Order Flow - Achieving the mindset
OK so many of you have read the order flow - finding cluster of stops on chart, and that's lovely. But I guess I started off in the wrong direction. It appears to not be on the chart, but behind it.
The order flow thread about finding cluster of stops on A CHART got overextended really, even though it has some MIGHTY good information. What some of the guys have said there takes off plenty of time of the learning curve.
This thread I want to be about what's behind the move. What makes the price inefficient? What does disequlibirum mean and how does it affect prices?
Basically, it is everything that moves the price, but it's not allowed to be showed on a chart. Pure discussion. I want your ideas on equilibrium. Disequlibiurm. Balance. Imbalance. WHAT MAKES PRICE MOVE?
I might shoot one off right now. I don't have a fucking clue why price moves and why sometimes it spikes up and moves down, can it be price inefficiency? Tell me about it. If so, what made that particular participant (let's say..) bid up the price of the currency so high? And why? if it wasn't the real value?
I have noticed sometimes that on the 5/15 min chart we have spikes up in price, from nowhere.. price moves 20-25-30 pips up on one single candle (sometimes more.. but for some reason.. NEVER WITH A RETRACEMENT ) and then the move get's faded 100% and sticks around the same area it moved up from. Then it usually trades in the other direction. I.e. if it moves up and gets faded, it continues to move down.. Why is that do you think? And no, it's not because of RSI.
This thread is about achieving the mindset of an order flow trader. And you are not allowed to post a single chart.
Hopefully this thread will make me THINK about what is happening and draw a conclusion in my mind, and then test my premises on the market.
Take care, and I hope I am not taking to much of your time, whoever you are. But understand that I really want to learn and there are several others who really want to.
Also, I'd like to contribute with some links to some Darkstar's posts:
About Orderflow Mindset
What to search with an Orderflow Mindset (second part of the post)
Stop-hunts and option barriers
A model to analyze the market with an Orderflow Mindset
This last one, to me, is very interesting.
What you have to do is to think to market participants and what they are willing to do BEFORE and AFTER something big happens
Another little pearl before I leave:
Start with the basics
Toyota needs steel from Mittal. So they sell yen to buy usd, causing a rise in USD/JPY. Then they convert those dollars to rupees, causing a drop in USD/INR.
It could be explained as simply as smart money fading obvious levels of entry in a given direction (trend), relative to TF (or trading session).
Oops i forgot, all that involves charts.
Don't listen to me, i don't know, I'm just guessing.
Great thread, was worried everyone had gave up? I am reading through T&E for the second time so I am actively studying this stuff.
If we look at a live example, cable today dropped 200 pips in a short space of time (20-30 mins). This was due to the news about the UK economy. Its now in a tight range.
I want to say I am just starting this style of trading and am on demo, I am trading just to explore this stuff and will likely lose so don't think this is a valid trade. However am long (demo) as I think we will see a move back up to 1.5900.
One thing I would like to know from the the order flow guys, is it possible to trade without being glued to the screen all day? Using trailing stops, limit orders etc? Or is is a case of waiting around then getting in and out quickly?
- environmental disaster
- change in trade policy
- technical traders
- terrorist attacks
- bursting bubbles
- boom & busts
- systemic failure
- regulatory changes
- social engineering
- new technology
- new financial vehicels
- pump & dump
- corporate takeovers
- excessive speculation
- carry trades
- energy crises
- shifts in risk appetite/aversion
- world growth/decline
- central bank intervention
- governmental/economical/financial shifts
- trade wars/protectionism
- quantitative easing
Don't forget these charts
Nah, just leave it. But no more charts, I think
I see order flow trading as waiting patiently for a situation when the odds are heavily in your favour then striking at just the right time. The key is knowing when the time is right.
Market Impact Model
Because some of you are having difficulty understanding how price moves in the simplest sense, I've created a spread sheet to model how liquidity is taken when stop orders execute. This model represents any market order, but I am using stops to show how liquidity is consumed at multiple price levels when a high volume of market orders hits the market(stops).
The spreadsheet always shows the after affect of stop orders. Assume that the stop price was $40 for buy stops, and $39 for sell stops. You will notice that the price moves up (for buy stops) to which ever price level finally fills all the market orders and vice verse for the sell side.
In real life, each of the depth levels would show 0 after the liquidity there was consumed, so ignore the depth numbers behind the market after it has "moved". This is the temporary "vacuume" that Darkstar was talking about. After the liquidity is consumed, traders must repopulate the price ladder with limit orders, or price will have large ticks between the bid and ask. Because the FX is so liquid, this rarely happens for more than 5-10 ticks at the extremes. Usually it's just 1-2 pips on the interbank. News times are the exception as you have all probably read.
In the spreadsheet you don't need to input anything into the fields. Just press the F9 key and the sheet will give you a new example. It's programmed with random numbers to show differant situations, some more volatile than others. In the sheet, you are getting both a buy stop and sell stop example at the same time. In real life it would be possible for a buy sell situation to happen like you see in the spreadsheet, but usually it's a one sided demand that occurs, meaning the stops don't spread the market two ways at once. Also, in the FX market, the majority of dealers are operating via a robot, so the temporary empty price ladder condition might only last for micro-seconds. Furthermore, in the real market, when the tape shows a print even at the first limit order ($40 or $39), the robots will often immeadiatley cancel their limit orders higher up the price ladder so they don't get stuck with the risky inventory. This makes the volatility even worse. This doesn't always happen, sometimes the dealers will increase their limit sizes to be easily filled by the stops.
The last thing I want you to keep in mind is the limit orders themselves. Assume in the spreadsheet that the demand you are seeing is all stoploss orders. This means that the traders who issued stops are out of the market, but now you have a whole new batch of sellers or buyers who entered with their limit orders. If the market moves too quickly through their limit prices, they may have to issue stops to. If they don't have enough time to slowly trade out of their inventory with limit orders on the other side of the market, they will create further cascades in price by executing market orders. This is what happens when the market consolodates. Everyone is entering with mostly limit orders, then one side gets squeezed out of the market and has to execute stops. The participants who were right the market will very possibly use those stops to liquidate at a profit.
I could go on for days and days, but I hope this helps some of you understand the basic micro structure.
For some of you this spreadsheet will show errors. For it to work you need to make sure you have the Analysis add-ons installed in excel. They are under tools>Add Ons
You might see on the chart that "the price" is 1.3000, while the market is 1.2995b/1.3005a. I think you all get the gist of what I'm saying. On some charts you can have a choice of which price you see. Oanda will dispaly both the bid and ask, or just the average price which is the default setting. I beleive Meta Trader shows the average price as well.
I am in the process of writing a program to simulate order flow (I am a developer for an investment bank) to look at different scenarios. Obviously it will be a simplified model but think over time it could be something that helps see the mechanics of order flow.
I stand corrected, gentlemen.
Thanks for the spreadsheet ScottyB. Someone mentioned you have been watching futures too long, do you trade futures? Or just watching futures for the additional info and applying it to trading currency?
Clever posts in the other forum
I have been teased about that dude my whole life! Yes it's my real name, no I don't like cool-aid, no I have never been to Guyana, no I don't know what my parents were smoking when they decided to name me that!
No problem with the spreadsheet. I hope it helps some folks understand a little more.
Futures..Yes, I look to the FX futures for data, and execute through Oanda. The central exchange, real volume info, time and sales ect. is extremely valuable if you know what to look for.
I was a little disappointed that the other thread gave up on the chart aspect of OF. There was one dude who was getting pretty close to what can be done via just a chart. It's common sense things, but you can paint a ROUGH picture of what is going on behind the chart i.e. the execution of orders. For example, it's fairly easy to see where there are lots of limit orders or depth. If the limits dry up and price pushes through them then of course there will be some stops that execute. What do you think this looks like? It's a DUH kind of answer, infact, I think I've already explained it.
Any help would be appreciated.
I would love to answer the question, but frankly I don't have a solid enough understanding of market structure and order flow yet. It just now occurred to me when reading your post that limit orders are probably a roadblock that have to be eaten up before price can continue against them. Before that I was not really understanding the diff between market and limit. Add in all the different types of limits (stops) and I am lost again
I am reading a couple of books Darkstar mentioned in his posts from 2006, 'TWOD' and 'Trading and Exchanges: Market Microstructure for Practitioners'.
Until I can really understand how markets work I think my answers will all be guesses...
I just sent you a PM. I'd really like to discuss more with you about tapereading in futures. I am currently learning it...watching the 6E. Just took a tapereading workshop...22 hours....as well. Would welcome any insight you can provide on this.
I am currently reading Tradng and Exchanges. But what is TWOD that you mentioned?
You can't just look at a consolidation and assume there are mega stops there. IMHO I believe these are actually longs covering their positions given only the info on a chart, oh and a reuters story I found from the 13th:
I believe that all the blind bulls are netting many of the big players out at a very nice profit. This does not mean that EU will not continue higher, but this 1.37 level will be one to watch and keep in mind. If the big guys are truly stepping aside, the wind could be a changin'.
I think the more probable stops will be to the down side where all the bulls are caught going the wrong direction especially if the pros begin squeezing them. Watch for areas where there are lots of bids, and take notice of what happens when those levels are sold through.
What I've just presented is more of a macroscopic view with fundamentals in mind, you can do similar things on tiny time frames. As I've said before, the sky is the limit with much of this. The idea is to become a market detective where you not only look for patterns, but the motives behind them.
I can't believe I'm about to post a chart. Ugh!
Just read that this supposed option was taken out. "according to traders." lol
I think I understand some of this, but am still learning myself. You are describing a bar formation that usually develops into a pin bar, or head and shoulders on larger time frames.
In simple but basic terms.
Let us say that price is currently consolidating (equilibrium) around 1.00. Orders will collect above and below that price level. Eventually, someone will determine it advantageous or be forced to fill those orders.
In your example it appears that there were buy orders 20-30 pips above where price was that were sufficient enough to be filled but not sufficient enough to consume latent and other market sale orders. The market moves up to fill the demand and then drops to quickly fill the subsequent vacuum. There is a vacuum because those buy orders were filled and there are no other orders to be met except back in the 1.00 level. Or better said, there is a "vacuum" because buy orders at that level are now exorbitantly out of proportion to sales at 1.00.
I hope that does not lead you in the wrong direction.
I am thinking about this in another way now. You see Darkstar pointed out that his learning was thru good understanding of markets and CindyXXXX pointed out a couple of days ago the function of the market (supply and demand). What I did was go out and read allot about supply and demand to understand it.
I really think we need to learn the REAL BASICS before moving on. The way I see it; price equlibrium is when the demand and supply curve cross eachother. That's when most of orders are traded and that's the most liquidity because both sellers and buyers are satisfied.
Now when price moves up strongly, it is obviously EXCESS DEMAND, someone want's more of it so they bid it up to WHERE THERE IS EQUILIBIRUM ONCE AGAIN, where sellers WANT TO SELL.
But then why does someone bid up that strong? Why not with any retracements? And why the hell did the move then get faded? And in which situations do we know if it's a real move (I.E. backed by fundamentals) and when do we know it's a trade to fade.
OBVIOUSLY, I understand that we cant "know".. but you guys understand me. Really the question is.. what are we looking for, and in which situation? And no charts. We're out to understand THE REASONS.
Price equilibrium I believe is more about value than high liquidity. I actually think, that when we have price equilibrium, liquidity is quite low. The informed traders capable of moving the market, don't see any value in participating at the current levels. So they stay on the sidelines either waiting for new information that would indicate a change in the value of the instrument, or wait for the price to move away from the value, and enter trades towards it. It is not that buyers and sellers are satisfied with the liquidity available, it's that they have no reason to demand it.
If price equilibrium is disturbed, without any change to the value (ie fundamentals are the same), this would be a move to fade. The price was most likely pushed there in search for liquidity. Large orders would be very difficult to fill when price is at an equilibrium(because of the low liquidity), so the market is being pushed to areas of high liquidity (ie SLs outside of a range). Once the liquidity there is taken, price comes back being brought there by the traders whose orders have been filled, and other traders that noticed the price deviating from its value.
My English is very crappy and i have a hard time explaining what i mean, but i hope it is somewhat clear.
Cable drop - update
Yes, this entire order flow stuff is very complex.
Understanding the markets really well is indispensable to determine a lot of different conditions and to recognize the noise.
1000s of hours can help to improve the experince and how to adopt this knowledge into a useful trading approach.
But without the right tools that help filtering and monitoring other participants, that would be very hard.
Naked charts don't provide enough information.
After the fact, anybody can say or interpret: hey here was a stop hunt,look at that "spike".
To achieve that "order flow reading-mindset" a lot of time and self teaching is necessary.
Nobody will do that work for you.
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