Greetings trader; this is the first instalment of a series which will cover the best tools used by professional daytraders of the Futures markets.
This article will introduce you to the Footprint charts, focussing on the Bid x Ask split view. At the end of this brief reading, you should be equipped with enough knowledge to understand how to read them and how Footprints candlesticks can be helpful to validate your trading setups.
Footprint candlesticks were first introduced to the public by Market Delta back in 2003. This trading platform isn’t available anymore as the society filed for bankruptcy in February 2020.
Being Footprint a registered trademark, these candlesticks can be found on various trading platforms under different names, often related to their display mode: Volume; Bid x Ask; Delta; VP.
Anatomy of a Bid x Ask Footprint
Footprint candlesticks, as said, have a wide range of display modes. The most famous one is the Bid x Ask split view, which is the central point of this article.
This candle’s appearance is very similar to the classical Japanese candlesticks, with the difference that they provide a sort of X-ray view inside the candles, highlighting the exchanged number of contracts between the Bid and the Ask in real-time for each price level.
As with regular candlestick charts, it’s possible to apply a wide range of periodicities to the Footprint charts as well: time-based; tick; volume; range; point&figure etc.
Here is the graphical representation of a Bid x Ask Footprint candlestick:
To recap, on the Footprint candlestick’s left side, we can read the amount of executed market sell orders, while on the right side, we can see the completed market buy orders.
Let’s see a practical example: if at “x” price we read something like 688 x 1514, it does mean that during the selected periodicity -which could be 5 minutes in case of a 5-minute Footprint- 688 contracts have been sold at market price, while 1514 have been bought at market price.
This information is derived from the DOM (Dept-of-Market) in the “recent traded Bid/Ask volume” column. The problem with the DOM is that it shows only the real-time activity. Indeed, the main advantage of Footprint charts lies within the historical representation of the so-called “aggressive market participants” activity on the price chart, making it possible to have some short-term memory.
One of the most common mistakes that inexperienced traders make -which often lack the knowledge-base of how to read the DOM- is to compare the orders that hit the Bid (left side) with those that lift the offer (right side) horizontally.
The interaction among market participants always happens diagonally from the Bid to the Ask.
When aggressive market participants -those who execute market orders, taking liquidity out from the markets- overcome passive participants -those who provide liquidity by placing limit orders- the traded instrument makes an uptick, or a downtick, according to which side prevails (Bid vs Ask).
Therefore the executed orders that we read on the Bid x Ask candlesticks must be read diagonally, following this pattern:
This reading scheme gives the trader an easy way to understand when the activity from one side overcame the one on the opposite side, creating an “imbalance“.
When the diagonal difference of the orders executed at the market between the Bid and the Ask prevails on one side, aggressive market participants are Imbalanced in favour of long or short positions, according to the given case.
Footprint candlesticks allow the trader to highlight the imbalance automatically by determining a % trigger difference value.
Example: let’s say that the Bid price of an asset is equal to 10, while the Ask price is equal to 10.5. Imagine a context where 100 contracts are market sold, hitting the bid price, while 400 contracts are market bought, hitting the liquidity lying on the Ask price. In this case, we would observe a 400% imbalance favouring the aggressive buyers.
It’s thus advised to set a value that enables us to highlight the relevant imbalances on our trading instrument of choice, filtering out most of the noise. In most cases, a value between 200% and 400% should cover the most relevant imbalances.
Anyhow, Footprint imbalances are not a rare occurrence. In fact, almost every candle during a trading session will likely show an imbalance. That’s why it’s advisable to filter the noise even more by paying attention exclusively to those imbalances with a higher than average volume on top of the so-called “stacked imbalances“.
Stacked imbalances are multiple, consecutive imbalances on the same candlestick for at least three upticks or downticks.
Once a stacked imbalance has been spotted, we likely must expect that the participants in control during the periodicity when the anomaly was printed will try to defend their position or that other traders will try to join in at the same level, following the flow.
If that doesn’t happen, the participants who generated that imbalance will likely close their position, causing a trend reversal in the short term.
In the shown example, we can see a stacked bearish imbalance, followed by a trend reversal which was generated by an absence of follow-through on the sell-side. Then we can spot a reclaim of the level derived from the stacked imbalance from the aggressive buyers.
To better understand why this reversal took place, it’s necessary to know what a “Finished Auction” is.
Finished / Unfinished auction
During an imbalanced bearish phase, the price will lower until there is sustained aggressive activity from shorters. When this activity vanishes, the price will stop moving.
The same mechanic is valid with an opposite fashion for the imbalanced bullish phases.
A finished auction is visible when there is a zero at the high of a bullish candle (zero Bid) or a zero at the low of a bearish candle (zero offer). This condition highlights the absence of interest from the market’s participants to bring the auction further above or below the current price.
On the contrary, an unfinished auction happens when the high of a bullish candle or the low of a bearish candle doesn’t show a zero, and the number of exchanged contracts is similar to what it’s shown in the middle of the candle, signalling the “unfinished business” from the aggressive market participants. Usually, if the price reverses by leaving this kind of anomaly, it would highlight some passive resting liquidity that will likely be revisited.
In the shown example, we can spot an unfinished auction at the highs of the highlighted candlesticks. The trend then takes a bearish turn with a relevant 5266 market sold contracts high-volume imbalance vs 1423 market bought contracts, for then forming a bearish stacked imbalance in the following candlestick, giving a follow-through signal.
During the next candlesticks, the market participant’s interest in bringing the auction lower vanishes, with two visible consecutive finished auctions and low volume sell-side activity.
When the price reclaims the level traced from the stacked imbalance, we have the second evidence of low interest from aggressive shorters with another two finished auctions on the lows matching with the highlighted level. From there, the market switches in control of aggressive buyers who bring the price up to revisit the naked level traced from the unfinished auction.
- Bid x Ask Footprint candlesticks shows the traded volume of the bought and sold contracts at market price for each tick, uncovering where the interest of aggressive market participants lay in the past.
- Bid x Ask Footprints can be used to identify anomalies within the short-term price action which may be revisited in the future (stacked imbalances; unfinished auctions)
- Footprint charts can be helpful to validate the strength of a level derived through various ways of analysis, on top of verifying that a trading setup has enough follow-through.
- The most common anomalies which are spottable through a Bid x Ask Footprint chart are:
- Stacked imbalances: the diagonal imbalance between Bid/Ask market activity upon at least three consecutive upticks or downticks.
- Finished auctions: volume drop at a high or a low. It signals the lack of interest from aggressive market participants to continue attacking the resting liquidity.
Unfinished auctions: no visible drop in volume at a high or a low. It signals the presence of active participants, suggesting that the same price will likely be revisited.
The Bid x Ask split view of the Footprint candlesticks discussed in this article is suitable for the more thick, liquid markets, like US treasuries futures, where the DOM is clearly readable, and the market speed enables a straightforward reading of the contracts exchanged between the Bid and the Ask.
Suppose your market of choice is mainly in a less liquid market like the NQ or even the Crypto markets. In that case, you might be interested in the upcoming articles that are part of this series, as I will cover various other display styles related to the Footprint charts as well as other tools.
In the next instalment, we will see how to set up Bid x Ask split Footprints on VolSys, our partner trading platform that you can use during your Savius challenge.