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Hey...what about Volume?

  • #441
  • Nov 26, 2018 8:04am Nov 26, 2018 8:04am
Quoting bapakjason
{quote} Thanks for the futures examples.
You are very welcome!! I hope you find it useful
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  • #442
  • Nov 26, 2018 10:47am Nov 26, 2018 10:47am
Quoting DonPato
{quote} Absolutely...While the theory doesn't vary the order flow does...I'm sure you are familiar with what happens at the opening of a session...price moves wildly for about 1/2 hr until things settle down. This (as you know) are people participating and the huge influx in orders causes swings in price due to liquidity coming in an being used up...etc...see my last post. But yes time of day does matter a great deal. As a bit of an example...in your futures trading, what happens around 11:30-1:30 (eastern time)? Have you seen that the price action...
Thanks Don. This is helping me and others I hope as well. I do understand the volume drives order flow and volatility so times of day during session matters. I wasn't asking about that. I guess I am asking is whether "order flow" is fractal in nature just like Price. Meaning if low volatility delta represents 3 for every 1000contracts (just making up these numbers), then would the same principle of 30 apply to 10000 contracts. That is what I meant. Is the order flow and cumulative delta principles universal in nature? is there a LTF volume based "order flow pattern" that can be applied to HTF volume based pattern? if yes, what is that signature to look for (without looking at charts or candles or price movement). I am talking about absolutely RAW data signature that can be measured, quantified, justified and can be treated as a leading indicator of sorts. Just saying "Order Flow leads to Price Action" without our ability to measure that relationship equation will only lead to subjective and inconsistent analysis by traders. I know I am asking you to reveal your edge :-)

I think Order Flow is also similar to price action patterns where "nothing works all the time and this sh*t works only some times". I am hoping to remove the "probabilistic" nature of trading out of order flow and replace it with X will always happen after Y and Z.... after all, cumulative delta or imbalance cannot remain in a static state forever. What preceeds has to eventually follow to bring the market back in balance. Fascinating stuff but too early for a noob like me to dig into.

I will have to re-read one more time to understand what you said about buystop and sellstop.

Here's a hypothetical question for you. What will happen to "order flow" and price action charts if every market participant is forced to trade only one of these three scenarios
1) Only Market Orders allowed to enter and exit.
2) Only BuyStop and SellStop orders allowed to enter. No other order types allowed. No SL Allowed. Only TP is allowed
3) Only via BuyStop and SellStop orders. No other order types allowed. No TP Allowed. Only SL (and/or move to BE) is allowed

Which option would you choose to trade with during active and liquid sessions.... just curious :-
Staying in my lane...
  • #443
  • Nov 26, 2018 11:00am Nov 26, 2018 11:00am
One more question about market making and order flow. During illiquid times, we all know that Algos are run by authorized market makers of CME or any exchange to create market and generate more order flow by enticing traders to become market participants. Algos are just a set of rules i.e. if generate positive imbalance to move higher, generate negative imbalance to move price lower until the price reaches noticeable SR or SD levels. We can also do what market makers do but there is a regulation that prevents traders from making their own market and/or colluding with the market making function.

What these market makers do is basically creating art out of thin air with one MM in front of canvas and other MM on the other side of canvas creating a painting i.e. chart pattern of sorts. If this is true and let's say, MM rules could be reverse-engineering to accurately predict order flow (i.e using the principle of what preceeds has to follow and what follows has to preceed in order for balance to return to normal conditions), do you agree that order flow imbalance could be more 'predictable' to follow during lunch hours or when markets are calm?
Staying in my lane...
  • #444
  • Nov 26, 2018 12:53pm Nov 26, 2018 12:53pm
Quoting VEEFX
...I guess I am asking is whether "order flow" is fractal in nature just like Price...
Not that I have noted...I am one of those believers in that small time frame control and "build" the larger time frames...NOT the other way around. The inefficiencies I note happen on very small time frames and I have noted that the larger the time frame, the less visible these inefficiencies are because they are buried inside all the data in the larger candle. By the time you have worked your way out to the larger time frames the relationship you are looking for is "diluted" and practically doesn't exist. This is why many traders don't use order flow but instead use the resulting price patterns to trade with. What these and other's fail or refuse to acknowledge is that these tiny inconsistencies are what cause the price to make that pattern. Because it is price's REACTION to order flow that creates the edge...not necessarily the order flow itself.

Quoting VEEFX
... I think Order Flow is also similar to price action patterns where "nothing works all the time and this sh*t works only some times". I am hoping to remove the "probabilistic" nature of trading out of order flow and replace it with X will always happen after Y and Z...
Aren't we all. I may be wrong but I truly believe that no such formula exists...nothing in my many years of study tells me that "X will always happen after Y and Z..." I will tell you this however, this IS a constant. There are only two native states in order flow. Balanced and Unbalanced. And these two states are completely separate and distinct from each other. And here is the constant...A balanced order flow will ALWAYS end in an unbalanced state and and unbalanced state will ALWAYS end in a balanced state. This is the ONLY thing I'm aware of that one can say is ALWAYS true of the market and price action.

This is because of the variable nature of participation. Thus one can never say that "Y will always follow X & Z" because Y is never the same...and X and Z are never the same. The level and strength of participation are NEVER the same from one moment to the next much less from one day to the next.

Quoting VEEFX
... What will happen to "order flow" and price action charts if every market participant is forced to trade only one of these three scenarios 1) Only Market Orders allowed to enter and exit. 2) Only BuyStop and SellStop orders allowed to enter. No other order types allowed. No SL Allowed. Only TP is allowed 3) Only via BuyStop and SellStop orders. No other order types allowed. No TP Allowed. Only SL (and/or move to BE) is allowed Which option would you choose to trade with during active and liquid sessions.... just curious :-
I'm pretty sure no market would exist or very little market would exist...that's akin to saying, "I'll buy your apples at my price and no other, I don't care what price you are offering, I will not negotiate." I don't think anyone with this inflexible frame of mind will be in business for very long.
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  • #445
  • Nov 26, 2018 1:08pm Nov 26, 2018 1:08pm
Quoting VEEFX
... there is a regulation that prevents traders from making their own market and/or colluding with the market making function...
I believe this is an attempt to make a level and fair market process.

Quoting VEEFX
...let's say, MM rules could be reverse-engineering to accurately predict order flow (i.e using the principle of what preceeds has to follow and what follows has to preceed in order for balance to return to normal conditions), do you agree that order flow imbalance could be more 'predictable' to follow during lunch hours or when markets are calm?
I suspect you are trying to come up with your own algo and are struggling with the believe that there is an X, Y Z, basis for order flow. I cannot say because I have never sought that. Even my own theories of Climax, Exhaustion, and Absorption are based on behavioral observation of the markets, not raw order flow data. Again, because you are talking about literally 100's of thousands of people every day, I find it literally impossible to come up with some logical or mathematical basis that will ALWAYS be true. Try to keep in mind that the market is made up of people...even the algos you mention were designed by people. Each participant has a completely different psychology for how and why they participate in the market. Different tolerances for risk and emotions that control much of their behaviors.

To date I have seen NO algo that can accurately predict those behaviors regardless of liquidity. Trading is an art form (IMHO). It is not for me to look at how someone else expresses their beliefs in participation and criticize...rather to express MY beliefs and act on those beliefs in a positive manner when ever I see those pre-defined conditions. I believe I clearly expressed my beliefs earlier along with my predefined conditions. I am a chartist, not a tape reader and when you start calculating logic and algorithms, I easily become confused and lost. In my opinion that is just making it too complicated. Again I renumerate:

  1. Participation in markets can only be done by placing orders
  2. The resulting order flow determines price and its direction and duration
  3. The order flow is constantly changing but has only two distinct and native states
  4. Each of these states MUST begin and end in the other.

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  • #446
  • Nov 27, 2018 7:54pm Nov 27, 2018 7:54pm
Quoting DonPato
{quote} I believe this is an attempt to make a level and fair market process. {quote} I suspect you are trying to come up with your own algo and are struggling with the believe that there is an X, Y Z, basis for order flow. I cannot say because I have never sought that. Even my own theories of Climax, Exhaustion, and Absorption are based on behavioral observation of the markets, not raw order flow data. Again, because you are talking about literally 100's of thousands of people every day, I find it literally impossible to come up with some logical...
Thanks again Don for your patience in responding to my questions. Just to say it, I am not disagreeing with anything you have shared. I also believe there is a LOT of meat behind "Climax, Exhaustion, and Absorption" and you have done a great job in articulating the three scenarios. Off the three, I only like to trade Climax because of speed in the movement offering best risk to reward. By that, I am not a traditional believer in standard "distance-based" RR models. The time or duration my positions remain exposed to market elements plays more importance (to me!) and that is why I am a rapid scalper as it offers the best RR by my definition (I am sure many will disagree with me on this). I also believe everything starts from the bottom up and eventually get to see what becomes available on HTF charts. With that said, kindly see my most recent post. I explained where I am coming from and why I am focused on the numbers behind the order flow as explained in this video I just came across. In futures, it is crucial to understand the underlying "footprint" of order flow as an early warning signal to follow price action. And hence my questioning to pick your brain and experience. I am also a believer in "process of elimination" which means, I need to try it out myself first before I rule things out and not take someone word for granted. Experience tells me that at the end of the day, I pretty much have to be in charge of my own destiny :-

I have been a "facts and data" (forensics) guy for too long in my primary work life to avoid diving into the details, ripping things apart, put it back, dissect things, over-analyze etc. That is just who I am by nature. My kids no longer come to me for advice because they know I will ask a thousand questions first to understand the full situation in black and white before I can offer any objective advice. That is why to run over to their mom which has worked out great for their growth :-
Staying in my lane...
  • #447
  • Nov 28, 2018 7:45am Nov 28, 2018 7:45am
Quoting VEEFX
...The time or duration my positions remain exposed to market elements plays more importance (to me!) and that is why I am a rapid scalper as it offers the best RR by my definition (I am sure many will disagree with me on this)...
I do NOT...I wholeheartedly agree. In fact this is most likely my biggest weakness in trading the FX market...I should probably trade it more with this mind set. In-make your goal-out.

I do trade this way in the futures market. I too feel that "patience" while you are in a position is over rated...sure it pays off sometimes...but most of the time if price isn't moving the way you anticipated...its because the order flow is changing. The longer price moves back and forth just teasing you that it will go your way...the more at risk your position is.

Quoting VEEFX
... I am focused on the numbers behind the order flow as explained in this video I just came across. In futures, it is crucial to understand the underlying "footprint" of order flow as an early warning signal to follow price action...
After watching that video I completely understand what you are aiming at. You are wanting to join into a potential climax order flow just before or right as it is beginning to climax. In my experience this usually happens when a support or a resistance level breaks and one side of the order flow just gives up. If you look at it from a purely chartist view I would say you expose yourself to the risks of a "false break"...however I would call your attention to the phenomenon of "absorption".

Once you have identified your opportunity: I would say these usually present as a small range or "Pause" in the order flow. This usually means that opposing order flow is sufficient to absorb or "counter balance" the dominant order flow. Once that range starts this is your opportunity. You must then decide on your direction...normally I would say that it is usually inline with the preceding dominant flow...but often times this signals a complete reversal...However you chose direction is up to you.

Then watch the order flow "at the edges" of the range. And look for absorption. Lets say price is currently at the high end (top) of the range and you see the buying just kind of "poop out"...what once looked like it was going to break...doesn't. This is just lack of interest in buying. This usually means price will fall back to where buyers are interested again...this is NOT what you are looking for.

OK, same scenario only this time at the top of the rage the buying is (let's say) 3 or 4 times the selling at the top...yet price is just ticking up and down rapidly and NOT moving higher in spite of all the buying. This is your SHORT signal and it takes a little courage to short here. Why?
First of all as I've mentioned before, the REACTION of price to the order flow is what is your key. If all that aggressive buying cannot cause price to rise, it usually indicates there is a "deep pocket" of passive selling absorbing all the buying. And once all that buying drys up price will fall, and fall quickly. Of course if the buying continues to pound the selling eventually buyers may overwhelm the absorption area. But that is a different discussion. So your candle will most likely close near the highs may even beyond the cute little line you have drawn on your chart BUT, if the buying cannot surmount the absorption, price will fall, and WHOOSH downward. You can apply this same scenario on the opposite side of the range as well.

My personal rule of "engage at the edges" applies this same concept. I will NOT enter or exit any position in the middle of a range. Unless of course we are talking about a huge 200 point range seen only on a large chart. (again, different conversation). But I believe that if you train your eye to see the absorption at the edge of a range, you will be able to enter at its outer edge, with very little risk in both distance (ticks) and time. You will know quickly if you are wrong and can quickly reverse your position with a small loss if you are.

Quoting VEEFX
...I have been a "facts and data" (forensics) guy for too long in my primary work life to avoid diving into the details, ripping things apart, put it back, dissect things, over-analyze etc. That is just who I am by nature...
I think I can help you with the facts and tell you where to look for the data...however the details may end up making things more complicated. I have found that whenever I try to "box in" the market with a detailed rule set, I either end up losing big, or sitting on my hands for weeks because nothing ever comes in with the "right" data. But I understand you want to see it for yourself so I will point you in this direction:

  1. Learn the general principle first. Absorption is simply defined as order flow IMbalance that cannot cause price to move in the direction of that imbalance.
  2. Define it loosely at first then examine it over at least 100 or more instances and slowly fine tune it. Keep in mind that the same conditions that made absorption on day may not necessarily be so the next day. In addition keep in mind that absorption can fail, because even though there are deep pockets, they are still finite...you will never know how finite until it fails.
  3. Finally understand that absorption occurs in each and every candle. It is in fact what causes the high and low of each candle. At some point, during the 5 min (or whatever time) candle selling will be met and absorbed by buying, and vise versa. Try to define your criteria to exceed the "normal" absorption so as to show "excessive" absorption.
  4. Start with 3 or 4 times imbalance. Some software I've seen uses 6x. Example: If the order flow somewhere withing 3-4 ticks of the high, is also showing 3 or 4 times the buying than selling yet cannot advance...you might have absorption. Again DELTA helps, but if you see (let's say) 120 bids and only 40 offers, yet price cannot rise...this is an example. These numbers would make a buying delta of 80. Worse, if the candle closes BELOW this level...you probably have absorption.

So...I hope this will get you started in the right direction. Again, I went BLIND looking at these numbers and found I focused a little too much on the data and not the bigger picture. That is why I color coded each candle. It was sufficient for me to look at the entire candle as (1) continuation (normal), (2) Climax, (3) Exhaustion, (4) Absorption.

Good luck and I'll see you on the other side of the "rabbit hole". Don't forget your life outside your office.

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  • #448
  • Nov 28, 2018 7:46am Nov 28, 2018 7:46am
Just an example from today's market activity, which, by the way, finishes my goal for the week.
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  • #449
  • Dec 4, 2018 9:04am Dec 4, 2018 9:04am
Hello friends...just thought I would show an update on Gold Long trade I posted earlier...
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1st take profit target was hit yesterday and the stop on the remaining position is at last week's low and locking in a small profit. I am anxious to see if buying will push price above the most recent resistance level where price is currently trading.
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  • #450
  • Dec 4, 2018 11:27am Dec 4, 2018 11:27am
Quoting DonPato
{quote} I do NOT...I wholeheartedly agree. In fact this is most likely my biggest weakness in trading the FX market...I should probably trade it more with this mind set. In-make your goal-out. I do trade this way in the futures market. I too feel that "patience" while you are in a position is over rated...sure it pays off sometimes...but most of the time if price isn't moving the way you anticipated...its because the order flow is changing. The longer price moves back and forth just teasing you that it will go your way...the more at risk your position...
Sorry, I missed responding to this post. Appreciate your response as always. You are quite the thorough guy I must say. I just started wearing my quant hat on over the weekend by learning algo trading in Sierra. It has tremendously accelerated my understanding of market structure and behavior in price movements.... something that is absolutely crucial to understand imo. My research is leaning towards "Volume Analysis is a bit overrated" when it comes to understanding Climax which is where decent money is to be made imo. A simple moving average based breakout setup is yielding pretty good results thus far. The trick (as in trading in general) is to find the right scale to manage your risk exposure against a potential reward. I will get there soon :-)
Staying in my lane...
  • #451
  • Dec 4, 2018 12:55pm Dec 4, 2018 12:55pm
Quoting VEEFX
... I will get there soon :-)
Best of luck!
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  • #452
  • Dec 20, 2018 11:13am Dec 20, 2018 11:13am
Hello again friends...I thought I'd share an update on the earlier posted long on gold.
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The remaining position is up approximately 650 pips and I have moved the stop to lock in a little over 400. I am hoping to ride this position for as long as I can. From here on out its pure cream. These kind of trades only come along once or twice a year, but when they do I really enjoy them.
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  • #453
  • Dec 20, 2018 11:24am Dec 20, 2018 11:24am
Just ran across this market today (near end of day) that I felt was a very clear set up for a long...NZD/USD.
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Note there is a completion of all three phases, Climax, Exhaustion, and Absorption. However as I have mentioned many times, these phases do not always occur in order. However, all three phases have taken place this week and show the order flow changing to a more buyer dominated market just before the weekend. I have entered a long position (higher of two positions seen here), with a pending buy placed a little lower anticipating a retest of this low. So, with the holidays coming and a lot of books squaring going on at end of year, we'll see how this position does into and through the new year.
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  • #454
  • Jan 22, 2019 7:20am Jan 22, 2019 7:20am
Hi DonPato,

Thanks for the great work, i read all of your post on this thread and enjoying it. If you dont mind/if you have time, please comment this chart (happened), i need to see if my understanding of the concept are correct.
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thanks
  • #455
  • Jan 22, 2019 8:30am Jan 22, 2019 8:30am
Quoting EVolta
Hi DonPato, Thanks for the great work, i read all of your post on this thread and enjoying it. If you dont mind/if you have time, please comment this chart (happened), i need to see if my understanding of the concept are correct. thanks
First of all let me say, thank you for your kind words and for commenting on this thread. I greatly appreciate any commentary offered. Second, allow me to congratulate you on putting these concepts into practice. You analysis is quite correct. The absorption you have indicated is especially telling on this chart.

One word of caution I would offer...on the candle you have indicated as a "low volume test". I'm not quite sure because I do not know which basis your chart is using...(NY close?, London close?) However I would offer a word of caution when evaluating "low volume" on intraday charts. This is something I have spoken of "ad nauseum" and it is why the smallest chart I use in FX is the daily chart.

As is clear in your chart you see the volume come in waves. This is due to the 24 hr nature of this market and low volume periods are not unusual and are in fact to be expected. This is during the "gap" time when no markets are open. Thus if your are of "low volume" occurred during a slacking off period when few or nor markets are open this can be misleading...however in your case it appeared to work out quite correct.

I congratulate you on your correct and intuitive analysis of this market. I actually did take this market short, my entry was a bit early but was stopped out last week. I still have a short running waiting to see if the current retrace will "roll over" and give a second leg down.

Now I challenge you...can you point out the selling exhaustion pattern using the same analysis on this chart? If you can then I further challenge you to watch the current bullish price action to find the buying exhaustion and enter to catch the next bearish leg....
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  • #456
  • Jan 22, 2019 6:43pm Jan 22, 2019 6:43pm
Selling Exhaustion signal found on EUR/USD.
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I am already at my limit for positions in this market so I will not be taking this signal, but if it works well, I will move my stop up here to the lows of this absorption signal
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  • #457
  • Jan 22, 2019 6:59pm Jan 22, 2019 6:59pm
big difference volume why
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  • #458
  • Jan 22, 2019 7:06pm Jan 22, 2019 7:06pm
Your volume histogram seems very similar to what my provider is giving on my platform. My volume data is displayed at the bottom of the price chart in a blue histogram. The very bottom of my chart is an indicator I wrote myself called "extrapolated delta" and is an attempt to extrapolate the buying and selling occurring inside each candle to give a clearer picture of order flow. I'm sorry for the confusion.

I'm still not convinced this indicator gives as reliable a signal as the indicator I wrote for my futures trading, but it does come into the ball park and helps me make more informed decisions.
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  • #459
  • Jan 23, 2019 1:05am Jan 23, 2019 1:05am
Hello Don,
Have you read the book "Volume and pen Interest" by Kenneth H Shaleen ?
It is one that I read some years ago, it was written some time ago - 1991, but its contents are still valid.
Regards
Pip
  • #460
  • Jan 23, 2019 2:55am Jan 23, 2019 2:55am
Quoting DonPato
{quote} First of all let me say, thank you for your kind words and for commenting on this thread. I greatly appreciate any commentary offered. Second, allow me to congratulate you on putting these concepts into practice. You analysis is quite correct. The absorption you have indicated is especially telling on this chart. One word of caution I would offer...on the candle you have indicated as a "low volume test". I'm not quite sure because I do not know which basis your chart is using...(NY close?, London close?) However I would offer a word of caution...
Hi Don,

Thanks for replying/commenting. Here is my view about selling exhaustion which causing the the decent up movement. Not sure if it correct, please comment
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i had yet to detect the buying exhaustion on the decent move, please enlighten me if you found already about the buying exhaustion.

thanks
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