In this article, we’ll discuss the rationale behind using the Price Ladder in trading. We’ll look at what it is, typical misconceptions and why it might be useful in your arsenal of weapons against the market.
Before we get into the meat of this article, let’s just clarify what we mean by “Ladder Trading”…
The Ladder has been around a long time and it picked up a number of names along the way “Price Ladder”, “DOM”, “Depth of Market”, “Order Book” and at Jigsaw, we call our extended Ladder “Depth & Sales”. Different names for tools that display market information in a certain way:
This looks so different from the chart that most home traders use, that they usually take one look and then run screaming for the doors.
Big mistake!
Fortunately, many come back later (sometimes years later), when they can’t quite figure out what they are missing in their trading.
I would say that almost all of those seeing the price ladder for the first time are taken by surprise. They’ve usually been solely looking at charts and the moment they see the numbers, they get fearful that this is some “next level ‘stuff’” and it’s beyond them. Comments that I get are “I want to do something less complicated” or “I am more of a visual person”. But don’t read an Order Book by it’s cover. Riding a bicycle is difficult and then you can do it. Because
…..you do not have to read all the numbers or remember them
Reading the DOM is a bit like hitting a tennis ball. You watch the ball come to you and are judging the speed of the ball, the potential for a bounce and you have your eye on the other player so you know how to hit the ball back. In tennis, you don’t use a chart of the other players shots to decide where to position yourself to return the latest one.
Some shots will come slower and some will come faster and it’s the same on the DOM. Sometimes a new event will rock the market but you didn’t hear the news yet - but you can see that the market “thinned” out and has become erratic. You see a distinct change - a faster, wilder shot coming your way. Or another way to look at it - crossing the road in the face of a 120km/h car coming at you is different from one coming at you at 3km/h. Part of reading the DOM is watching it speed up and slow down.
Now - this is the opposite to reading charts. With charting, the promise is of trading with a mechanical mindset, of having absolute signals with no vagueness, of having mechanically defined entry and exit points and to be an emotionless robot. For some reason, many people think they won’t have the talent to watch something speed up and slow down - despite it being an innate skill in humans.
If you can cross the road, then you have this skill already. You just need to train yourself to this mode of “transport” by doing targeted drills to learn how to watch this speed up and slow down - and that skill - does not require you to be focused on all the numbers.
Some think the price ladder must be old - but in fact, the price ladder came into existence decades after price charts. This IS the new kid on the block, relatively speaking.
Some people think “well that sort of trading is dead because of HFT” - because some users of the price ladder are short term scalpers. But many traders in proprietary firms will look at a charts at start of day and then purely trade off ladders and stick with those trades, for extended moves as long as the DOM tells them that people are still engaged in that market.
Some think that if you use the ladder, you can’t use charts. I even get people emailing me, apologizing for the charts in a screen shot they sent - as if I am some sort of anti-chart Bond-villain.
This is not the case.
Charts do a good job of showing you what happened. They show the result or the outcome of trading activity. The Depth of Market shows you the actual trading in real time. That’s the big difference.
At Jigsaw, we are not fans of “chart-only” trading. That’s not because we think our tools should only be used for price ladder trading but because news, political events, economic announcements tend to set the tone for the day (even if through their absence) and are a major factor that set how a market will move. “Chart only” traders tend to ignore all this, repeating the mantra “it’s all in the charts”.
In 2020, someone threw a missile at a Saudi Oil refinery and oil was a wild ride for the next few days until a Saudi Prince came along and told us how quickly they’d be back on line. There was a beginning, there was the middle and then the end - not rocket science, you don’t need a degree in economics - it’s just a applying a little common sense about supply and demand of the actual physical product. If a refinery has exploded, there will maybe be less oil - so price goes up, plus - where one rocket goes, often others will follow.
So on one side - you have those pesky humans and their wars/politics/nonsense keeping the markets on their toes and on the other - you have the actual trading providing another part of the picture for you. The news hits, then you can see how participants are reacting, then you can jump on for a ride, using the appropriate price ladder strategy. But - you still need a set of overruling guidelines/trading rules for how you engage the price ladder. You don’t jump from a set of mechanical rules to just sitting there and trading your “instinct”.
And yes - discretionary trading can have rules. There’s a good article on this on the CME web site here: https://www.cmegroup.com/education/courses/trade-and-risk-management/system-based-vs-discretionary-trading.html and our video on discretionary trading rules here: https://blog.jigsawtrading.com/trading-group-therapy-discretionary-trading-0
When traders are looking to improve and they go to the internet searching for another indicator or chart type to complete the picture, they are creating an ever-growing ruleset all based on one dimension of trading data - where the market went. The ladder, just like the news - gives you a different dimension of information to use. Not just “where it went”.
You can use the price ladder to trade off without charts, no problem at all. You don’t have to though! You could also use the ladder to reject/refine chart based entries. For example, you might want to go long right at a price but sellers are hammering the markets and showing no sign of letting up. Ladder traders would hold off and wait for the sellers to ease off and get a lower risk opportunity at better prices.
Charts provide a part of the picture, the ladder provides you with another part, as does the news. Each market has it’s own factors too. Grains will be impacted by weather events like an early freeze. These things add to your trading edge.
It’s actually a little unfair to charts, leaning on charts to do all the work. Many end up with a lot of charts/indicators - but it’s the same intel, regardless of how you slice it. Smart traders utilize different sets of information rather than slicing up the same information (charts aka ‘where it went’) in different ways. Here’s how I like to look at the S&P500 right now.
News on the left, a price and order flow charts in the middle, then the price ladder and to the right meters/time & sales which I look at only at certain times. The news is going in my ears, so it’s really the things to the right that I need. The top chart shows blue and red “swing lines” - as I’m not really even interested in the individual bares
In short - this is how I’d break down the ladder strategy.
Ultra short term trading/scalping (1 or 2 ticks most traders but more on outliers) - This is the domain of ladder trading. Bidding a market, then scratching out if you can’t get a fill on the other side quickly.
Day Trader Days - This is the term we coined for “normal days” - where the markets have decent volatility, have nice swings up and down. These are the “bread and butter” days for day traders. They are the majority. On these days, the plays are: pullbacks, temporary ranges, exploiting stop runs and headfakes. This is the domain of ladder traders - who might be using charts but are using the ladder to get in at the best prices, find where people are trapped in position, getting out when the tide turns - all by watching how and where people trade. There is news on these days but the reaction to it is orderly.
Dead-duck days - while news does provide us with the biggest moves, some days (thankfully low percentage wise) simply provide no opportunity. In my experience of watching the S&P Futures every day in the pre-covid day, you could often tell in the first 30 seconds that this was going to be a terrible day. No interest, very few trades - choppy action with no direction. You see the lack of interest - and you’ll see it on the charts too - but it’ll take 30-90 minutes to build up enough bars to show that it’s flat. Similarly - you will get into trades and there will be no “pop” - the markets will meander around. You won’t get the reactions you want and stopping is the best course of action. You’ll come to that conclusion not to trade far earlier using the ladder.
News Motivated High Volatility days - Otherwise known as “who threw that rocket” days. On these days the ladder is totally different. There is high volatility and less liquidity. There is zero chance of getting in at an amazing price, of really finessing an entry. We advocate getting in small, tolerating more offside than usual and scaling in as it goes your way. We aren’t saying you should get in on a 2 tick pullback - just that if it does pullback - it’ll be trickier to gauge the end of the pullback on these days. The ladder is important because if you do go into a pullback long and you see significant trading against you - you still get out.
Now - how can you tell the difference between these days? Well - giving the tennis analogy - it’s going to fell like 10 players on the opposite side all hitting balls to you at the same time. You couldn’t MISS the difference. Which is another benefit of ladder trading - you will often see the market change state before you get the news of what cause that change in state.
We’ll go into more specifics on techniques in another article. The key takeaways are:
- yes - it is discretionary but so is hitting a tennis ball back and most of us can do that
- It provides you with a different dimension of information.
I think what shocks people the most about the price ladder is that it only goes up and down. Charts go left to right and up/down - so it feels unnatural to those who only learnt about charts.
If you do start with the price ladder - the best way is to do drills, all our customers get a set of drills to do first. These have you focused on learning what to use and how to read it. It’s also what proprietary trading firms have their interns do. It’s the fastest way to see if the Price Ladder/Order flow is for you and the fastest way to learn what matters and how to see it.
