Price Ladder Trading – How to apply to your trading strategy?

Trade%20plus%20logo%20png Price Ladder Trading – How to apply to your trading strategy?

app mockup header Price Ladder Trading – How to apply to your trading strategy?

If you have been hearing about price laddering strategy in the last few months, it is emerging as a very important tool of trading.  Before getting to what a price ladder trading strategy connotes, let us first understand it by another name, DOM trading. DOM trading is short for Depth of Market trading and it is exactly what the functionality of ladder trading strategy is all about. Let us focus a bit more on what depth of trading or ladder trading and how it gets designed.

a 2 Price Ladder Trading – How to apply to your trading strategy?

Depth of market, the essence of ladder trading

Depth of market is never evident from the price screen. The price screen is normally a price / volume screen. It shows the volumes that are being executed in the market and how the shifts in volumes are bringing about a shift in the stock price. But there is one step before the volumes and that is the depth of the market. When you execute any buy or sell order, you can always click on the tradable instrument and check out the five best buy and best sell prices in the market. This shows the number of orders and the number of shares that are available for buying / selling on the stock at different tick levels.

The above image captures the gist of what DOM trading or price ladder trading is all about. The entire trading screen is divided into 3 key parts. The first part is the price level of the stock or index and this is a constantly dynamic variable. That is provided at the center of the screen. On the two sides are the depth of buying and the depth of selling in terms of the number of shares at each price level. In short this is the price screen and the order depth screen combined together in an elegant manner.

How exactly is ladder trading done?

As stated earlier, the ladder captures the price of the stock, the buying depth and the selling depth in a single screen. The way laddering works is that the trader can trade in combinations of buy and sell in such a way as to ensure a spread on each trade. Normally, this method of trading is actively used by scalpers who don’t try and profit on each trade but ensure that their trading is profitable overall over a period of time. Want to know who a scalper is? Visit our UNIV and read the section SPECTRUM OF TRADING TECHNIQUES – FROM SECONDS TO YEAR to understand.

The advantage of this screen is that you can design a ladder trade based on your risk appetite and return requirement and build that into your trading strategy.

Key takeaways from the ladder trading strategy

Here are five key takeaways from the discussion on price ladder trading.

  1. Price ladder strategy is a combination of the price screen, the best buy screen and best sell screen into one. Essentially, there is the range of the best buy order and the best sell order which keeps hovering in a range around the actual market price.
  2. Price laddering is about the execution of a buy and sell order based on the best buy and best sell orders so that the spread can be locked for the trader.
  3. It is very difficult to manually execute so many ladder orders on the screen as price may change by the time an order is manually executed. Hence, such orders are best executed by algorithms with high frequency trading or HFT orders.
  4. The spreads in a ladder strategy is very critical and hence it is normally small. The trader, therefore, needs to trade large volumes to ensure that they are able to make good profits on an absolute basis to justify the risk.
  5. The ladder trading strategy is most popularly used by scalpers who use shifts in the buy and sell order screens to take a view on spreads. This is a hyperactive game in the market for low spreads on large volumes.

Hope these help you get more insight about Price Ladder Trading. 

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