TFlow and DOMTracker, Part 1: Their Uses in Spread Trading

Here, I am going to go through some specific techniques for using TFlow® in spread trading. Certain spreads, such as Heating Oil against Crude, lend themselves to sustained trends. TFlow, in combination with the DOMTracker, can be used to spot trend beginnings and endings.

Whilst TFlow highlights the relationship with what was hit and taken, the DOMTracker plots the residual bids and offers above and below the current bid offer. The green line represents bids and the red represents offers. The setup I use is a thirteen-bar TFlow and two DOMTrackers set at two and thirteen.

There are a variety of visualisations that DOMTracker provides, including:

  1. The level of participation.
  2. The bias between residual bids and offers.
  3. Spikes in depth.
  4. Shifts in the depth on either side.

The chart below shows a sustained trend. My preferred method for tracking that trend is an eighty-period Moving Linear Regression line. This study maintains sensitivity without lag, in contrast to a Moving Average. The trend is deemed to be over when the line changes direction, although the DOMTracker will often flag exhaustion faster and in emphatic fashion.

Throughout the downtrend, the thirteen-period DOMTracker shows that for the most part, residual offers (red line) are greater than the bid. This is the opposite behaviour that normally occurs in straight futures. However, the level of participation in offers towards the end of the trend is lower than when the trend began. This acts as the first warning. The final signal that the trend is over comes with the sudden spike in residual bids on the two periods. This shows a dramatic shift in sentiment, which is confirmed by the thirteen-period DOMTracker creating a larger bubble of interest.

Three days later, an even more dramatic shift in sentiment occurs as the market quickly shifts from residual offers to residual bids.

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