The L2 will often lack large bids and asks away from
the price once we have found Value. In the market cycle this is what we call balance. During this period the
volume will often drop. Often starting a consolidation of some sort.
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Accepting and Rejecting Value
Once Value is accepted you will often see a consolidation and then a trend continuation or reversal on light
volume. This is an attempt to Reject Value. Let me clarify that Rejection of value does not mean up or down. It’s
means to move away. Once we have value accepted. We will see the price start to attempt rejection in both
directions. Under and Over the price. It will continue to do that over and over again until it doesn’t. After all
that is what the Camarilla system is based on.
Eventually excess will build in a particular direction depending on the supply and demand. As imbalance starts
to set in the perception of value by the participants will start to change. Eventually the price will reject in an
attempt to either return to prior value or go in search of new value. This rejection is where our trades begin. It
is very important to wait for the large participants to make decisions.
Let’s look at an example of Value being accepted. Then I want to talk a bit more about what I call the “Grey
Area.”
12
Accepting and Rejecting Value
Twitter call on market today
13
Accepting and Rejecting Value
Twitter call on market today
14
Value is set by large orders at 12:15 and
12:42. You can spot them quite easy by
looking at the volume below. Soon after
the 2nd volume spike VPOC moves to
this level.
The price is rejected multiple times.
However, after about 2 hours value is
accepted and the stock enters a
consolidation. Once this happens the
stock becomes untradable.
15
The History of Camarilla Pivots
Camarilla word definition: cam·a·ril·la. A group of confidential, often scheming advisers; a cabal.[Spanish,
diminutive of cámara, room, from Late Latin camera. See chamber.]
A quote from the inventor of the Camarilla Equation:
“Everyone asks me that. When I first started trading, I thought (as a lot of people do!) that the markets
were controlled by a secret 'insiders club' of powerful organizations who manipulated prices for their own
benefit. I remember that at the time I was smugly sure that this was so and was excited to be joining (as I
then thought!) this secret 'cabal'. Of course, as I learned more about the markets, I realized that this was
nonsense, and that the markets are far too big to be effectively controlled, even by gigantic financial
corporations. However, it still looked to me as though there was a pattern in what was supposed to be the
'random walk', a pattern that matched very closely what I imagined a 'secret society' would try to
implement in order to maximize their revenues. The obvious conclusion, of course is that if you have
enough participants, statistically they start to behave in broadly predictable 'over-ways', and this leads to
the patterning that the equation is so good at predicting. The word 'Camarilla' is based on the Latin word
for room (camera), and it means basically a small clique of 'advisers' who try to manipulate the person in
power for their own ends. Frankly, it was just a joke, and I am always surprised at how seriously everyone
took it.”
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The History of Camarilla Pivots
Camarilla pivot points were not discovered in 1989 by Nick Scott, a successful bond trader. As I did research for my
upcoming book, I found out that the true creator was a brilliant student from Montreal named M.B. (Mitchell) Kurzencwyg.
M.B. discovered Camarilla pivot points in 1990 after and intense study of the futures market. He kept this system secret
but in time the information spread after he sold a few select copies of the strategy. Over time many traders like myself
have adapted these strategies for the new market. M.B. turned this strategy into a black box system that many large funds
pay top dollar too utilize.
The basic thesis for this strategy is a common one: That price, as most time series, has a tendency to revert to its mean,
right up until the point it doesn't. Camarilla pivot point calculations are rather straightforward. The Pivots themselves
aren’t overly complicated, but they have amazing accuracy in both trending and sideways markets. They can be used with
Stocks and ETFs.
Camarilla Pivot Points vary in two major ways from classic pivots. One is they don’t use a central pivot and second is in the
3rd and 4th level calculations. These levels will be the most predominate levels we will focus on for these strategies. Each
Level is color coded to help keep things straight as you look at them.
Camarilla Pivots have another major benefit. And it’s actually what they help you to not do. Because the Points are specific
areas, they force the trader using them to wait. As you all well know the hardest thing for a trader to do is nothing. Having a
strategy with key areas to focus towards is extremely helpful in giving a trader patience. Taking some of the anxiety out of
trading and giving you the ability to quickly scan stocks for price action that is approaching these key areas.
Once the strategies are absorbed you should be able to identify potential setups quickly. Evaluate the signals and assess
risk.
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The History of Camarilla Pivots
Calculating Camarilla Pivots is quite easy. To start we need the previous days High, Low, Open, and Close. Then we just
need to put those into the formulas to get our levels. The main levels we will be using are listed on the left with R4 thru
S4. R standing for Resistance. S standing for support. In the case of an R4 or S4 Breakout the stock may trend. In those
instance it helps to use the 5th and 6th Camarilla Pivots. DAS can AutoDraw all of the Camarilla Levels up to R6 but just in
case you’d like to know all the calculations they are listed below.
R4 = CLOSE + (HIGH – LOW) * 1.1/2
R5 = R4 + 1.168 * (R4 – R3)
R3 = CLOSE + (HIGH – LOW) * 1.1/4
R6 = (High/Low) * Close
R2 = CLOSE + (HIGH – LOW) * 1.1/6
S5 = S4 – 1.168 * (S3 – S4)
R1 = CLOSE + (HIGH – LOW) * 1.1/12
S6 = Close – (R6 – Close)
S1 = CLOSE + (HIGH – LOW) * 1.1/12
S2 = CLOSE + (HIGH – LOW) * 1.1/6
We have a hot button for calculating these thanks to our moderator Kyle. Here is
a link to the forum topic on this: https://forums.bearbulltraders.com/topic/2511tool-pivot-point-helper-for-s5-s6-r5-r6-values/?tab=comments#comment19306
S3 = CLOSE + (HIGH – LOW) * 1.1/4
S4 = CLOSE + (HIGH – LOW) * 1.1/2
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Setting up Camarilla Pivots
To setup the Pivots you need to add the pivot
study by right clicking the chart and selecting your
Study Config.
Next you need to add the study to you chart.
Before configuring go ahead and click on the
“ConfigEx” button and uncheck all the values in
the General Config. This will help the screen fit.
The bottom screen shot shows you how I have my
point configured. You will notice that I have them
color coded in a very specific way. The 1 and 2
pivots are coded Grey because they represent the
“Grey” area. Trades in here should be based of
value to support and resistance levels from Prior
Days.
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Color Coding your
Camarilla Points to DAS
Green Pivots are Buying Levels. S3 will act
as our principal buying area for for the S3 to
R4 Traverse. R4 will act as a location for
Breakouts and Extreme Reversals.
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20
Color Coding your
Camarilla Points in DAS
Red Pivots are for shorting and extreme
reversals. R3 will be our principal shorting
location for a traverse down to S4. S4 is a
location for reversals or extreme break downs.
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The “Grey” Area
One of the many things we are going to cover is “The Grey Area”. In
the Camarilla strategies we like to wait for the stock to establish
value and then reject it. As that rejection happens the goal is to play
the extremes of the price action. Wait for the price to rally and then
short for a long trip back down. Or let it sell off and accumulate then
play it long for the ride back up. This gives us the best possible RVR
for our trades.
The Grey area is where you are most likely going to get chopped.
Since you are playing close to value you will often find yourself taking
lots of stops as you wait for the stock to pick a direction. This is why
we want the extremes. To avoid the chop. If you keep trying to play
value, it’s like tossing a coin at best. But in reality, it’s worse. Because
when we are at value, we expect the price to move up and down as it
builds momentum.
We will use our Camarilla Pivots to help find the grey area. And using
the book we can dial it in further. The longer we wait after the open
the better the book is and the easier it is to see value. Since we
haven’t established value in the first few minutes, there is no way to
tell if its being accepted or rejected. So, in that regard we are
attempting to gamble at what we think the value will be. Rather than
waiting to see what the value is.
On the next slide I’m going to show you quick look at the Grey area to
give you an idea of what we are looking to avoid.
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The “Grey” Area
R4
R3
S3
S4
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The “Grey” Area, Why?
R4
R3
S3
S4
24
Inside Day
A major part of the Pivot System is reading the relationships between pivot
ranges to determine if you are more likely to have an inside day or an
outside day. An inside day is represented by a wide Pivot range. In most
instances the prior days pivot ranges will be narrower, and you’ve most
likely recently had a breakout or major move into this range.
An Inside Day means exactly what you would think. Since the ranges are so
wide, we are not expecting a breakout. Rather we are expecting traverses
inside this range from the top to the bottom and vice versa. This is one of
the best things you can do you help avoid the chop. By deciding what kind of
range you are expecting. You can plan your trades accordingly with a solid
bias. If the price is opening near the top of the range and it looks like its
going to be an inside day. Then you won’t be looking for any longs. You will
wait for the price to squeeze to the top of the range. This will allow you to
trade it short and get maximum potential out of it since you will have the
entire prior range beneath you.
Naturally a reminder to please wait for a clear volume signal before
entering a trade.
25
25
Outside Day
As mentioned before the other type of day is an Outside Day. And Outside day or
Breakout day often has more chop in the beginning of the session but eventually
makes a breakout in search of a new value area either higher or lower. Remember
we play the extremes and R4 is the extreme. As the momentum builds and we
breakout from the 4 levels on a narrow pivot range. We can expect a large move
out of range.
Outside days can be very difficult for momentum traders. Because most
momentum traders like to get in early, tripping over dollars trying to get dimes.
On a day with a tight pivot range, it will help to wait and let the price bounce
around inside the range for a while. Sometimes 5 minutes, other times an hour or
2 while value is established. Once the price breaks out from R4 you can expect a
long run up to the next value area. Once you are on an R4 break you should expect
to continue on trend until a large order halts the movement and attempts to set
value. On breakouts I often like to take a little profit then set a trailing order to
take advantage of the move. Only getting all out once we lose the trending
average.
These days can be some of the most rewarding and large moves can be expected.
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Value Accepted
and then rejected.
The SPY has been a perfect example of Pivot Relationships
over the past couple of days. And the acceptance and
rejection of value.
Notice how on 5/20 we had a tighter Pivot range. This
caused the expectation of an outside day. The price broke
for 415 and set value for the next session.
On 5/21 we have a very wide Pivot range. Even with a
bullish position because of its wide range we are not
expecting a breakout. So we play it as an inside day. The
SPY rallied in the premarket and failed R3 at the open for a
return to Value.
On 5/24 we have a significantly tighter Pivot range which
points to a breakout outside day. With tech rallying the SPY
rejected value and broke out from R3 going on a run for
420.
Each Day on the SPY play as you would’ve expected given
the ranges.
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Forming a Bias
Going along with our cheat sheet lets talk about forming a Bullish Bias. The
most notable way to determine this is the pivot relationship. If the pivots are
above the pivots from the prior session. We are already going to have a
more bullish concept overall. This doesn’t mean it’s time to get long. That
just means in the overall trend this stocks price seems to be on the rise from
day to day.
Before we can confirm our bias we need to see where the price opens. If the
stock is in play this is a great time to form some contingency ideas. For
instance, if the stock price opens near R4 I’m going to let it sell off for a bit. If
it reclaims R4 I will go long. However, if it opens under R4 and struggles I
will look for a short for a trip back down to the most established area of
value.
Bullish Bias:
Today’s Central Pivot Range
is Higher than previous
sessions. (Keep in mind over
lapping CPRs are still bullish just not as strong.)
Today’s CPR
Previous Sessions CPR
Remember we are playing Pivots. Basically, a decision point. We either go up
or down but we are going somewhere, and a choice needs to be made. If we
continue up from the R4 breakout then we can estimate we are going in
search of new value. As long as the volume stays consistent, and we don’t hit
any large sellers it is likely we will continue to run. But if the stock loses
momentum, we will come right back down.
29
Forming a Bias
Our Bearish Bias is formed in the same way only in reverse. Since our
Ranges are going to open lower. We are seeing a trend down on the larger
time frame. Again, this doesn’t mean we are a short of the go. Quite the
opposite. We need confirmation. The only way we get that is to wait for the
stock price to open and see where value sets. But for now, we can overall
have a Bearish Bias on the trend.
The reason we need the price to open is the overall trend gives us very little
information. Sure, we’ve moved down yesterday. But what if we are near
the bottom of a significant range. This is why we need to factor in other
variables like significant levels and value across the broader time frame. We
can’t play the rejection of value if we don’t know where it is. The cam points
will give us some ideas of ranges and where the price can go but its up to us
to decide which direction the price will pivot and how to trade it.
Bearish Bias:
Prior Session Closed below
its CPR. Today’s Open
price is below the Pivots.
Previous Sessions CPR
Today’s CPR
In many instances you will have a strong upward move on a bearish trend.
This doesn't mean you don’t trade it. It just means you need to have the
proper expectation for the trade. Since you are overall in a bearish trend it
is likely you are going to run into resistance faster. So, traverses will often
be a great tool to play the bottom of the range back up to value. We will
cover those strategies again shortly.
30
Forming a Bias
When today’s Pivots are closed in by yesterdays Pivots. We are unable to
form a Bias on the overall trend. This is not much of an issue because many of
the major breakouts can happen from tight pivot ranges like this. Because of
the tighter range we most likely have compression occurring on the larger
time frames. This means the stocks is near a breaking point that will cause it
to move in one direction or another. If the stock has a viable catalyst these
tight Pivots combined with an outside day can produce some very explosive
moves in one direction or another.
Next, we will talk about confirming our Bias with the open price. Where the
price opens is critical. If the price opens to high in the range and doesn’t have
the correct momentum, then you can expect a return to value within the
pivots. Breakouts take a lot of effort on the part of the market. So, the signals
are often quite clear. Sometimes the lack of volume can be all the information
you need to take a short as the stock breaks trend in the opposite direction.
No Bias:
Today’s CPR is between
Yesterdays CPR. Likely Chop
Then big move.
Previous Session
Today’s CPR
31
Forming our Bias
Where the price opens as I
said before is critical to
how we play the stock.
Even stocks on a bullish
trend top out at some
point. And the last thing we
want to do is go long at the
top of a trend just to have it
fail and return back down.
Not paying attention to this
will often result in getting
trapped in the dreaded
chopfest!
If the price opens above or
below the pivots we are
looking for a breakout or
extreme
reversal
depending on the VPA. If
they open within the price
then we are looking out for
Traverses back through the
range and breakouts if we
are have the setup for an
outside day.
No Bias:
Today’s CPR is between
Yesterdays CPR. Likely Chop
Then big move.
Previous Session
Today’s CPR
32
One of the most important things to decide is if we have
the potential for an outside day or not. Either way we will
have an opportunity to make money. But you don’t want to
be trying to go long near R4 when the stock has a wide
pivot range. The reality is you are already extended, and
the probability lies much greater to the downside at that
point.
In an outside day you will have an extremely narrow pivot
range. This tight look with result in a lot of chop. Therfore,
you must avoid the grey area entirely. Wait for the
extremes to be rejected and play either breakouts or
Extreme reversals of the 4th levels.
On an inside day you will have an extremely wide pivot
range. This range will often result in lots of chop near the
extremes. In this type of range, you will play traverses from
and to the 3rd levels. Since the range is wide there will be
plenty of space here for you to get profit. Just make sure to
be patient as these trades can take some time to move
since we are just moving up and down off of previously
established value zones.
No Bias:
Today’s CPR is between
Yesterdays CPR. Likely Chop
Then big move.
Previous Session
Today’s CPR
33
Value Accepted
FB has a tight Pivot Range and
although it is lower, it looks to open
near R4. If the price holds and we
break R4 and a large move is likely.
Since R3 lines up with yesterdays S3
which provided a lot of support I’m
going to look for R3 to hold today. If it
does and new highs are made plan is to
go long.
34
Step 1: Develop Trading
Bias based on the Pivot
Ranges
Bullish Bias:
Today’s Central Pivot Range is Higher than previous
sessions. (Keep in mind over lapping CPRs are still bullish just not as strong.)
Previous Sessions CPR.
Step 2: Confirm the Bias
Prior Session Closed above its CPR. Today
the Price is opening above the pivots. (If the
price opens under R4 then be looking for a trend reversal short at
R3..)
Prior Session Closed within its CPR. Today
the Price is opening high within pivots. (If the
price opens under R4 then wait for the stock to sell of and bounce
out of the grey area. Long at R4 or the retest of R4 if VPA supports.
Otherwise, short R3 if breakout is rejected.)
Step 3: Judge
potential for
Trades Range
Inside or Outside Day
A narrow CPR has two views. Chop
and Breakout. You will need to wait
for confirmation. Don’t over trade
this range as it may take some time
to pick a direction.
strong.)
Long Bias: (Always use VPA/Setups to
confirm Entry)
BUY at S3 and Target R4 using whatever
partial taking method you choose in
between.
If price opens above the CPR then BUY at
R4 of retest and target R5 and R6
Today’s CPR
Bearish Bias:
Today’s Central Pivot Range is Lower than previous
sessions. (Keep in mind over lapping CPRs are still bearish just not as
Step 4: Trade the Cams
Prior Session Closed below its CPR.
Today’s Open price is below the Pivots. (If
Prior Session Closed within its CPR. Today’s
Open price is low within the Pivots. (If the open
the open price is above S4 then be on the lookout for a trend
reversal long at S3.)
price is above S4 then wait for the stock to squeeze and reject S3.
Go short at S4 for breakdown if VPA supports. Otherwise, be on
the lookout for a trend reversal long at S3.)
A wide CPR means you are more
likely to be bound to the range. In
this setup the idea is to buy as low
in the range as possible and sell as
high in the range as possible.
Short Bias: (Always use VPA/Setups to
confirm Entry)
SELL at R3 and Target S4 using whatever
partial taking method you choose in
between.
If price opens below the CPR then SELL at
S4 on retest and target S5 and S6
Previous Sessions CPR
Today’s CPR
No Bias:
Today’s Central Pivot Range is between the prior
session's CPR (If it doesn’t chop a big move is likely.)
We can’t confirm a bias on an inside range. Nothing to do here but wait. We need to watch
the VPA for direction signals at the open. Then play the breakup of R4 or the Breakdown of
S4. Use R4 and S4 as bias indicators. Once value is established on either side and holds you
can play the trend for what will likely be a solid move to the top or bottom of the range.
Previous Sessions CPR
Today’s CPR
Lots of potential for a big move.
However, we do run a chance to get
chopped as well. It will be important to
be patient with this range. We are likely
consolidating in a daily range, so we
need a breakout and confirmation to
take a position.
*If the open price is outside the pivots
despite a narrow CPR. Look for a run in
either direction to S5 or S6 before
trend reversing and coming back inside
the range.
(Always use VPA/Setups to confirm Entry)
Open Above CPR = Long BIAS
BUY at R4 targeting R5 and R6
Open Below CPR = Short BIAS
SELL at S4 targeting S5 and S6
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What is an Order Book?
• The term order book refers to an electronic list
of buy and sell orders for a specific security or
financial instrument organized by price tier
“Level”.
• An order book lists the number of shares being
bid on or offered at each price point, or market
depth. Often referred to as a Level 2, or DOM
(Depth of Market). It also identifies the market
participants behind the buy and sell orders,
though some choose to remain anonymous.
These lists help us traders, the market maker
algos, and also improve market transparency.
Providing us extremely valuable trading
information.
• General rule of thumb when reading the order
book is “Price moves to Size”
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Balanced Book Example in DAS
Orders evenly
placed
throughout the
book
No Orders at
any price or
so many
orders you
see no
imbalance
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Bullish Book Example in DAS
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Bearish Book Example in DAS
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Watch for Icebergs
What is an Iceberg?
Earlier we talked about Liquidity and Supply and referenced how important it is for large
accounts to have enough of it to perform their transactions.
What do they do if there isn’t enough?
Simply put they use an Iceberg order. An Iceberg order is a large order that is intentionally
having its display hidden electronically on the Level 2. This is actually something that we
can do in DAS although most of us don’t take position sizes large enough to use it.
The reason they do this is because of the lack of available supply or demand. As you recall
you can lose a lot of money if you get a lot of slippage. Imagine trying to sell off 40000
shares. Once everyone spots your order, they are going to start taking profit in front you.
This will often cause your target to get missed.
When using an Iceberg like the example below you can choose to only display 1000 shares
at a time. On the level 2 other traders will only see a small 10 lot even though there’s 40,000
shares there.
Icebergs have a very characteristic look on the L2. You will see the lots recycle. You’ll see a
50 lot for instance as the price goes to it ,the quantity drops to 10. The as the price moves
away the quantity suddenly moves back up to 50. You’ll see it happen over and over again
until the Iceberg melts or the other participants exhaust themselves.
So like an Iceberg the majority of the orders are not visible. When trading if you are
struggling to move to a new price but can’t figure out what’s in the way. Start looking for the
signs of an Iceberg. If it’s to big and the Market Maker exhausts themselves trying to fill the
order. Imbalance can set in very quickly causing an extreme move in the opposite direction
that will provide amazing RVR.
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Watch for Icebergs
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What is a Heatmap?
A heatmap is a DOM or Depth
of Market that has been
organized into a visual
representation.
This allows for an easier
visualization of price levels as
participants enter and exit the
market. And has orders are
requested and transacted.
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Advantages of using a Heatmap
• Historical Information
• Easily identify areas of high
supply and liquidity.
• Easily identify areas of low
supply and liquidity
• See Participant decisions being
made in “Real-Time”.
• Easily read Market Bias
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Jigging Analogy
Jiggin’ Analogy:
Per usual my level of country cannot be contained
in a simple presentation. Since I think in pictures
and metaphor, I often find my best examples are
stories related to things unlike trading at all.
In this example I’m going to talk about how the
market maker entices participation but constantly
teasing the bid trying to get them to chase.
Like the way you get a fish to come of the bottom of
a lake if you are using a Jig Lure. You keep teasing
the fish by lowering the lure lower and lower until it
comes off the bottom. When it does you reel as fast
as you can and try and get the fish to chase. In
similar fashion the Market Makers will lower the
price attempting to find the bid or raise the price
until they find that seller. And when they do they
run as fast as possible.
On the image to the right notice how the bid closes
the position and then moves it up to a higher price
at almost the exact same time.
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Jigging Analogy
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Advantages of using a Heatmap
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What are Dots?
• Dots in a heat map represent
Market Order transactions.
• You must have markets to fill
limits
• The Bigger the Transaction the
bigger the dot.
• The dot can only be as large as
the number of shares transacted
at the price level. A large
transaction can be split into
multiple dots at multiple levels.
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Example of Buying
• Buying shows as Green Dots.
• Just because you see buying that
doesn’t mean the price is going up
afterwards. It just means there’s
buying. It could be a short
covering in front of a large order.
It could be an eager bull going
long. Without a ladder the price
has no where to go to. A buyer
without a seller. So we continue
down.
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Example of Selling
• Selling shows as red dots.
• Just because you see selling that
doesn’t mean the price is going
down afterwards. It just means
there’s selling. It could be a long
selling in front of a large order. It
could be an eager bear going
short.
• In this example we can see we
sell into a large buyer. As the
price moves lower a large
amount of market orders cause
the price to drop quickly.
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Volume Delta
• Takes the number of buy
transactions minus the numbers
of sell transactions to return a
positive or negative share value.
• Example if 3000 shares are
purchased at the same time 5000
shares are sold then the value of
the dot will be returned as 2000
shares sold.
• Larger time frames group
transactions more making volume
delta very helpful.
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Total Volume
• Takes the number of buy
transactions minus the numbers
of sell transactions to return a
positive or negative share value.
• Example if 3000 shares are
purchased at the same time 5000
shares are sold then the value of
the dot will be returned as 2000
shares sold.
• Larger time frames group
transactions more making volume
delta very helpful.
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Volume Pressure “my term”
• The price is stuck between the best
bid and best ask. Market orders to
buy are applied to the ask. Market
orders to sell are applied to the bid.
To move the price, you need more
market orders to one side.
• I call this “Volume Pressure”
• You can see using the book how
many shares are available and then
watch the tape to see if enough
orders hit to move the price.
• Like lift on a plane wing volume on
the bid or ask will cause the price to
move in that direction.
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How News Effects the Book
• Buy the Rumor Sell the News
• News Algo make very fast
decisions.
• Anticipation of news events
can clear the book. This creates
low volume, high volatility
opportunities.
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How News Effects the Book
• Inititial jobless claims moved
the price into a perfect spot to
buy where large buyers waited
on the book.
• A couple days later the market
gapped.
• The market moves on the large
time frames by news events
and economic data. This is the
catalyst the MMs use the
justify price movement.
Follow me @ThorYoung
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Better Entries
• Since you can see where
the institutions are
targeting price levels
you can determine
where to take profit.
• Use this to plan your
entry and risk
management
• Don’t trip over dollars
to pick up dimes.
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Better Exits
• Institutional orders are
most often grouped at
large round numbers.
• Place profit targets
slightly in front of large
institutional orders to
get fill priority as the
price moves to fill
them.
• Go all out when there
are no more
institutional orders
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Book Flips
• A book flip occurs
when the market
shifts its bias from
Bullish to Bearish
and vice versa.
• Book Flips can
happen slowly
• Book Flips can
happen suddenly
• Lack of new sellers
helps fuel drop
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Buying the Book
• Occurs when a larger
number of transactions
occur then are available
on a large portion of the
order book.
• Causes massive price
movement in a very quick
period of time.
• The reason low floats are
so dangerous. Because of
the often-low price and
low number of shares
available to transact.
Anyone with a significant
bank roll can move the
price easily buy throwing a
lot of market orders into
the book.
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TSLA EXAMPLE
• As stock open order
book is obviously bullish
• Large institutional seller
marks target for trade.
• Stock does an R4 retest
after opening under R6
which is a pivot play. Bid
steps up to support
retest and order book
stay very bullish. Trend
long breakout.
• Many buy orders left on
book showing price
running to seller.
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ES Example Book and Level
• As stock open order
book is obviously bullish
• Large institutional seller
marks target for trade.
• Stock does an R4 retest
after opening under R6
which is a pivot play. Bid
steps up to support
retest and order book
stay very bullish. Trend
long breakout.
• Many buy orders left on
book showing price
running to seller.
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ES Example Book and Level
• Large Buyer sits directly
on S4.
• Stock price transacts
down to level and
immediately bounces.
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AMD Trade based on R3 and Selling
AMD opened in support and rallied across the range and exhausted on a
large order. As buyers started posturing lower the market went weak and a
sell off began driving the price back down to bids near 104.50
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Question & Answer
63
A Complete Day Trading System
@ThorYoung
Audio Book Version Available!!
www.bearbulltraders.com/pivotbook
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