Trading ask stacks
Updated: Sep 30, 2019
Basic micro structure of ask stack
This pattern is present on all markets, but it is less frequent on more liquid markets, and more frequent on less liquid markets. USDCNH is good asset with frequent setups, therefore the focus will be on examples from this asset. It strikes good balance between being somewhat more exotic asset, but with still decent daily liquidity to trade those patterns on ECN brokers. Those patterns are as well very frequent in very low volatile mid-cap equities, especially SSR names, but it is harder to trade those due to hard fills.
Ask stack pattern is developed inside the minimal possible ticking distance of asset. In some cases there is off-shot with aprox 1-2 cents / pippets but on average it is following the minimal possible distance. For example if stock has 5 cent fixed bid / ask and current price is 10,25 USD, then ask stack can develop around 10,25 and 10,30 USD.
It can be set up due to decreased liquidity and participation of orders, or in many cases due to heavier player soaking / distributing his position (offers) in chunks around specific price, forming the ask stack rejections. Or third case just larger number of players ganging onto ask willing to get filled on shorts, or willing to get out on longs with much larger participation than bid side (bid orders 1 vs ask orders 4 for example).
In most cases tape will be stacked with heavier participation on ask side with offers, thus making the ask rejections every time price up ticks into ask, forming sort of micro-shelf which can last from few minutes up to an hour or more.
In order to spot this pattern it is important to use very low time frames, such as 10 second or 30 second TF, or tick time frames for USDCNH or FX in general. Using MT4 will not be enough, unless trader has specific indicator for it. IQ Options platform is solid to use, which is free and very robust software for low time frames on FX and equity assets.
For equities tick charts can be used, or brokers such as Speedtrader, that provide data under M1 time frame.
Asset / Micro
This patterns are very common on USDCNH asset (US dollar vs Chinese renminbi).
It is also common to see them on other exotic assets that trade in semi-peg to US dollar, but only in CNH they are present in higher frequency and on many assets it is impossible to trade them for retailer due to too high spreads or commissions.
And trading them without catalysts or other variables stacked along the pattern is not a good idea, ask stack is just a micro there should be something more behind the trade than just that. My preference is to trade those along the escalations of trade war between US and China, which adds to higher degree of pattern to work out plus stronger potential direction.
This patterns have low edge extraction due to high commission cost impact. Takes a grind of trades to turn decent profit. Especially because they are more common on low volatile assets in equities the RR on trade will be minimized and commission impact increased, which makes those patterns a grind to trade.
For trade executions i use ICMarkets ECN broker, using MT4. It is a must to use ECN broker with tight spreads, otherwise it will be impossible to have positive edge on play.
On equities any broker that charges per share commission structure should do.
Those patterns are very tight on volatility scale and small commissions along with tight spreads are a must, otherwise the edge will be turned negative. Since the liquidity in market is changing constantly it is also important to note that 80% of patterns will be un-executable. Simply the liquidity will be too low and spreads too wide for trader to execute on play. Trader should be patient and wait for right opportunity, using macro combinations that create larger chance of decent move so that trade makes sense from RR perspective.
USDCNH with most brokers is capped to 1:100 leverage. Trader should take full advantage of maximum leverage possible, because those plays are on low volatility scale, which requires decent size on trade to make notice-able profits. It is important to pre-calculate how much size should be used in order to avoid any margin calls due to too heavy sized positions if trade turns south. 30% of capital should always be free to have cushion for counter move against trade.
The downside of trading this pattern in FX is (doesnt apply to equites) that there is small chance that one lands on a mine of large surprising catalyst which can lead to large loss with sized position (even with SL set, which should always be set if playing this pattern).
Bellow is example of bid stack. I only trade ask stacks, due to how spread is positioned on most FX brokers. But just to point setup bellow:
Entry / how to play it
Entry is always long (long USDCNH) on ask stack. It might seem counter-intuitive as on first sight it looks like a short play. If price rejects on ask every time then one should go short around that level right? The problem is that since the liquidity on this plays is low and spreads are high relative to size of structure it is very hard or nearly impossible to get fill short around the ask level (supply). Mostly dark pools or other primary route level traders / MMs will fill there but retail trader often cant. If retailer was to short into this play one would only get filled at the bid (near lows) with terrible average on market order.
Therefore the way to trade is for price to give clue when supply on ask side is no longer rejecting and is getting absorbed and to initiate long trade. Absorption will be seen with price no longer rejecting with single candle down, but instead will start to "hang around" supply level with few candles. That will be usually the clue for supply breach and squeeze.
Example bellow with such behaviour, 5 second chart time frame bellow:
If supply is not absorbed then price should just keep going into further down trend. No absorption - no rotation. Every ask stack will need to be absorbed if down trend wants to rotate into up trend (if down trend is very aggressive, no proper upticks). Watching price behaviour is critical for that and the speed of rejections. Exotic FX assets do not have centralized tape / level 2 thus it is important to put that much more focus on price behaviour.
Examples bellow are all from 5 second chart timeframes.
Behaviour change as main entry trigger
Observing the symmetry of behaviour is the main core on how to put an entry into such pattern. There should be consistent behaviour of rejections on the ask with offer sitting there, and then over time that behaviour should change, with bid starting to push and hold into supply of ask and as well clearing the ask and offer that is sitting there. Higher micro lows should also present themselves in order to give trader heads up that bid is stepping more aggressively and potentially trying to soak up offer.
Both of those variables have to be present, otherwise it is just too much guesswork, along to which was already mentioned a decent catalyst or some sort of other macro variables that increase chance of larger move after offers are eaten on ask and up trend has chance to establish. Those patterns are also present across all other markets with larger setup (not just bid / ask distance) for example M1 or M5 depth of structure, similar rules apply, however Level 2 can be of help there additionally.
Bellow are main variables to look for on ask stack and its rotation (from 5-15 second chart):
Bid / ask stacks on SSR equities
Large samples of bid / ask stacks on SSR equities resolve with very strong move in either of directions and make them hard to trade due to high slippage costs on trades that go wrong. There are some prop firms that trade those with routing that allows them to fill inside structure and also get out of trade with minimal slippage. For retailer it is more of a gamble however, because if stack breaks the other way trader will always have slippage fill on stop loss even while using 2 cent stop loss. Initial micro trend direction ahead of ask stack is good variable as it adds additional chance for ask stack to resolve in same direction of initial direction, if stack is stacked on same side.
Non SSR assets are better and safer way to trade ask stacks, but stacks are more rare there. My prefference is to only trade stacks on USDCNH since asset needs to have decent volatiliy for micro structure to have depth on 10 second chart, otherwise there wont be visible micro rotations of lows / highs, bid aggression and such clues. In equities Level 2 is much more important to read those patterns.