Winning With Market Depth

03/19/2014 10:12 am EST

Focus: TRADING

Jake Bernstein

Publisher, The Jake Bernstein Online Weekly Capital Markets Report and Analysis

Futures trader Jake Bernstein explains how one can use market depth to trade futures short term and reveals his favorite markets.

SPEAKER:  You can't look at a futures trading platform without seeing depth of market, but a question might arise, "What's the use of that?" I'm here with Jake Bernstein, veteran futures trader.  Jake, is depth of market important?  Can it benefit a short-term trader? 

JAKE:  It is the greatest thing since sliced bread.  It's really one of the best tools I've ever used if you're a short-term trader, but beyond just being a short-term trader, it lets you know where to place your order.  If you're prone to using market orders and getting ripped off, a tick here, a tick here, a pip here, a pip there, if you know the bid and the offer, you know the quantity, you know where to place your order; it's fantastic. 

SPEAKER:  Depth of market can also provide, in a certain sense, a sort of support and resistance that's beyond the capabilities of, maybe, traditional support and resistance analysis.  Is that true? 

JAKE:  Absolutely.  Couldn’t be more true.  The thing that is of concern with depth of market is when you're looking at depth of market and you see the bids and the offers—whether you call it depth of market, the ladder, or the order book, whatever you want to call it—those numbers can change very quickly, so you may see that there is like 1500 S&P to buy at a certain price.  Two seconds later, it's 900.  Two seconds later, it's 2300.  It's so fast you can't see it, so the problem with depth of market for most people is you have to be able to use that which is not moving so fast that you've got to be a computer to see it.  Another issue is how many of those orders are bogus?  Now, there are some rules; you can't place bogus orders that you don't intend to get filled, but once you've done it enough, you get to realize where support and resistance really are, and if you're the kind of trader who likes to trade with two or three ticks, there couldn’t be anything better. 

SPEAKER:  So when there are clusters of orders around certain prices, is that something that interests you, or you can see that something's going on? 

JAKE:  I look for the big numbers.  If I see there's 200 to buy here, 150 here, 1800 over here, and I'm interested in being a buyer, and then I look at the sell side.  I see there are 20 to sell here, 13 to sell here, 14 over here, 15 over here; I know it's a buyers' market.  Buyers are in control.  I will buy that sucker.  I'll wait three or four seconds.  Usually those trades, I'm in and out of within a few seconds, and that is a great gratifying experience, because if you like to do that kind of stuff, it's a lot of fun, and it makes money. 

SPEAKER:  Is there a market that you particularly love depth of market on? 

JAKE:  You're going to laugh.  You're absolutely going to laugh, okay?  I'm going to say it anyway, because, you know what?  The money's all green.  Soybean oil.  Soybean oil, U.S. dollar index, YM-1, the day session, even the S&P five-dollar Dow, and corn, believe it or not.  Currencies generally move too fast, and some of the currencies don't give you 10 deep, by which I mean 10 quotes above, 10 quotes below.  They'll only give you five.  Dollar index gives you a lot of numbers above, a lot of numbers below, but soybean oil is a beautiful thing because, a) it won't kill you dead if you're wrong.  If you're right, you make some good money.  It's $6 a tick, and it's slow enough so that you can practice and really understand how it works. 

SPEAKER:  That is amazing information on depth of market from a veteran trader.  Thank you, Jake. 

JAKE:  Thank you. 

SPEAKER:  You're watching the Money Show video network. 

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