Do you really not need to look at the order book and time and sales for swing trading?
“If you’re doing swing trading, you don’t need to look at the order book or time and sales.” I’m sure many of you have heard this. When I was doing day trading, I was constantly watching the depth of the order book and the movement of time and sales, but since switching to a focus on swing trading, the frequency with which I do that has decreased significantly.
To conclude, the idea that “you don’t need to look at them constantly” is correct. However, my current feeling is that you can’t go so far as to say you “don’t need to look at them at all.” Today, I’d like to write about finding the right distance to keep from the order book and time and sales in swing trading.
The order book and time and sales are only the stars on a short time horizon
The order book reflects the current situation of sell and buy orders at this very moment. Time and sales is a record of the prices and quantities that were actually executed. Both are tools for reading “what is happening right now” on a scale of seconds to minutes, not tools for predicting price movements days or weeks into the future.
The core of what you should judge in swing trading is information with a longer time horizon, such as daily and weekly trends, volume trends, and market conditions. No matter how carefully you read the order book or time and sales, you won’t find the answer to the question, “Can this stock maintain its upward trend next week?” In this sense, the opinion that “the order book and time and sales are unnecessary for swing trading” is not largely incorrect.
Even so, the moments of entry and exit are different
However, there is an exception. That is the moment you actually place an order. At the timing of entry or exit, by looking at the situation of the order book, you can reduce the risk of having your order executed at a price less favorable than you anticipated.
Especially when dealing with small to mid-cap stocks that don’t have very high volume, if you place a market order as is, you might find that your order is executed at a price significantly different from what you expected when the order book is thin. By checking the order book once just before entry to see if the sell side is extremely thin or if there are unnatural orders lined up, you can reduce unnecessary costs caused by such “execution failures.”
Time and sales is insurance for noticing unexpected sudden changes
You don’t need to follow time and sales around the clock either, but while you are holding a position, if you feel that something is clearly wrong (e.g., volume is surging in a short time, price movement has suddenly become volatile), it is worth checking once.
By looking at time and sales, you can distinguish to some extent whether that sudden change is due to large-lot trading or the accumulation of many small-lot orders. If large-lot selling continues one-sidedly, it is highly likely a sign that supply and demand are changing rapidly, and it might be a situation where you should rush to re-evaluate your target range. Conversely, if it is just small-lot trades crossing, there is often no major problem in treating it as temporary noise.
You don’t need “techniques” for reading the order book for swing trading
In day trading, highly specialized order book reading techniques are required, such as spotting spoofing or reading price movements seconds ahead based on the balance of OVER/UNDER. I believe that such techniques are basically unnecessary for swing trading.
What is needed is a very basic way of looking at the order book that allows you to confirm, “Is the situation clearly abnormal right now?” Is the depth extremely thin? Has the volume suddenly surged relative to recent price movements? I feel that if you can check these two points, it is sufficient for the role of the order book and time and sales in swing trading.
A story about a time I was glad I checked the order book for a trade
Previously, I once tried to enter a small to mid-cap stock that had a good daily chart shape. All the conditions for theme, trend, and liquidity were met, but when I checked the order book just in case before placing the order, the sell side was much thinner than usual.
If I had bought it with a market order as it was, there was a possibility that it would have been executed at a price several percent higher than I had anticipated. A difference of a few percent might seem small, but this difference leads directly to a deterioration in the risk-reward ratio. At that time, I waited a little for the order book to settle before re-entering with a limit order. If I hadn’t had the habit of checking the order book, I would have entered at an unfavorable price without realizing it.
Conversely, there have been times when I was saved by checking time and sales while holding a position. One day, the price movement of a stock I was holding suddenly became volatile, and larger-than-usual volume was concentrated in a short period. When I checked the time and sales, I found that large sell orders, which appeared to be from a large player, were being executed in succession. By noticing this change within the day—a change I might not have realized until the next day if I had only looked at the daily chart—I was able to re-evaluate my target range early.
You don’t need to look at them constantly, but you should “know how to look at them”
Such situations do not happen frequently. That is precisely why an operation of “constantly monitoring the order book and time and sales” becomes an excessive burden for a swing trader. On the other hand, if you don’t know the basic way to look at the order book and time and sales when the time comes, you will have no means of noticing these small risks.
I usually make decisions based primarily on daily and weekly trends, and only check the order book and time and sales at the moment of entry or exit, or when I feel something is off about the price movement. Since I became able to use them selectively in this way, I feel that unnecessary execution costs have clearly decreased compared to before.
Conclusion: They are not the main act, but they are excellent supporting roles.
The order book and time and sales are not the main focus of swing trading. Entry decisions and holding strategies should basically be determined by information on longer timeframes, such as daily and weekly trends, volume, and market conditions.
However, if used to increase the precision of the moment an order is executed and as insurance to notice unexpected sudden changes, I believe the order book and time and sales are still very useful tools. Rather than dismissing them as the exclusive domain of day trading, I keep them on hand as a ‘supporting role used only in specific situations.’ I feel that this level of distance is just right for a swing trader.
※ This article shares my own thoughts and criteria based on my personal experience and does not recommend the buying or selling of any specific stocks. All stock examples in this article are fictional. Please make final investment decisions at your own responsibility.