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.
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
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
62 11073
38 11072
104 11071
262 11070
132 11069
US T-Bonds Sept
1328 107.30
2669 107.29
1211 107.28
800 107.27
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]
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
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
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
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
1328 107.30
2669 107.29
1211 107.28
800 107.27
http://www.cbot.com/cbot/docs/73767.jpg
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]
