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How to flow with the order flow? 23 replies

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Attachments: Order Flow - Finding cluster of stops on chart
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Order Flow - Finding cluster of stops on chart

Am I the only one that looks at it this way?
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Quoting CindyXXXX
Was looking good until 4 hours ago... What happened?

Don't worry its always when someones watching lol

Such is Life
Win some, lose some
  • Post #243
  • Quote
  • Edited at 11:11am Jan 20, 2011 11:03am | Edited at 11:11am
OK, so I have a fuckton of writing to do today (thanks for all your input BTW) but I can hammer out a quick post this morning...

Quoting Carnegie
I don't think the proper word for this is "lazy". Really I don't want to come forward as "the retail trader who never gave up"-bullshit but really I have been studying as a bitch and still I am not getting anywhere. I don't think it is a matter of laziness but rather it is a question that not many of us know WHAT and WHERE to look for things.
I don't really think any of you are lazy... I needed to motivate "someoen" to respond to the chart and I figured calling everyone out would incite the desired response.

Quote
For you this might seem obvious (i.e. what to search for) because you already know this. And in my mind, you must be some kind of a ultra code-cracker something in the way of Tom Hanks in the Da Vinci code.
Why am I saying this? Easy.. When I started reading T&E I found some stuff and immediately understood what he was talking about in the book, because these concepts have already been explained to me by you and other people. BUT HOW THE HELL DID YOU FIND THEM?

This is probably going to come off as bragging but it helps to have an IQ in the top 0.045% of the population. Ofcourse in and of itself, that fact doesn't mean dick. However, when you combine it with 20 years of studying economics and ~20,000 hours studying finanical markets/trading, some things are just bound to come together.

When I started T&E didn't exist, but what you have to understand is that T&E didn't change the market, it simply explained in a uniform way how it has always operated. ANYONE could have written T&E or developed all this stuff about orderflow, they simply needed to spend the necessary time thinking about and reseraching the subject.

At this point T&E has vastly shortened the time it takes to understand fundamental microstructure processes, so what took me 10,000 hours to consturct, people like scottyb can do in a couple weeks. Unfortunately, for all the good that T&E has, it says nothing about how to turn that info into profits. To do that requires another 10,000 of hard work, thought, an dtrial/error.

Which brings us to the point of why I'm writing a book. Hopefully when its done it will act as a bridge between T&E and profitable trading, but that is by no means the end of the road. Stop hunting and the other ideas I'm trying to explain are only a few of the things that exist in the market. I have little doubt that 10,000 after someone reads it, a whole host of new ideas, systems, and concepts will be developed that make what I'm struggeling to explain seem like childsplay.

It's all a mater of perspective.

Quoting PiptheRipper
I have read that market orders demand liquidity and limit orders provide liquidity, but don't you also provide liquidity when you place a market order? ex. if Trader X buys his 1000$, don't he provide liquidity to Trader Y who wants to place a short order?
It has to do with the match rules on an exchange. Market orders only match against existing limit orders, so by necessity they demand the lquidity that limit orders provide.

It may help to think of it in terms of immediacy instead of the general desire to trade. Market and stop orders demand immediacy of execution while limit orders provide the option to do so. Its the option to trade that constitutes liquidity so when someone exercises that option, the liquidity is consumed.

Quoting auxesis
The main concept I think DS wanted to hammer down is the makeup of the market (order volume, placement or the lack there of (vacuum) , when price moves, what happens not necessarily the nuts and bolts of the transaction.
Good point.

One thing you guys should realize is that the liquidity model is not meant to directly correlate to situations in the real world. In the real world all those components will forever be fluctuating, so it would be very rare to see such perfect liquidity distribution on either side of the market.

The model is a tool for visualizing how price and liquidity interact across time. Its power comes from its ability to produce ideas about exploitable situations. Once you have something that should work in theory, then you can set about looking for situations where the phenomena you noticed within the model occur in the real market.

Its a 2 step process.

Luck be with you
DS and auxesis, thank you for your replies.
The way I see it, the most interesting part of Darkstar's picture is the area I've highlighted with the blue rectangle. That is the liquidity vacuum created by the shift lower in price - there are no (or few) remaining orders there. If large buy orders start coming in, price should pass through that area very quickly searching for liquidity higher up. I would want to be in a position to capture that move should it happen.

Which I suppose is visualized in your third picture, Scott.


Quoting scott89
Am I the only one that looks at it this way?
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DS, its great to be able to communicate with someone else who has an IQ bigger than the size of his dick and I'm sure your million years of experience stands you in good stead, however, are you in profit trading FX ? Or are you a theoretician ? Nothing wrong with being a theoretician of course and I've read your posts and learned stuff I didn't know, however, making money by trading FX (or any other instrument of course) needs more than theory and it would be interesting to know if you're able to profit from your undoubted intelligence.
Quoting dr_who
DS, its great to be able to communicate with someone else who has an IQ bigger than the size of his dick and I'm sure your million years of experience stands you in good stead, however, are you in profit trading FX ? Or are you a theoretician ? Nothing wrong with being a theoretician of course and I've read your posts and learned stuff I didn't know, however, making money by trading FX (or any other instrument of course) needs more than theory and it would be interesting to know if you're able to profit from your undoubted intelligence.
I guess it was only a matter of time...
Don't wish it were easier, wish you were better. ~ Jim Rohn
Is there an EA for this?
Time hides Nothing
Quoting CindyXXXX
Is there an EA for this?

Read my post again Cindy. Its not in any way related to your somewhat trite comment.
Quoting Darkstar
It may help to think of it in terms of immediacy instead of the general desire to trade. Market and stop orders demand immediacy of execution while limit orders provide the option to do so. Its the option to trade that constitutes liquidity so when someone exercises that option, the liquidity is consumed.
So, a stoploss it's different from a limit order? a stoploss becomes a market order as soon as the stop price is reached?
As I'm seeing it, a stoploss NEEDS to be a market order, so that it can be filled even at worse prices, but still be filled, rather than not being filled because of a fast changing in price.

And I think that's why stoplosses are not viewed as limit orders on an orderbook.

Geez, I fell like I really need that T&E book, gonna order that soon. I feel like I really started to think about things now, even doing some researches. It feels nice.

So let's become practical here:

Price is now at 1.2275, Bank A wants to short, and to do that it needs liquidity.

Right behing 1.2300 there's a bounch of limit orders and stop losses.

Bank A buys a relatively small amount, but enough big to move the price in the 2300/2320 are, where the liquidity is (liquidity is provided to the bank by buy limit orders from breakout traders, but the bank is actually providing liquidity for stop losses; in both ways, the bank is entering its big short order).

Price immediatly drops down, and a cascade of other orders are triggered, helping the price to drop further.

Now here's what is happening. What would be the best strategy to profit from this event?
Quoting CindyXXXX
Is there an EA for this?
Classic.
Don't wish it were easier, wish you were better. ~ Jim Rohn
Quoting CindyXXXX
Is there an EA for this?
Lol, you crack me up xD
Quoting dr_who
Read my post again Cindy. Its not in any way related to your somewhat trite comment.
Sorry bud all in good fun - I know what you meant I just couldn't resist
Time hides Nothing
Quoting CindyXXXX
Sorry bud all in good fun - I know what you meant I just couldn't resist

OK, understood. No offence taken (well not now anyway !)

Its a serious question though. I know some highly intelligent people who have created some great theoretic models but who are themselves incapable of making practical use of them.

I was merely interested to see if DS put himself in that category. It was not intended to be a slight on his character.
Quoting Wamo
The way I see it, the most interesting part of Darkstar's picture is the area I've highlighted with the blue rectangle. That is the liquidity vacuum created by the shift lower in price - there are no (or few) remaining orders there. If large buy orders start coming in, price should pass through that area very quickly searching for liquidity higher up. I would want to be in a position to capture that move should it happen.

Which I suppose is visualized in your third picture, Scott.
This liquidity vacuum stuff is KILLING ME. So what if there is a liquidity vacuum there, in theory it might be, but it is impossible in practice because the dealers MUST have liquidity there, so there is no vacuum in reality? Also, I'm more than 100% that more orders will start pouring in and "block" that liquidity vacuum that was there (with sell orders) resulting in that price could never move back to that price area again. What is it that I am not understanding here?


Quoting dr_who
DS, its great to be able to communicate with someone else who has an IQ bigger than the size of his dick and I'm sure your million years of experience stands you in good stead, however, are you in profit trading FX ? Or are you a theoretician ? Nothing wrong with being a theoretician of course and I've read your posts and learned stuff I didn't know, however, making money by trading FX (or any other instrument of course) needs more than theory and it would be interesting to know if you're able to profit from your undoubted intelligence.
He is/will soon be a millionaire. I recall I read somewhere he said he was like 5k pips from becoming a millionaire.

Quoting scott89
So, a stoploss it's different from a limit order? a stoploss becomes a market order as soon as the stop price is reached?
As I'm seeing it, a stoploss NEEDS to be a market order, so that it can be filled even at worse prices, but still be filled, rather than not being filled because of a fast changing in price.

And I think that's why stoplosses are not viewed as limit orders on an orderbook
T&E:
Stop orders accelerate price changes. Price often changes because traders on one side of the market demand more liquidity than is available.
When these price changes activate stop orders, the stop orders unfortunately contribute to the one-sided demand for liquidity.
Stop orders accelerate price changes by adding buying pressure when prices are rising and selling pressure when prices are falling. They demand liquidity when it is least available.
I think for the most this illustration is very confusing.

They're talking about vacuum or something like that.

If you're making a transaction size becomes known and MM are keeping records.
If you're building inventory within a (new) value zone, how would you do it?

Right, sucking in as many as possible.
It's the same if you're playing poker when raising inconspicuously with a very strong hand.

As a large participant you can risk it because of various reasons: better information or longer term investors are standing on the sideline.

The disequilibrium is developing over time and will be unloaded when the initiator decides to flush out the opponents.

That is the exact point when his money/liquidity will shift to the opposite active side.
Quoting Carnegie
T&E:
Stop orders accelerate price changes. Price often changes because traders on one side of the market demand more liquidity than is available.
When these price changes activate stop orders, the stop orders unfortunately contribute to the one-sided demand for liquidity.
Stop orders accelerate price changes by adding buying pressure when prices are rising and selling pressure when prices are falling. They demand liquidity when it is least available.
During the stophunt the stops are backed by the bigger order the Market Maker drops in the market itself, while, on the other side, stops triggering during the move AFTER the stophunt are adding to the strenght of the move itself; these stops are of the limit orders triggered with the stops hunted.
I think that's what we called "a cascade of stop losses" and we agree here.
But i repeat my question, what is the best way to monetize this event? What do we HAVE to do?
Quoting UnnamedPlayr
If you're making a transaction size becomes known and MM are keeping records.
If you're building inventory within a (new) value zone, how would you do it?
I feel stupid to ask this, but can you explain me the difference between "making a transaction" and "building inventory"?

I apologize for this
Hey DS, just curious if you recommend a specific couple of chapters to focus on in T&E. I recently got the book, but was overwhelmed with all the intrical information. What sections of the book will give me the best jumpstart on contemplating orderflow inefficiencies in the market? Thanks!!!
Quoting scottymoll
Hey DS, just curious if you recommend a specific couple of chapters to focus on in T&E. I recently got the book, but was overwhelmed with all the intrical information. What sections of the book will give me the best jumpstart on contemplating orderflow inefficiencies in the market? Thanks!!!
+1 to you. I never even thought about asking him to point out "good" chapters regarding order flow.

Today I have seen something really interesting in the market. Really, really interesting. I will try to build on it and see if it works out.

Thanks guys!
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