@nithin Which is the best alternative to LTP based charts ? As a scalper, I should avoid LTP based charts, as LTP is past data. How are market depth based charts used for analyzing liquidity and buy/sell momentum?
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Market depth can be viewed on a 20 Level II data window in Zerodha. Other brokers also provide price ladder indicating the number of buyers and sellers at each price level. Not sure if anyone provides an overlay representation directly on the candlestick chart. So far, we only have – volume profile and OI profile (on Sensibull)
In terms of liquidity – if there are high number of buy and sell orders close to the current price (narrow bid-ask spread) – then it is considered liquid. This means that large orders can be executed without significantly affecting the price and lower slippage.
Regarding momentum – let’s say there are significant sell orders above the current price, it may indicate a potential resistance level where price might struggle to rise above. On the flip side, a large number of buy orders below the current price can mean a support level, meaning that the price may not easily fall below that price. Plus, price zones where the orders are very less – could indicate less support or resistance signaling chances of rapid jumps / gaps when price reaches there.
So, the key is to monitor where the orders are clustered and watch for changes in the order book to identify real-time shifts in sentiment. A sudden increase in buy orders might indicate growing bullish momentum, while a flood of sell orders could signal selling momentum. Veteran traders call this ‘reading the tape’.
But the contrarian take here is that in current market scenario where price spikes are so common – is there an edge in reading the tape? As a scalper, unless you have an algo to do this – reading market depth will cause burnout quickly.
Does it make sense? @Athul
It will be great to know more about your style of scalping, like which instruments and timeframe you trade etc.
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Hello Pratik,
Thanks for your insights. I am an Algo trader; I trade only FNO, trading very quick scalping, semi-automated, and automated as well.
But there are some other areas in which we need to look, and that is the most important side. “Tape reading or DOM trading” professional traders don’t look at LTP based price movements, as they are more focused on market depth.
For equity, we can consider volume to check liquidity, but for options, we can’t do that because the movement of options depends on many factors.
There are edges to analyzing market depth, but it is very difficult, and most of the time we don’t get a clear picture. Big players will spoof retailers by placing fake orders; after that, they will cancel immediately. So if we are an algo and statistical expert, we can crack market depth. In fact, 70% of trades on exchanges are automated.
As of now, I am in a learning phase, and it’s been years.