2012issue C1230
Checklist exits and the limits of visible book depth
A pre-trade checklist writes discipline, the stop-loss, the profit target, and the holding period before an order is sent. After 2007 routing changes, displayed book size is a weak filter of demand and supply and a poor substitute for that written unit.
- Discipline is the first step of the pre-trade checklist; without it, later profit-target and stop-loss rules have no operational effect.
- A planned risk-reward ratio must be set before entry and kept consistent with the holding period, from an intraday hold to multiple weeks.
- Aims of 5 to 10 cents of gain are inconsistent with 40- to 50-cent losses on the same short-horizon style of trade.
- After 2007 best-price routing, unseen liquidity pools, and subpenny pricing, displayed book size is a weak filter of demand and supply.
Discipline is the first step
Discipline is treated as the first step of a pre-trade checklist. Without it, later profit-target and stop-loss rules are said to have no operational effect.
The pre-trade checklist is a short, repeatable sequence. It fixes discipline, planned loss, planned gain, and holding period before an order is sent.
A planned ratio before entry
A planned risk-reward ratio is required before entry. In a 2:1 example, two full losses of a given size are offset by one full win of twice that size.
Short-horizon trades aiming for 5 to 10 cents of gain are described as inconsistent with 40- to 50-cent losses on the same style of trade. The same risk-reward arithmetic is said to apply across holding periods from intraday trades to multi-week holds.
A pair-position example sets a 10-cent stop-loss against a 30-cent profit target inside an observed 80-cent trading range.
Displayed size is a weak filter
Visible order-book depth is described as restricted to market makers in the 1990s and then opened to all participants in the 2000s, after which false bids and offers appeared as a known abuse.
After 2007 best-price routing, plus unseen liquidity pools and subpenny pricing, displayed book size is presented as a weak filter of true demand and supply and as a poor use of a trader's service budget.
Displayed liquidity is size that appears on public depth but may not remain executable after routing, hidden pools, and finer pricing.
All readings on this track · 7 readings
- 1991Testing dealer inventory caps against a frozen order tape
- 2003Cheaper access still left a routing and cost problem
- 2006Order-book depth and passive flow for execution
- 2008Depth, close imbalances, and pairs on one clock
- 2012Checklist exits and the limits of visible book depth
- 2013Constructing forex orders from provider imbalance and book depth
- 2017Ladder, trail, and average as one execution ticket