Where do the ideas for trading strategies come from? The idea that automated trading came from traders that never were involved in the market is not true. Although the majority of actual developers of automated trading systems never traded in their lives, the strategic minds behind the modelers came from the world of manual traders. From either the exchange trading floor or from one of the many trading desks of financial institutions, the ability to profit from trading is one developed from over years of experience. High frequency trading (HFT) is all about making profits in short time frames with as minimal risk as possible. The key to a short-term trading strategy is the trading data that comes out of each day's trade. It does not matter if it is an equity, currency, bond, or a derivative. Each market is about matching up buyers and sellers and how one can interpret the price action in the most efficient way. Those who can will be the ones who are the most successful.
Analyzing the top of the book is the first step. The top of the book is defined as the current bids (buys) and offers (sells). As an example: If the current market is 10.50 at 10.51 with 1,000 on the bid (10.50) and 10 on the offer (10.51) the logical assumption would be that since the bid is much larger than the offer the next trade would be more likely to be at 10.51 than 10.50. This is not a guarantee since there may have been a trade done prior that sold at the price of 10.51 that ...