The position of this gauge could vary between the two extreme points: “Overbought” and “Oversold” indicating that either the Bullish Sentiment has reached its exhaustion level (Overbought Level) or the Bearish Sentiment has reached its exhaustion point (Oversold Level). The position of this gauge is determined by a number of factors, including:
- The relative frequency of the order cancelations registered on the Bid side of the order book vs. those registered on the Ask side of the book.
- The traded price deviation from its equilibrium level calculated using the prices and sizes of “Filled” orders.
- The relative frequency of order size changes vs. their level in the order book.
All of these parameters are processed in real-time using highly sophisticated computer algorithms. The results of those computations are then presented through the value of the extreme Overbought/Oversold sentiment levels and the position of the current Sentiment Line relative to those extremes.
It is a well-known psychological phenomenon that the majority of traders make their buy decisions when they believe that the price has fallen too far, too fast. If this situation occurs, it usually manifests itself through the increased number of order cancelations that occurs on either the ‘Bid’ side or the ‘Ask’ side of the order book. By measuring the relative cancelation frequency of buy and sell orders it is possible to extract information about traders’ intentions to buy or sell a security. By using the Sliding Time Window concept applied to the different uncorrelated time frames, Hydra measures this valuable aspect of traders’ sentiment. It’s called “The Trader’s Commitment”. If the gauge’s green marker is in the top section of the gauge, then the cancellation activity on the Bid side of the book is higher than the cancellation activity on the Ask side of the book. This could mean that the traders’ commitment to stick to their Sell orders is greater than to their Buy orders (i.e., possible anticipation of an upcoming price decline). If there is a higher number of cancellations that has been registered on the Ask side of the book (the green marker is in the bottom part of the gauge), a possible price increase may be forthcoming.
This gauge contains a unique algorithm that calculates the fair or equilibrium price of the monitored security based on the analysis of the price fluctuations that are registered over a 5-minute sliding window. Based on the assumption that all of the processed orders on the book should result in the price movement that fairly represents those filled orders (i.e., the market efficiency assumption), the gauge calculates the difference between the current actual price level and its fair value. This gives a trader insight on how far the efficiency state the market is from the currently observed levels. Therefore, it can enable the trader to make more accurate trading decisions. This difference is calculated in standard deviations and is displayed in the price levels that correspond to those deviations.
To form the spectrum of sentiment, the real time flow rate of the Bid and Ask orders by all traders on the Exchange Electronic Trading Book is measured. These orders are weighted by:
- Proximity to the inside Bid/Ask levels
- Time elapsed since order origination
All weighted orders that have been registered in the book over a period of time (called the Sentiment Compression Interval) are then totalled to create a weighted sum of Bids and a weighted sum of Asks. The ratio between the weighted sum of Bids and the weighted sum of Asks is refereed to as the Trader’s Sentiment and it is used to analyze the built-up pressure to buy or sell a security. The ratio is then further filtered by the series of filters of different lengths.