(binned per thread starter's request) Behind Price-Orderflow

Same as mutt's example. If the market maker / whoever wants to take price lower and sell, why not sell to someone willing to pay more (the buy stops).

Well, he did say:

So we are looking outside the box to find out who is trading and why. I guess once the 'Hand has been tipped' then price only moves in one direction because it has no choice.

I believe price action is a reflection of the order flow, so the who and why are secondary. BUT, if you KNEW in advance someone HAD to trade long, then putting on a long trade is a no brainier. That is what I'm getting out of the thread, to understand the order flow and where it's going, by who and why.

Other clues we've been given? You can do it by looking at price and not using a chart. If you want to look at a chart the less on it the better.

Yeh I think you missunderstood, we can never know who is trading and why they are trading with any certainty and can never know, we are not Gods, we are not omnipresent or omnipotent. We only need to know where the orders have proven themselves to be. Its not a secret, theres nothing wrong with asking what resources he uses. I used metatrader4. Big deal, its a price chart that shows me where the imbalances of buyers and sellers have been, so I can deduce with a high probability that area will continue to provide support or resistance in the future, until those orders have been worked through. If you truly seek the exact whys and whos then you truly seek the holy grail.

Man I just asked what products he uses, if hes not using a chart hes using something else, this isnt rocket science. I didnt even ask how hes uses the product. And I didnt ask you.

I think this is where our understandings of this start to diverge..If you go to the CME link and take a look at the order book, you are looking at peoples real orders. When you say we cannot see any, what do you mean? Tell me where liquidity comes from.

@ SK..How does pip operate?...lol..I'm still working that one out..I am away from home at the moment, but will be getting back shortley..I have some thinking to do..I'll be back in a couple hours guys.

Easy fella... I don't think LasVahGoose was disrespecting you in anyway... No need for that attitude.

Sure... I was just relaying the clues he's given us.

I wouldn't mind an answer to that one too, or even a hint would do!

Come on Steve, you really might have swine, this could be your legacy, we'll even place a plaque in memory

Yeh its cool guys, essentially what the point of this all is trading from an order book, reading the tape etc. Just been doing some research into that, not too much out there but somethings caught my eye.

Iceberging: a way for large orders to be shirted into the market, orders are broken into pieces and shifted into the market in stages, so as not to attract any unwanted attention.

I'm beginning to believe from my own trading that we as a group have missed the point of trading and what a market is from the day one.

Here is Larry's book which is not the full version but will give you some insight I am sure. And a book review which summarises a few things.

Cheers mate

I thought we're talking about spot?

In a round about way we are talking about spot. But where do you think our brokers get their quotes that they feed to us? Who do our brokers trade with? And on down the line it goes. All that matters is who is moving price. I am going off on a limb here, but I will verify this later, but I think the answer lies in the two tier market.

I will list some block quotes from the yesterdays homework that should clear things up so we can move on. This is from Osler agian BTW: (Bold for emphasis)

"A Two-Tiered Market
The foreign exchange market has two segments or “tiers.” In the first tier, dealers trade exclusively with customers. In the second tier, dealers trade primarily with each other. The interdealer market forms the market’s core in the sense that customer prices are all based on the best available interdealer prices."

"The Interdealer Market: In the foreign exchange interbank market there are no designated liquidity providers. At every moment a dealing bank can choose whether to supply liquidity or demand it. A dealer needing liquidity can, of course, call another dealer and request a quote. Until the mid-1990s such “direct dealing” accounted for roughly half of all interdealer trading (Cheung and Chinn 2001), while the other half of interdealer trading was handled by voice brokers – essentially limit-order markets in which people match the orders. During this period the best indication of the market price was often indicative quotes posted on Reuters’ “FXFX” screen.
The structure of interdealer trading changed dramatically after the introduction of electronic brokerages in 1992. In the major currencies, electronic brokerages not only took over from the voice brokers but also gained market share relative to direct dealing. Electronic Broking Service (EBS) now dominates in euro and yen while Reuters, the other major electronic brokerage, dominates in sterling. As the electronic brokerages took over, their best posted bid and offer quotes became the benchmark for market prices. By the end of the 1990s, voice brokers were only important in the “exotic” (relatively illiquid) currencies for which electronic brokers are unavailable. By now, “direct dealing among major banks has all but disappeared” (Barker 2007, p. 5). The speed of this transition reflects the intensity of competition in this market.
EBS and Reuters share a common, uncomplicated structure. Standard price-time priority applies. Hidden orders are not permitted. Limit orders are not expandable. Orders must be for integer amounts. Trading is anonymous in the sense that a counterparty’s identity is only revealed when a trade is confirmed. Dealers pay commissions on limit orders as well as market orders, though the commission on limit orders is smaller.
These markets have low pre- and post-trade transparency relative to most other limit-order markets. With respect to pre-trade information, price information is limited to the best bid and offer quotes, and depth information is limited to total depth at the quotes unless it exceeds $20 million (which it usually does during active trading hours).
(Scotty here..The writing in bold is a huge clue)
The only post-trade information is a listing of transaction prices. The exchanges do not publish any trading volume figures.
Trading on the electronic brokerages was restricted to dealers until 2005. Now, certain hedge funds are permitted to trade on EBS. Automated (program) trading was permitted around the same time. These shifts are reported to be a major source of the surge in trading between dealers and their financial customers since 2004 (B.I.S. 2007)."

The next quote is very enlightening in regards to how the big guys manage risk..This is also another important clue. (bold for emphasis):

"Dealers are constrained by position and loss limits which are, in turn, management’s response to rogue trader risk, meaning the risk that traders will incur immense losses (Goodhart 1988, Cross 1998). A single rogue trader can bring down an entire institution: Nick Leeson brought down Barings Bank in the early 1990s by losing $1.4 billion; John Rusnack brought down Allfirst Bank by losing $700 million. Such catastrophes could not occur in the absence of an information asymmetry that plagues every trading floor: management cannot know each trader’s position at all times. Traders are technically required to record their profits and losses faithfully and in a timely manner, but as losses mount they sometimes resort to falsifying the trading record.(can you guys say inefficient? the big guys are not god's and will get in going the wrong way and have to cover sometimes) Position- and loss-limits are intended to minimize the risk that losses mushroom to that point. Intraday position limits begin at around $5 million for junior traders, progress to around $50 million for proprietary traders, and can be far higher for executive managers. Data presented in Oberlechner and Osler (2007) suggests that intraday limits average roughly $50 million. Overnight position limits are a fraction of intraday limits, and loss limits are a few percent of position limits."

There is much more to this paper that is helpful in this search. I may spend some time chopping it up and adding commentary as I think it is extremely helpful. But one thing that should be dealt with first is order types and an explaination of liquidity, where it comes from and where it goes. I'll work on that today and post it later. That way we are all on the same page.

Scotty B

They're derived from their liquidity provider(s) quotes.

Sorry, I don't see your point.

From my partial reading of the material in my previous post, if I understand it correctly (if not please tell me):

Limit orders encourage liquidity. These can be seen.
Market orders dry up liquidity. These cannot be seen.

Limit orders create the structure of the market. Its boundaries causing market orders to come in creating liquidity but also drying the liquidity up. Market order create a demand for liquidity whilst reducing its supply. Limit orders are a source of liquidity. Without limit orders the market has greater volatility as it is left to market orders to push price around until a limit order gives the market some sort of direction and structure. When there are no limit orders and the market is left to market orders reducing the supply of liquidity then the market is considered inefficient.

When this happens specialists enter the market with limit orders to encourage liquidity -market orders come in to try and take advantage of the size and position of the limit orders. Therefore, the value of a limit order is dependent upon knowing the order exists and its size. Limit orders are on the whole visible (Level 2), but their size can be disguised.

Informed traders can take advantage of limit orders by getting in before the limit order and taking advantage of the thrust that the limit order will produce. However, the momentum this causes creates the opportunity for those traders with equal size to trade in the opposite direction causing the price to reverse. ('front running'). This gives another dimension of how prices might shoot in one direction to then tank in the opposite direction and allows the informed traders to use limit orders to push price higher to sell at cheaper levels where there are plenty of buyers.

Old Larry says: Limit orders execute quickly if they are on the wrong side of the market but they do not execute if they are on the right side of the market. This is opposite to the concept of front running and therefore, it makes you wonder how often front running ocurrs but is most likely to ocurr when the limit order is on the wrong side of the market. How do you know if the limit order is on the wrong side (larger trend possibly?).

So informed traders will get in before the market reaches a limit order on the right side of the market. This makes sense because if the right side is bearish for example, the more sellers there are the quicker the move will be exhausted as there will be less buyers to sell from and therefore less profits for those shorting.

I think the bottom line is that well informed traders do not use limit orders (unless they are encouraging a bluff), but instead use Market Orders (which you cannot see). Like Skfx says, its what you cannot see that is important. What you cannot see are the market orders that have the potential of drying up liquidity in one direction until a limit order is placed in front of it. The informed traders use that limit order to temporarily take the market in the opposite direction which encourages the herd to jump in, creating enough liquidity for the original direction to then resume. In a trend this causes the wave like action.

Could it be therefore, that what we should be concentrating on is order types? How are informed traders who use market orders, using limit orders, highly visible in the market, to their advantage. What are the signs that we can use to our advantage.

Scotty, just read your post. Looks like we are thinking on the same lines with regards order types and liquidity..

This is not my understanding of price action, order books are driven from limit orders resting in the market. The iceberg effect discribes the way in which large orders are shifted into the market at the same price level, ie. the order is being broken into chunks. This is where most of us lack the proper knowledge of the market, the real money doesnt chase price around, they have their price levels where the have to execute their orders. I read in a study that two thirds of orders executed in the FX market are limit orders. Noice traders have missed the point of the game from the start. I think the common misconception is that the real market moving flows chase price around all day. Sure there may be a few few stops tripped here and there, but that is far from the bulk of the movement in the market.

That 4th chart on the 1st page, the EURUSD H4, looks familiar... if you look at it on a lower TF, it's a "bucket trade" described on the nobrainer thread... I remember this particular one, I saved the chart after going short near the top of the spike Was my lucky day, indeed. And here's another chart with similar setups. Check the nobrainer stuff if interested in buckets.

I believe that our market belief system is our trading methodology. I just don't believe that money that can move the market in such a way as described in that euro chart can be continuously targeted and used to fund the accounts of the big boys. Sorry. The amount of capital required to move the market is phenomenal, if the capital was moving the market it would soon dry up when their accounts were run dry. It just doesnt make sense that this would happen. So as holy grail and secretive as some are making this out to be, I say you need to check your market belief systems, and align them with the reality of the market, the reality of all markets and the simple equation of the law of supply and demand that makes markets.

There is a great read by a trader called 'deeman' over on another board that really describes how stock specialists work orders for big customers. The dynamics of the stock market are a bit different than FX, but it goes a long way to show why ranges form, why price after a breakout will retrace into the old range before continuing the trend or actually reforming the range.

http://www.elitetrader.com/vb/showthread.php?postid=39614

http://www.elitetrader.com/vb/showthread.php?s=&threadid=2267

Thanks Indic-hater! I personally dislike market sentiment the most, how can we know how every other trader is feeling toward the market? If we think we know we are claiming to be all knowing and if we read someones opionion about the sentiment then thats all we are getting, subjective opinion.

Any and all influences on price is reflected in price.

I agree 100% with your first sentence, it's funny and also tragic what some people "see" behind price movements.

Honestly I didn't quite understand the rest of your post, I'm not stating anything other than the EU chart on the 1st page is an example the "bucket" scheme described by BRV on the NB thread and here (http://www.nobrainertrades.com/2008/10/bottom-of-bucket.html). No holy grail, just a pattern.