Reading Order Flow

The more time I spend mentoring traders, the more I realize that a key ingredient in successful trading is the ability to read order flow. Perhaps you have read previous articles of mine on this subject, but the fact is, just like the markets are constantly changing, the strategies to use order flow change too. At The Marlin Letter Inc, our typical client is a full-time trader who is able to follow along in our Hotcomm trading room for the better part of 7 hours each day. Through the trading room, they listen to the flow of information from the trading floor, such as support and resistance levels, and then use the order flow to determine what trades to make. We also use order flow to determine absolute profit targets and stop-loss triggers. We’ll even use order flow to identify trading opportunities between support and resistance – when the “systems” and “indicator” crowd is on the sidelines.

We’ll take a look at how to read order flow a bit later, but first let’s review what it is and where to find it.

When trading futures on the computer, a typical order entry system (“front-end”) will provide a vertical display of the best 5 bid (orders to buy) prices on the lower left and the best 5 offers (orders to sell) on the upper right. The volume at each bid price is displayed directly to the bid price’s left; the volume at each
offer price is displayed directly to the offer price’s right. The price that is currently trading (“last”) is
indicated by showing the number of contracts trading in parenthesis.

This is what is commonly called “the book” or order book. The movement of those prices as the market ebbs and flows is what we call order flow.

Below is a view of a typical order book, in this case Ninja Trader provided courtesy of Mirus Futures.

http://www.cbot.com/cbot/docs/73766.jpg

Note that this order book is for trading the CBOT mini-sized^SM Dow’s September contract and that the trader has pre-set 10 as his/her Order quantity (usually referred to as volume; the number of contracts the trader wants to trade with each click of the mouse). Also note that all of the orders placed in the queue will be “Day” orders, meaning that if they are not filled, or cancelled by the trader, they will be automatically cancelled by the front-end at the close of the session. Other features of note are the “C” located near the lower right corner of the order book; a simple click of the mouse on that “C” lets the trader cancel all of his/her orders already in the queue (“resting orders”).

A major benefit of the order book is that it allows for one-click trading; this trader can click in the “BUY” column next to 11034 and instantly buy 10 September mini-sized Dow contracts. Or, he/she can click in the “SELL” column next to 11033 and instantly sell the remaining 10 contracts that are being bid for. Another action the trader can take, for example, is to move their mouse up to 11045 and by clicking the mouse in the “SELL” column there, place an offer to sell 10 contracts at 11045. The versatility of the order book extends beyond these points, but hopefully these will provide the reader with the insights necessary for the scope of this article.

Let’s move on….

Mini-sized Dow Sept

11068 243
11067 86
11066 37
11065 62

(17) 11064 39

43 11063
39 11062
97 11061
93 11060
58 11059

In the above example, we see that the current market in the September mini-sized Dow is 11063 bid and 11064 offered. We also see that 11064 is trading, that 17 contracts have traded, and that the sellers want to sell 39 more contracts. If we want to immediately get long in this market, we would click with our mouse on the 11064 offer price column and instantly buy the pre-set number of contracts that we programmed into our front-end. If we wanted to sell this market immediately, we would click with our mouse on the 11063 bid price and instantly be short the mini-sized Dow.

Now, let’s talk about how to use the order book for successful trading. First of all, realize that a portion of what you’ll see in the volume columns is not “really” there. For example, the large offer up at 11068 may have NO intention of actually selling those contracts. Instead, that trader may want to buy and hopes that by placing that order in the book (the “que”), he will lure other traders to sell in front of him. Their selling could push the market lower – so he can buy it. So how can we tell if it is real? Watch to see how the offer responds as prices move closer to it. If it remains at 11068, and the size does not markedly diminish, he is probably “real” and can be useful to us.

Let’s assume that the mini-sized Dow trades up to 11066 bid at 11067 offer and the 243 – lot offer at 11068 is still there. A couple of ways that we use this information is to take some profits on any longs we have, and also place a few orders to sell at 11071-11073. The reason we are taking some (but note, not all) of our profits on established longs is because this size of a trader might be right and 11068 might be a short term top. We placed a few sells above him though just in case he is wrong.

Let’s walk though a bit of the thought process behind those sells above the large offer.

What has undoubtedly happened is that other traders have placed sell orders in front of the offer at 11068. They believe that the size is resistance and that they are going to be able to buy their contracts back at a lower price (profiting on a short position). However, IF the buyers buy all 243 of the offer at 11068 – or IF the seller at 11068 decides he/she is wrong…or IF the seller at 11068 decides as 11068 is trading that he/she doesn’t want to sell all 243 – the market will pop through 11068 by a few ticks. It will make that pop because all the folks who expected 11068 to be the top will race to exit their (shocking!) losers – but because of the liquidity and depth of the mini-sized Dow, the market will only move 3…4…5 ticks – right into our sells.

No discussion about interpreting size in the order book would be complete without giving the reader some idea about what “typical” size is. In the mini-sized Dow, any size above 180 or any prices where “size” is “stacked” is noteworthy. At the other end of the spectrum, any volume below 30 at a given price should be considered light. In the bonds, (US 30-year Treasury Bond futures) volume around 3000 is heavy; volume below 1000 is light.

Mini-sized Dow Sept

11078 22
11077 27
11076 97
11075 68

(7) 11074 44

62 11073
38 11072
104 11071
262 11070
132 11069


US T-Bonds Sept

108.04 2100
108.03 1870
108.02 3570
108.01 3800
108.00 1762

1550 107.31 (250)
1328 107.30
2669 107.29
1211 107.28
800 107.27

http://www.cbot.com/cbot/docs/73767.jpg

US T-Bond order book provided courtesy of Mirus Futures. Note the larger (“heavier”) volumes compared to those seen in the mini-sized Dow order book.

In the mini-sized Dow example above, the area of 11069 to 11071 should be looked at as supporting the market in the short term. Trade above 11076 should be able to rally (note the light volume). In the bond example above, 108.01/108.02 will provide some resistance. 107.27 has light volume.

Now, the reader must understand that the order book is almost constantly changing….it is NOT static!
But again, these examples DO provide some insights at this point in time:

Short Dow traders should respect the size at 11069/11071 and take some profits….short Dow traders should NOT stay short IF prices move above 11076…..long bond traders are going to have a hard time selling their contracts above 108.00….long bond traders will have to very careful if prices move below 107.28….

The next point to discuss is how to use the constantly changing order book for information. This space does not provide for the multiple of screen shots it would require to walk the reader through the ebbs and flow of the order book price changes – but we can talk about it a bit.

Basically, in the mini-sized Dow, we’ll focus on watching the number of prices the market surges upward versus the number of prices it surges downward. In the above example, 11074 is last….suppose the market then trades 75 76 77 – that fast. Then it sits and trades 77……..then trades 76 77 78 79….trades 79s…. 78 79 80….THIS market wants to trade higher….the surges up are much bigger than the surges down… the market pauses as it trades the offers….that is bullish information. We would want to trail this market with some bids in an attempt to get long. If we are already long, we can stay long. If we are short, we are on the wrong side of this market. Now, add some volume into the equation – and the surges. Assume there is a 220 lot to sell up at 11085….the mini-sized Dow trades 81…82 (the offer is still there) ….83 (trade is slowing; the offer is still there) 84….85 and suddenly trades 84 83. The size offer is at 84 now… but only for 200. We deduct that the seller got a partial fill but NEEDS to sell (he is lowering his offer, in effect chasing the market). The mini-sized Dow trades 82 81 80 and the offer is still moving lower…it is real and if we are long, we need to get out.

Watching a size order move up (or down) the book is very useful to us to know when we have to get out of a losing trade. But before we go into that discussion, remember: our style of trading is to have pre-determined prices in our mind before the market gets to them; prices that we expect to be support and resistance. So, we may already be in a trade when the market uncovers a sizeable bid or offer.

For example, suppose our analysis and interpretation of information gleaned from the trading floor tells us that 11050 is a place to buy the mini-sized Dow. We go down in the queue and place those buy orders. Now we watch the order book – the flow – as trade moves lower. Suppose we have seen an offer moving down the book as described above; perhaps we’ve put on small short position and will use part of our buy order down at 11050 to cover those shorts and the rest of the buys to establish the long position. Trade hits 11150 and because we were in the que early, we are filled. (CBOT products, with the exception of the 5-year note, are first in - first filled) The market starts to uptick….51 52 53 54 and uncovers a large sell order at 54…the mini-Dow trades 53 52 51 50 ….we are still long but we note that the size offer has now moved down to 11050. Trade moves down to 11046 and trades 47 48 49 50 49 48 47 46 45 46 47 48 49 ….the market CAN’T get back above the 11050 – and the offer is still there. We must get out of the long.

These are just a few ways that we use order flow to trade successfully. But I encourage you to see it first hand by visiting us on the floor of the CBOT and watching us trade live, or via our live chat room, broadcast from the CBOT floor. Watch us use the concepts discussed in this article. It will make YOU a better trader and at The Marlin Letter Inc, that is a priority of ours.


Jack Broz is a member of the Chicago Board of Trade. Along with his partner Saul Shaoul (CBOT member since 1984) they run The Marlin Letter Inc, (www.themarlinletter.com) a trading advisory and education company focusing on the CBOT’s Treasury and Dow markets. Free trials for the advisory service are available through the website; mention this article and receive a 10% discount off any educational or mentoring program (www.mltradingeducation.com) including the Marlin/CBOT Experience described at www.themarlinletter.com. For more information, email [email protected]

Does this have some connection to Forex that I missed?

I use a similar method to trade CME currency futures. I monitor the order book thru my broker but it can be monitored for free at CME-E quilvalents. There is direct correlation between future and forex that can be observed

Dear Editor,

I read your thread with interest. Although I cannot see "the book (order flow)", I also look at CME current reports and FX broker's "bull-bear sheet".
Order Flow reminds me of something.

On December 8, 2005, Mizuho Securities Co., a brokerage unit of Mizuho Financial Group Inc., offered a massive erroneous sell order for shares of J-Com, a manpower recruitment firm newly listed on the Tokyo Stock Exchange's Mothers market.
A Mizuho employee placed an order to sell 610,000 J-Com shares for only 1 yen each, instead of offering to sell one J-Com share for 610,000 yen.
(The TSE's computer system would not accept the cancellation request.)

The 28-year-old Japanese individual investor (called a J-Com man, although he calls himself BNF) who gained 2 billion yen profits at this time became famous suddenly in Japan.

He began equity investment for 1.6 million yen six years ago, he has never cut his stock trading and is said to have increased even to 15.7 billion yen at last month.
It seems that he watches "board information(means "the book")", long goatee of candlestick and the rate of moving average deviation...

WOW. 15 bill is quite interesting.

i'm using mbt navigator to monitor order flow information. I hope i learn something from it. I'll be watch esp during NFP this week

Just a quick FYI, the MBT orderbook is complete BS. Even if the entire book was consumed in one direction, interbank pricing wouldn't move. You may glean something from it, but it is unlikely to be of much benefit long term.

even ifi watch it before NFP?

Yup. The heart of the matter is that the MBT orberbook does not show real orders. It's a synthetic book managed by an trading desk. You'll see MBT customer orders ofcourse, but that isn't indicative of what the real market is doing. Durring NFP you'll see spreads on MBT blow out to 10+ pips, while the real market will only be at 3-5.

then and hotspotfxi is just the same then?

The hotspotfx"I" platform is true pricing. The retail based hotspotfx is the same as MBT.

Does anyone out there know of or know how to read the order flow on CME- Equivalents . Such as Volume, price wat to look for, don't want anyone's secrets just some direction . Please useful insight would be greatly appreciated :



Regards : Vinny

what software do u suggest for us retail traders darkstar?currenex maybe?

I have read through the information in this forum on order flow trading and Darkstar has been talking about it since 2007. Does anyone know the best way for a new trader to learn order flow trading.

You have to look at an independent book platform. Something that can be integrated into any platform.

Hi,

Anybody knows how to monitor the true and complete, or almost complete market depth of the forex markets in US, Europe etc. I know tradestation or
Dukascopy has market depth but not sure the extent of it.

Best if got alert configuration and/ or addition features. (hope i know what I am talking about)

Using MT4 platform.

Titu

Darkstar, I have watched order flow for 15 yrs on and off. You are not 100% right. Not at all. You are 200% right! Not only what you say is true, but the obvious games they play from the pit because they know the retail public is now watching is ridiculous. I agree...even if you saw the first five mm's on the bid for 100 and the same OR different mm;s on the offer for 2, it means nothing. It looks like there is huge demand for the stock or future and nobody is selling right? Thats what they want you to think. Then I have watched where you see big volume coming in on the bid and now its leading down to all the mm's listed, so there has to be big buying now. You cant have 10 market makers playing games can you? Yes,No, and maybe. I will give you one "inside trick" I was taught long ago. You follow one market maker only and ignore the rest. Try to find out what the stock does as he goes up and down on the bid and offer. Does the future or stock move with the market maker or is the mm faking you out? You like that? Here is the bad news. You must lose in the end anyway, because if he is faking you out, going the opposite way wont work for long either. And if he really wants the shares or contracts.....they could be gotten with a phone call 30 seconds before you ever see it on the screen so when John at Morgan asks his buddy to sell him 500 contracts of ES futures at 5 handles below current mkt, he has to get the price down there somehow, and when you see the price show up, strangely your order never gets filled because there was only enough for the one guy, and it was broken up into 7-20 orders by the computer so you cant tell only one guy bought it.(I cant tell you more than that.)

Bottom line is Dark Star is right and if you want to trade by "tape reading" as its called, there are plenty of "advisory services" that all claim to have ex-pit market makers as the owner giving you their advice. Why would they sell you the advice on even just one area all day that will be weak. If they are too busy updating their website...guess what...how much trading can they be doing. "And then you say.."But yeah, this guy knows what he's talking about, he actually wrote a book on it!" LOL

Im not making fun of anyone, God knows I have looked for that tape reading course, market structure newsletter, secret trader pivots, and all the names they give to being able to follow or even outguess the market makers! Save your money. Maybe 15 Years ago when they didnt have these HFT's and so many firms able to scramble their information, you could buy on the bid and sell between the spread over and over. But even then, you never could know for more than a few minutes on your best day which way the market is going.

That said, if you never looked at charts and just spent day after day watching order flow, could you make money. Yes, no and maybe. Just make sure you have health insurance. It will make you sick. In fact the days of ALL traders be it in the pit or electronically trading 8-4:30 is a dying trend. The high blood pressure,heart disease and loss of quality of life is not worth it.

I am very interested in incorporating order flow reading into my trading. Can anyone recommend me some reliable softwares for that? (preferably free)

you can see the order flow on the charts see where price left the level with few trades taking place that's where the banks and firms came in to buy or sell the market. They usually sell right into nice green candles and buy into nice red candles creating pin bars or sometimes they wait for close of the bar to head fake the public or retail clients into going long and sell into the next candle trapping the retail clients in a losing trade and when the retail clients sell out of the losing trade it moves the market that much futher and then usually it will head right to the next level of liquidity which could be and average daily range or average true range away to the down side and yes average daily and average true range are different. look for a rally base drop rally base rally drop base rally or drop base drop and you'll find the order flow on the chart you allways have to look for the fresh levels where price hasn't traded back into yet and that is usually where price will stop and turn and this is on any time frame chart. Look where price based for one to three candles and then took off from the level wait for the pullback and enter the trade setting your stop just below or above level depending weather you went long or short and please make sure you have a 3x the distance the distance of your stop profit potential or leave the trade alone there are a lot of trades if your reading level right that are 5-6x reward to risk ratio. Once you learn to read these levels on the chart and get consistent you will be profitable for life.

Hey man I like what you wrote, can you Pm me, I just have a few questions about order flow.

Thanks for the great info on that matter.