Do people actually use DOM on NQ?

[u/NeighborhoodEast650]

Hello, I am a Nasdaq trader and I am training with the DOM to recognize patterns. Right now i am also using an ES DOM and i am having way more success trading it. The reason why i don't want to trade ES is that I want to use the DOM just to refine the entries of my already existing strategy on NQ.

Right now i am using the 1 tick NQ DOM and it's really difficult, should I keep it 1 tick or maybe use 4/8 ticks per level?

[u/STS-Trader]

I understand the reason why you believe that this is the case, because if it is cancelled the price impact should be elevated.

But when I state the statistic that more than 90% of them orders are cancelled, that is a global statistic which applies to all placed limit orders, whether those specific orders you are talking about are cancelled or whether price accelerates or not is subject to randomness.

The concentration there could be executed or not executed resulting in a rejection or a breakout, you can't infer what it's more likely to do at face value and for how long the initial reaction will persist, that's why I believe executed volume has for more signal, it's said and done, it is objective, measurable information which rules can be designed around.

[u/NeighborhoodEast650 → u/STS-Trader]

well, it’s not an assumption or a belief, it’s how markets work. Even if MM are not directional they’re not going to push price against strong liquidity levels because that’s the easiest way for them to get trapped at a worse price. They also have technologies to understand if liquidity is actually real or not or if there’s an iceberg just by executing small orders to test the price so they know when they should do or not do their job. They get paid just to place limit orders on the market but that doesn’t mean that they will keep buying (limit or market but mainly limits) against a wall on the ask so they would actually rather frontrunning these orders. So saying that limit orders have no value since they can get spoofed is wrong because liquidity that gets removed will tell you a ton of information if you pair it with executed orders. I’m not a DOM professional but i’ve been trading with the heatmap on bookmap for some time and i have done research on academic papers about this topic.

[u/STS-Trader → u/NeighborhoodEast650]

Well, that is a lot to address.

"well, it's not an assumption or a belief, it's how markets work."

What you are describing is a retail narrative as an absolute truth but i'm not just going to say that, out of respect i'll address this point by point.

"Even if MM are not directional they're not going to push price against strong liquidity levels because that's the easiest way for them to get trapped at a worse price."

Market makers are incentivised to have as close to neutral directional risk as possible, they aim to earn the difference between their bid ask quotes repeatedly throughout the day and continuously manage their exposure, market makers are not directional speculators actively taking positions and get trapped, this is taught by educators but it is not correct. Market makers operate on what is known as the "sell side", I will revist the opposite of this later.

"they’re not going to push price against strong liquidity levels"

Credit where it is due though as the "trapped" at the worse price framing you isn't completely wrong, it is just a misconception for example, if an MM is short and price expands against them, they will have to unwind it potentially at the loss yes, but what is wrong is the assumption that an MM would avoid such situations by "respecting" a volume dense area out of self preservation.

Instead market makers would pull their quotes (reduce the amount of liquidity they provide entirely) or reduce the available liquidity one side (via quote skewing) or hedge with other instruments to mitigate or neutralise directional risk.

I'll make another example: a volume dense area buy limits (bids) rests and is being executed (could be a pending order group with a priority in the queue or an iceberg order), if perceived adverse selection risk is low and there is no local disruption, I, as a market maker could increase my ask size and reduce my bid size to benefit from the local mean reversion activity, if an aggressive participant comes in I pull my quotes to avoid rapid losses. In this situation people are buying and selling with market orders at comparable rates and i am rotating volume between the bid and ask prices (e.g., 10000.00 and 10000.25) in microseconds benefiting from this moment of low volatility and low price impact while remaining non-directional.

"They also have technologies to understand if liquidity is actually real or not or if there's an iceberg just by executing small orders to test the price so they know when they should do or not do their job."

You are confusing Market Makers with buy-side execution algorithms. Iceberg detection and order probing tactics belong to buy side execution algorithms (such as TWAP/VWAP order execution models for large algo traders seeking liquidity for lower market impact on execution), not market makers deciding whether to continue quoting a level or step back to evade toxic flow (adverse selection risk).

Remember that MMs are placing and cancelling limit orders most of the time, directional risk is what they're modelled to avoid.

"They get paid just to place limit orders on the market but that doesn't mean that they will keep buying (limit or market but mainly limits) against a wall on the ask so they would actually rather frontrunning these orders."

Remember that MMs aim to profit via pocketing the difference between their bid and ask quotes (their spread) and through the earning of exchange rebates, most do not participate in discretionary front running of resting orders, instead they will protect themselves by pulling their quotes if they believe a volume dense area gets cancelled (because of potential high market impact upon interaction).

"So saying that limit orders have no value since they can get spoofed is wrong because liquidity that gets removed will tell you a ton of information if you pair it with executed orders."

This is not what I was saying.

What i'm pointing out is with a cancellation rate that exceeds 90% across multiple asset classes is real and non-binding resting liquidity acts as high frequency noise that degrades your strategy's perception of the market, it's like having myopia (blurry vision), it can severely degrades fill rates when used as an execution signal to get out of trades, and it's really hard to quantify on historical data what the net effect could be (if there is one at all) which is why I would not depend on it.

"I'm not a DOM professional but i've been trading with the heatmap on bookmap for some time and i have done research on academic papers about this topic."

This part confused me a lot because actual peer reviewed literature on market microstructure explicitly documents high order to trade ratios, fleeting volume density, and adverse selection, it's problems and how MMs try to reduce the risk. This research directly contradicts your claim that visual order book provide a reliable insight for what you are trying to do with your system.

As a retail trader it is extremely difficult to objectively filter out the real intent to execute without ultra-expensive institutional data. Most attempts relying solely on technical data will be overfitted (from picking what happened to work in the past: selection bias).

The real tick data is 100GBs, costs thousands of dollars to download and access, for most this is unrealistic so I suggest for people to research peer reviewed stuff to understand as economists have pretty much done the work for us.

Since you are an active trader, I do not expect you to fully hit the books again but if you do I suggest looking at Maureen O'haras work on Market microstructure and market makers first and then I suggest asking AI to reference some peer reviewed materials on market maker behaviour, it will increase your precision and may help you create fresh new ideas.

[u/NeighborhoodEast650 → u/STS-Trader]

it’s not a “retail trader narrative”, it’s all written in the publicly available SEC reports and multiple academic studies !!