Illustrative article · Sample editorial content and publication date, prepared for this website. Not a disclosure of proprietary research.
Reading the order book
Every trade meets a resting order. When buyers repeatedly take offers faster than sellers hit bids, the imbalance says something about near-term pressure. Changes in open interest add another view: whether new positions are being opened or existing ones closed.
Small effects, short horizons
Signals from order flow tend to be weak and to fade within minutes or hours. They are best treated as probabilities, weighted against the prevailing regime, rather than as forecasts. A small edge repeated many times can matter; the same edge acted on without regard to costs usually does not.
Costs decide
Spreads, slippage and market impact are often the same size as the effects being measured. An honest test includes them from the start, uses timestamps that reflect when information was actually available, and checks whether the relationship holds in periods the model was not built on.