Heatmap in Trading: How to Learn What Market Depth is Hiding?
Heatmap is a direction to determine where fluidity is in the market and how liquidity-providers are behaving. In other words, it is a room to determine where the actual orders in the grocery store are being made. In this article, we will explain what Heatmap does and why it is utilitarian to traders .
price charts : Is there a better method acting ?
Since equity and futures markets first developed, most traders have relied upon price charts to understand the behavior and psychology of early traders and institutions. In the early on days of trade, these price charts were made up of lines or bars. Since the late 1980s, they have been made up of “ candles ” that show an unfold, near, high gear, and gloomy for the given time-period .
These types of charts are a tried-and-true method acting for understanding the market. They are surely better than relying on gut feeling to make trades. But these methods were besides developed during a time when computers were much less brawny than they are today and when many sources of commercialize information were not available. This means there may be better ways of understanding the grocery store today than have been available so far .
For example, before the 1980s, there was no publicly available information about limit orders. If you were a soy trader before the 1980s, there was no way for you to know if a deal order for 1,000 contracts of soybeans had been made at $ 16 per repair. today, this data is available. And since the price is ultimately determined by these types of orders, it is possible to develop a chart method that provides this information .
This is what Heatmap is. It is a better method of charting fiscal assets – better because it charts the actual determinants of price, the orders themselves, alternatively of their consequence .
What is Heatmap ?
Heatmap is a ocular representation of the limit orders put into the order book. On the right side of the vertical timeline is the current holy order bible. On the leave side of the erect timeline is the stead of the order book in the past. This information is recorded as a color-coded map .
In this image, a large number of limit buy orders can be seen at 2741.50 ( orange line ). The red, dot line is the “ best ask ” ( depleted price limit sell order ). The green, dotted line is the “ best bid ” ( highest monetary value restrict buy order ). When the best bid and ask first began to hit the area of eminent fluidity at 2741, they rose .
They are now testing the sphere again, and support can be seen at this degree. There is besides a large total of limit sell orders at 2745, as represented by the chicken occupation at that tied. This implies that if the best bid and ask ascent to 2745, resistance can be expected .
In Bookmap, there is no limitation on soar. Traders can analyze the market on unlike time frames up to nanoseconds ( although in drill it ’ s never necessity ). here is an exercise of a higher solution position :
This provides a close-up tear of the best ask ( crimson line ) and best bid ( green line ). The price of the most holocene transaction is indicated with a rectangle on the right side of the screen. In this case, the most holocene transaction was a market sell order for $ 2740.25. This transaction occurred at the best command ( the highest price specify buy order ) .
The bubbles shown indicate the volume of market orders. A green bubble means there were significantly more market buys than marketplace sells. A bolshevik burp means the opposite ( significantly more market sells than market buys ). A burp that is partially loss or green indicates that the ratio between market sells and buy was more balanced .
profitable trade with Heatmap
Heatmap is not a trade “ system, ” nor an indicator. It doesn ’ triiodothyronine order you when to buy or sell. It merely provides accurate information about what grocery store participants are doing. To the extent that inaccurate information leads to badly trades, Bookmap ’ s Heatmap can allow you to eliminate this trouble. This can lead to a more profitable trade business .
however, the Heatmap does not interpret market data for you. In our educational materials, we provide theories as to what order book information “ means ” in one context or another. But ultimately, you must decide how to trade based on the information Bookmap gives you .
A dear doctrine of analogy for trade with Bookmap is real-time multiplayer games. If you play online poker, for example, you can choose to pay care to early players ’ demeanor. You can pay attention to whether a actor bets or folds in this or that context. You may still misinterpret why the player is betting or close up, but at least you have more information than you would if you only paid attention to your own cards. The heatmap displays true and non-aggregated market astuteness data with a preciseness of up to the pixel resolution of your monitor. This allows you to see what the early players are doing. This should be better than not being able to see their actions .
market data visual image in the era of HFT and AI
High-frequency trade computers can execute round-trip trades within milliseconds. artificial intelligence algorithms can detect patterns in huge amounts of market data. As human day traders, we do not want to compete against any of these powers .
so, what is the area in which a chart trader can still get a competitive advantage over machines ? The answer is visualization. A immediate proof of it is the being of Captchas :
The argue captchas are being used is because of the human ability to spot building complex patterns better than calculator programs .
We can besides observe a alike “ proof ” using Bookmap itself. Take a look at the double below. We can determine that it was generated by a single trader with a single glance, and we can see how it affects the price. Those who are companion with calculator skill and machine eruditeness understand how challenge it would be to detect this with a calculator program in real time .
The typical “stairs” pattern
The convention itself consists of precisely several ordering replacements, but this belittled snapshot of the chart contains many thousands of market data events. This is a noise that such a course of study must filter out. In accession, the program must deal with the make noise generated by this trader himself in a form of different meter intervals and ordain size during order modifications .
large traders are normally more influential on the market than little traders. On one hand, they can use their weight to move the market in the desire direction. On the other hand, they have the challenge to execute or manage large orders due to liquidity constraints. Because of this, they try to keep their activity undetected – to mask the fact that this activeness belongs to a single trader .
One of the techniques they use to obscure their natural process is to split big orders into smaller orders and place them one by one. To make it even more difficult for other robots, they add “ make noise ” in a shape of non-equal sizes of smaller orders and non-equal time periods between them. This is an effective method acting against other robots, but the human eye can spot it with a glance, as shown below .
Notice the different time scale of the two charts
here is another exemplar which is even more complicate for calculator imagination but hush easy for human sight :
This is unlikely to be a spontaneously created pattern by multiple traders
This is how Heatmap can be used in deal. By visualizing liquidity, Heatmap allows a trader to get the like data the robo-trading algorithm have access to, but with the lend advantage of homo sight and human sympathize. Like any other creature in trade, this doesn ’ t guarantee success. But it does offer an excellent means of gaining an edge over early traders who do not have it .