So here is the review of Part 3 of the Six part series. This one is titled "Trade Execution"
Part 3 of 6 - Trade Execution
Though execution is an important topic, a lot of what is shared in the video is not relevant from from an Indian perspective. I would still urge you to watch the video. Below are the key ideas shared in the video from an Indian perspective.
Scalping Efficiency - Here Tom talks about understand the products that you would like to scalp and then goes on to explain which are the better suited products in the US market. Let's look at products in India , given the way taxes are structured, Options are any day more cost efficient products in India.
Let's compare the costs - 1 lot of NIFTY Futures vs. 1 lot of slightly ITM Call Premium (Delta 0.7 approx)
Compare the STT which is almost 12 times more for Futures. The net loss of trading for a 1 lot is 6 times higher in Futures. Also note the break even points. almost 2 times more. I would suggest you do the math yourself using the Zerodha Brokerage Calculator.
Orders - Though Tom talks about "Marketable Limit Orders" more about it here, we in India don't have that choice. Its either a Market Order or a Limit Order. Yes, there are other orders like Cover Order and Bracket order that is available, but they don't work for my trading style. Since every penny matters in Scalping, it only makes sense to do limit orders and if required manage the position by scaling-in. But both entries and exits have to be on Limit orders unless in an exceptional situation you just want to square off and scoot.
Default Size - Tom says 1 lot has been a default size for him, but then he is talking about futures in the US. I would answer this in a more nuanced way. (Disclaimer - This is the method that I use, there is no best way to do it, there are several ways, just that the below described method works better for me, happy to hear your comments)
I trade in a way, where I identify a trade location. Once price gets to my trade location, I define boundaries of that location, and scale-in to my position in tranches of increasing sizes, for example if 10 is the total number of lots allocated for the trade in a specific price zone of 10 points, I would scale in with a the fall of every 3 or 4 points with 2,3, and 5 lots. This approach works (only) if used in a context of a larger probabilistic framework. Similarly, I also scale out of the trade and trail around 30% of the position to catch larger moves.
So the bottom line in terms of size is, define the size that you would like to trade, and don't change it arbitrarily, also define a stop loss level based on the average cost of the position. More on this when we talk about Risk Reward ratios.
Market Depth - Most of us i.e retail traders have access to Level 1 Market Depth, which shows us 5 best ask and bid prices, I personally do not see an edge in that, however, glancing at it would give us a sense of the bid-ask spread, volatility/rate of change, and the volumes being traded.
Order flow - To view this, you would need a tick data feed, preferably e-signal and some charting tool like Market Delta for foot print charts. This data again has limited predictive capabilities, but definitely better than the minimalist market depth. Here we can, to some extent, identify large lot buyers, spot cumulative volume delta divergences etc. I subscribe to these through Vtrender.
All these tools help us make a probabilistic guess about the very near term market direction (30 minutes to 2 hours), and add to that a cost efficient product helps us make the best of the market moves.
Hope you found this useful.
Feel free to post your questions or write to me on firstname.lastname@example.org