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

"@Scotty
Quote:
It's kind of a funny thing anyways. If you are a profitable trader and have some edge then in a round about way you are profiting from the underlying orderflow, without ever really seeing it or realizing it.
"LOL.Makes me laugh everytime.
This is a classic Scotty.Before i 'understood',i would put a trade on every now and then and she would be golden from the get go,never looked back.
When your trading blind you really think that it was your system/your edge that you had devised that cut it out for you.HA,what a big joke that is.Talk about no idea."

I tried this logic yesterday and SK scolded me for it. This tells me there IS someway of knowing maybe not necessary who, but when and how much- if that makes sense..The data is out there somewhere, maybe it's right under our noses, but it's there. These guys are not playing a guessing game. They are dead on the money; pardon the pun.

Quote from DS:

Benefits of Trading CME FX Futures and Options:

 

1. Open, fair and anonymous trading
2. Equal access to the same FX markets and prices for all traders
3. All exchange fees are public and spreads are consistently tight
4. Global access to CME electronic markets virtually 24 hours a day
5. Access to in excess of $48 billion in liquidity each day
6. Guarantee of counterparty credit and central clearing by CME Clearing

I got this of of the CME website and I think the bullet in bold above answers my question about the value of the futures orderbook data. 48 Billion, is a far cry from the 2+trillion that changes hands on the interbank. I don't think it's going to be very helpful. I'm not crossing if off my list yet, but I'm still searcing.

Now I am going to post some more block quotes that I copied off of some trashy add-laden website that I thogut did a good Job of explaining the Interbank market. I think this is the direction we need to be going with this. IMHO, It is the guys on the interbank that we need to follow. If we are concerned about orderflow, lets focus on them.

I will bold the info I think Is relevant to this discussion in the text below.

"The interbank forex market is a financial system of currency trading among the world’s largest banks and financial institutions. This currency exchange takes place directly among banks or via electronic brokering platforms, such as Electronic Brokering Services (EBS) and Reuters Dealing 3000 Matching. Both these platforms offer trading in the major currency pairs. Trading in cross currency pairs is typically not supported by these platforms. The major currency pairs primarily traded on these systems are:



EBS

 

1. EUR/USD
2. USD/JPY
3. EUR/JPY
4. EUR/CHF
5. USD/CHF

Reuters

 

1. GBP/USD
2. EUR/GBP
3. USD/CAD
4. AUD/USD
5. NZD/USD

The interbank forex market is decentralized and unregulated. It does not have a specific location where the transactions are recorded. The interbank foreign exchange market is an important component of the larger forex market. It is a wholesale market having three major segments, which are:

 

1. the spot market – In the spot interbank forex market currencies are traded and delivered immediately.
2. the forward market – This market deals in contracts for future delivery.
3. SWIFT – The Society for Worldwide Interbank Financial Telecommunications is a worldwide network for exchanging messages between banks and other financial institutions.

Most interbank trading is conducted from the banks' own accounts, while some interbank trading activity is undertaken by banks on behalf of their largest customers.

Who Determines the Interbank Forex Rates?


Each bank sets its own forex prices. However, given stiff competition and a large number of players in the market, the prices determined by different banks do not vary significantly. The factors considered by banks to determine forex prices include:

 

1. volume available at the current price level
2. current economic and political environment
3. their opinion on the prospects of various currency pairs
4. their inventory levels

Central banks play a key role in determining the interbank exchange rates. This is because the central banks have the power to alter interest rates. High interest rates prompt traders to buy currency from banks, exerting upward pressure on the value of the currency. Central banks can also buy and sell currencies to alter supply, thus impacting prices."

All of this info is baby stuff, I understand that, but I think it gives us a good map of where to start digging. One of my strong questions is, can we in some way gain access to EBS or Reuters data? If this is where 'the big players' orders are 'flowing,' then this is a common sense place to look.

Again, thanks for humoring me,

Scotty B

Okay guys..I feel like I am talking to myself here..I found a temporary free data feed to true Interbank orderbook data.

Dukascopy if I understand correctly, trades on the actual interbank network.

Here is a FAQ dealing with this that I borrowed from their website:

Do all the accounts have access to interbank Forex trading market?
Yes, all the accounts have direct access to the interbank Forex trading market via SWFX - Swiss FX Marketplace.

They allow individual traders to open an account with them for 10K minimum. Also in their platform, you can see the orderbook. I am assuming (I could be wrong) that this is the broad interbank orderbook. This is probably a good place to start focusing. Also, if I am right, this orderbook data is the 'headwaters' that trickle down to our retail stuff. This is where the quotes are coming from.

Anyone who is interested in following this with me can download a 14day demo:

http://www.dukascopy.com/swiss/english/forex/demo_fx_account/

Now the question is, is this the 'right stuff,' and how do I interperet it.


Scotty B

Here is a quick screenshot highlighting the depth of market.

[quote=Scotty B;3008472]Okay guys..I feel like I am talking to myself here..

Thank you for sharing your research and thinking out loud. It is appreciated.

[quote=Teiresias;3008508] I am enjoying it. It's been an enlightening last few days for old Scotty. No word from SK for a while. I hope he's feeling alright. Anybody out there with ideas on this, please by all means, chime in. I don't think it's rocket science type stuff, but like SK has said, UNDERSTANDING is one of the keys. Hard work and and a little brain power pays off.

[quote=Scotty B;3008527] The only feedback you will get on this subject is from people who know less than yourself, the OP is the exception{If he is going to continue with this thread}. Once you get in to this stuff your pretty much on your own as far as getting a trading method down, and rightly so, since were talking about money here.

Ive got to say that im suprised, I always skipped over your posts before because of my allergy to all things magical (fibs inc). But your coming across as very interested in all this and searching the net like a mad-man for info.

Good luck mate.

I think every ECN uses its own internal order book. It only represents the orders made through Dukascopy.

That could be so...but the one advantage we have in this small resource is that these guys do trade on the Interbank. Meaning, orders flowing through this orderbook have the ability to move the prices on the interbank itself. I think it will be a great tool none the less. What we really need is access to the EBS and Reuters orderbooks. I am finding that is not going to be easy though. With the Dukascopy orderbook we have a small stream that flows into the broader interbank 'river.' We need to get to the place where all these streams converge.

Leon..Thanks for chiming in my friend..I know from my lurking that you are in the same search I am. If I am correct you have the Harris book as well. Isn't it funny how much we really don't know? I am really enjoying wading through all this stuff. Join the search man. Many hands make light work, and many brains make quick research. That goes for everyone else who is following along!

Scotty

[quote=Scotty B;3008527] The usefulness of level 2 data remains inconclusive it seems after a quick web scan.

I'd say you don't really need it. I don't. Hard work is only necessary if you are looking at the right stuff. Nice discussion though.

Other Forum discussion (http://www.traderslaboratory.com/forums/f150/level-2-data-still-worth-4130.html)

[quote=Porkpie;3008737] Hey,

Thank you for the referral. The fact of the matter is that guys like the OP, Gaston, DS ect. are using this stuff profitably. If we want to do the same it's gonna be an up-hill battle.

Here is a paper I got from another website dealing with the very issue at hand where the opposite is true (attached).

One thing I want to mention along with this is that academics are not traders. We probably won't find what we are looking for in them, but we can get plenty of ideas to work from.

Here are some quick quotes from the paper that already have me thinking:

"differences in quoted depth between the bid and ask side do predict future price changes, especially for price changes over short intervals"

"the relation between order imbalance and future price movements. The “order imbalance” in these studies refers to the difference between quantity bought and sold."

Order Imbalance is what orderflow/net liquidity demand trading is all about.

Ahhhh, more homework.

That may be true, but there are ears around here too.

i hope skfx gets well soon so the discussion can carry on.

Hello guys. Great discussion going on here. Scotty B, please continue to think out loud as it really me going deeper myself. I am writing from work but will chim when i get time and i am getting 13 weeks off work starting september 12th so will have a lot of time, next 3 months, to decipher this matter more deeply.

It really seems, that one root to successfully trading is really to get hold, somehow, of those order books of the bigs players and then develop a trading strategy where you just drive the wave along with them where your own order get picked up by their moves.

I do agree that market profile in one great graphic representation of the "other timeframe" which are big players, specially when you are using merged market profiles.

Man, SKFX has really started something very much interesting but i dont get much hope that we will give details much as his point is that the trader need to get what he offer and find by himself the "real thing".

I do agree, doing things that way, is more rewarding long term, as your own reseach will bring you to a point where you know the keys to successful trading.

Having said that, by sharing our reseach alltogether, we can definitely come with something worht it.

Shreem

EDIT: this made me think, spot forex been decentralizded as compare to future market, stock or commodities market. There is certainely a reason why this market is still decentralized and that we dont have access, as retail traders, to the whole reported daily volume. If we could get a way to get the majority of the daily volume of the true interbank fx market, we would be on something.

Dealers usually aggressively price only the side where they want to trade.
Dealers who wants to buy quote high bid prices to encourage sellers to
sell to them! They also quote high ask prices to discourage buyers to buy
from them!

All you need to know in two sentences.

Some info

http://www.forexfactory.com/showthread.php?p=23354

http://www.forexfactory.com/showthread.php?t=10078&page=1

http://www.forexfactory.com/showthread.php?t=73047

London Stock Exchange info attached

I think essentially, if you can identify true areas of supply demand (SR) - no brainer, and use level 2 data to identify the strength of those levels then you are pretty much sorted. Currently I just enter trades at true SD levels (using a strength determination assessment), and then look at volume on lower time frame for entry. But most of the time I set and forget. Level II data will stack the odds in your favour at these levels with greater certainty. (shit I just revealed the Holy Grail!! DOH! )

Reading support and resistance
On many Level 2 screens, certain price levels
attract large numbers of orders. These clusters
can be identified on a Level 2 screen and will often
act as support and resistance points depending on
whether they are above or below the current price.
Matching these with key technical levels can be an
effective trading strategy.
Advanced Level 2 strategies
Here are some advanced strategies that, with
more experience, you can benefit from:
• Trading by using ‘Times and Sales’ data (historic
trades executed) in conjunction with a Level 2
screen. This enables you to look at the
relationship between large executed orders
and the subsequent move in a share price
and depth of market.
• Reading a Level 2 screen to validate breaks of
key technical analysis levels. Breakout trades
is a very common strategy for trading markets.
Level 2 data can help you assess if the breakout

is real or false.

• Recognising and trading off ‘iceberg orders’
that can be identified on a Level 2 screen.
An iceberg order is a large single order managed
by an exchange that has been divided into equal
quantities by the use of an automated program,
for the purpose of hiding the actual order
quantity. This can hold back the share price at
a specific level as the full extent of the order
gets executed.
• By understanding supply and demand
characteristics on a Level 2 screen you can
identify intraday shifts in momentum from strong
buying to strong selling. This is seen by rapid shifts

from the left to the right side of the order book.

"to cope with the lack of order depth insight, you can look at the CME currency futures level 2. they track well with the forex market. i dont scalp, but if i did this is the setup i would use.

btw, anyone used "the matrix" in TradeStation? awesome level 2 setup..." Merlin

"yeah for sure...the first thing you have to learn when trading the level2 info (in any market) is that the executed orders are much more important than the resting orders. 90% of these resting orders come from gamers and automated systems." Merlin

"executed orders = order that were filled = "the tape" = "time and sales"
pending orders = order that are resting = "the book" = "market depth"

"the tape" and "the book" is what makes up level2. obviously there is no level2 in forex because it is decentralized, all of this is related to currency futures (or any other centralized market).

now...the tape is a record of the orders that were executed. basically its a list of orders filled, the price executed at, the time they executed, and the size of the order. is this is the most important part of level2 because it shows you what is driving the price.

for instance...if i am long and the market is going up, and i see a boatload of sell orders come in (on the book), i might think that the orders are just a ploy by the shorts to muffle the move. in this case i wouldnt exit my long position. HOWEVER, if the price reaches the sell orders, and they actually execute, i might be a little worried that there really are sellers at that level.

now, what would make me decide if i am to exit or hold my long is determined by how the price reacts to this selling. if the sell orders get fiilled, and the price continues north, i would know that the bulls are in control and i would hold my long position. HOWEVER, if the price bounces off the sell orders, i know the shorts have taken over and its time to exit.

so you can see how the book and the tape really work together to give you the complete picture. the book is important, but without the tape to show you what actually happens the book is almost useless. the tape, however, is useful all by itself". Merlin (again).

"the thing about "large" orders is that they are usually broken down into several small orders. so you really have to pay attention to figure out when a smaller order is part of a larger order. for instance, if the market is going down, but keeps bouncing off of buy orders at a specific level, you might conclude that there is a big buyer at that level. the orders might be small, but if they keep appearing at the same level (and for the same lot size) thats a good sign there is a broker sitting there executing a large order all day for one of his clients. large orders can sometimes take WEEKS to execute! the name of the game when scalping on level2 is to figure out where the buyers and sellers are, and determining how big the orders are." (Guess who?)

"...there ARE a lot of automated systems that trade the level2. as i said earlier, the book is filled with orders from automated systems. the main strategy ive seen employed is to automatically keep a bid and ask a few points away from the market. this is done to catch people sending market orders when there is no liquidity. if a sell market order is entered, and there are no bids for a split second, the market order will get slipped to the level where the auto system will fill it. this is common practice, and thats why i find it so funny when forex traders complain about getting slippage on their market orders...they dont realize thats how trading works!" (M...)
"

Steve,

First, thank you! But you really did say too much already! I can understand why people who are on to this took you to task.

What's funny is that a multi-billion dollar industry has to rely on this at the core of it's business model, with no easy option to change it. I read through the entire thread, and it's remarkable the energy people have put in searching for the answer. I learned a few things about microstructures and liquidity dynamics I wasn't aware of along the way. It's an interesting read.

This is the best thread on FF. ...besides picture tennis

Those orders would be large enough to move the price? The retail market itself too small for that.

What is most important regarding this lengthening thread?

Where price stops and reverses.

That is the foot print of order flow. That is about all you have to know.