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How to Use Orderflow in Forex - Any Ideas? 9 replies

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

Quoting pipmutt
Who, do you mean who as in who is making price?

From memory Reuters 3000 Xtra had the 'who', mind you I don't know how extensive it was and you need to be a speed reader but I saw some household names flashing through. The fun part for me was watching quotes and spreads across one NFP, all I can say is wow, those people are nuts!
The 'who' depends on what kind of inefficiency you are trying to exploit. In some situations you only have two single oposing players to think about, sinse they have a massive interest in keeping the exchange rate wherever. Imo, this is a much easier task than trying to work out what effect thousands off different traders will have on the rate.

Something else to think about is the banks dealers who provide liquidity. Ever wonder why Institutions get better spreads than lone traders? Because financial Institutions are classed as Informed--- On the surface I guess your thinking, 'well why would that meen they get charged less?', well, by keeping Informed trader's on your books you are gaining valuable information. And the theory is that aggregate informed orders are a much better indicator of future price changes than one, it makes sense.

Now to link the above para in to what im saying: trading is a 1st in wins kinda game, assuming the move is favourable. Why would you think you can beat a bank at figuring out upcoming market moves caused by 1000's of traders? Remember that they have many Informed traders order info..... What do we have?

Interesting stuff.
Living the adventure in my head.
Quoting AstonDan
Thanks Hensch. Just getting my head around it

Having said that, price has hit last weeks lows, so wouldn't that qualify as a discount area where you would expect a cluster of long orders to be placed?
Just my opinion, but I think what we are trying to read here is how to ride on the market movers coat tails, not trying to predict what the may be doing.

So we still have to let the dust settle and discover the missing pieces of this puzzle.
Quoting hensch
Just my opinion, but I think what we are trying to read here is how to ride on the market movers coat tails, not trying to predict what the may be doing.

So we still have to let the dust settle and discover the missing pieces of this puzzle.
Very true because I for one didn't see that massive drop coming.
"I made all my money by selling too soon"
Quoting hensch
Just my opinion, but I think what we are trying to read here is how to ride on the market movers coat tails, not trying to predict what the may be doing.

So we still have to let the dust settle and discover the missing pieces of this puzzle.
Apologies, my misunderstanding then.

If that is the case, then to be honest, i fail to see how this takes us any further beyond Price Action 101.

For me, the value on reading order flow is in being placed to front-run the orders which actually move the market.

I'll go and sit in the corner for now
Quoting LasVahGoose
Anyone willing to translate this for me?
"EUR/USD Dealers report more trading of Friday 1.44"s this morning in London....The well hyped Asian CB barriers at 1.4450 are due to expire around 22nd September and should continue to cap any fresh advance."
What are 1.44's and 13.5 level? 800 mln will contain spot? Why will barriers at 1.4450 cap price advance?
This involves FX Options.
1.44 is eur$ exchange rate (1.4406 is the high last Friday/late Thursday). it must have something to do with this.
13.5 level? i have no idea.
800mln is a value/amount in euros possibly involved in the transaction related to the barrier.
"barriers" can be literally looked at as barriers: something that hampers/prevents. in the above article, an Asian CB (Central Bank) has an interest for price (of eur$) not to touch &/or exceed 1.4450 (this Asian CB set up this 1.4450 barrier). every time price nears 1.4450, this particular Asian CB will protect the 1.4450 price by counteracting demand for price to touch/push past 1.4450, eventually deterring/capping price advance.
Sometimes barriers are successfully protected (barrier is intact; that is, it was not breached &/or touched), sometimes not.
Once the barrier expires(in this case Sept22), the price at which a barrier was previously placed (in this case at .14450) can now be possibly easily/much easily breached.
That is all i know. This is likely incomplete &/or only partially correct explanation.
Quoting supremeChaos
This involves FX Options.
1.44 is eur$ exchange rate (1.4406 is the high last Friday/late Thursday). it must have something to do with this.
13.5 level? i have no idea.
800mln is a value/amount in euros possibly involved in the transaction related to the barrier.
"barriers" can be literally looked at as barriers: something that hampers/prevents. in the above article, an Asian CB (Central Bank) has an interest for price (of eur$) not to touch &/or exceed 1.4450 (this Asian CB set up this 1.4450 barrier). every time price nears 1.4450, this...
13.5 = the Implied volatility

http://en.wikipedia.org/wiki/Implied_volatility

Theres a nice read for you.
Living the adventure in my head.
Quoting Bleek
Very true because I for one didn't see that massive drop coming.
Don't sweat, depending how near (time frame) you were looking the market, is easy to get messed up.

Now, we still have to find out the "invisible part" which seems to be crucial. Don't forget that according to those who know what they are talking about, the chart plays a small role in this market charade.

AstonDan, I agree this seems to be mission impossible.
True. Usually if a barrier is breached there're lots of stop loss orders clustered right behind it. Knowing what you know already you should know who placed them there and where to place your orders

There're some other ways in which options influence spot but I don't have much time now to discuss it.

Happy trading




Quoting supremeChaos
This involves FX Options.
1.44 is eur$ exchange rate (1.4406 is the high last Friday/late Thursday). it must have something to do with this.
13.5 level? i have no idea.
800mln is a value/amount in euros possibly involved in the transaction related to the barrier.
"barriers" can be literally looked at as barriers: something that hampers/prevents. in the above article, an Asian CB (Central Bank) has an interest for price (of eur$) not to touch &/or exceed 1.4450 (this Asian CB set up this 1.4450 barrier). every time price nears 1.4450, this...
After laboring over this stuff for nearly three weeks straight, I had to pull myself away from it yesterday and I had a great day of golfing with some buddies. I think in any avenue of life, studying (accumulation/absorption of data), is not fruitful until a person can break away for a time of reflection.

It hit me yesterday while golfing, that the limit order book is only 1/4 of the other half of the equation. I would say that price action could reasonably be 50% of it, 1/4 goes to limit orders, but what about open orders? Current open orders in the market are where fear and greed reside. Limit orders are just possible future orders that may or may not execute. It is how people deal with profit and loss that we need to be focusing on as this is the epitome of orderflow analysis.

If I am in a profitable trade and I am 100 pips in profit and decide to close that trade, what happens? I have left the market and transferred the risk of an open position to someone who was willing to take on that risk be it I trade with a standing limit order at the next bid/ask or with someone who just placed an opposite market order (don't quote me on the latter). So, IMHO orderflow is about understanding who will demand liquidity and when they will do so.

If the market is trending up, and has been doing so for a while, why would it in theory be stupid to buy? Because you can bet your butt that there are open market orders in profit that are at some point going to liquidate (take profit). So it would make more sense to sell while the profitable longs are taking profits it you can identify that this is whats happening. Keeping this in mind, take profits should be almost as powerful as stop orders. Stop orders in my mind would naturally always be more powerful in terms of creating volatility, especially in obvious places like the OP showed us because people are only willing to loose so much and will start exiting in unison. In terms of profit taking though, some traders exit sooner than others. They will exit their profitable positions in different places. Also, think of the volatility that is caused when both stops and TPs start demanding liquidity at once along with all the market orders that start piling on in response to that volatility

So, if we can have some idea of existing open orders (not limits), then we can begin our investigation on the places those open orders will TP or hit stops. All limits do is provide liquidity, and I am relaxing in my quest to fully understand them. This is probably why only the depth of market is shown for the next 5 prices on each side of the market.

I am not saying the orderbook is un-important, just that its 1/4 of the equation. Lets now assume that I am a 'big player,' carrying a very large long positon in profit, and I see that huge limit buys are just coming to the market in the limit order book (idiots, or utiliatarion trades). Not only are they large, they will provide plenty of liquidity for me to completly unload my profitable position at a high price point. It makes perfect sense to unload in this place. Why? Well lets assume that liquidity is lacking in the buy side of the book. Why would it under normal market conditions be stupid for me to sell off my position at that point? Because I would work against myself when I sold and get a lower net profit on my long. There are many possibilites and exit stratagies I could use, but no matter what, given normal market conditions, it would be my goal to exit when I found a large liquidity pool on the buy side of the book.

This brings us to the chart. What do deep pools of liquidity look like there? What do shallow pools look like? Think like a big player and you can indeed find yourself in their company

Go get some fresh air now people and think about what I've said. Heck, maybe I've got it all backwards still, but I feel closer and closer as the days are passing by.

Thank you all for sharing your ideas! Give it a few more weeks and more research and we might have some folks sweating a little bit. I have not looked yet, but I already have strong ideas of where to find the real info I need. This is probably the most I have ever dealt with trading in a solid objective manner and it feels good.

Regards,

Scotty B
Attached Image
Quoting Leonlorenzo
13.5 = the Implied volatility
....
Thanks Leon.
I have heard/read a little about imp.vol. but im not sure that that value is imp.vol. so i just said "i have no idea"


Quoting Haxor
True. Usually if a barrier is breached....
There're some other ways in which options influence spot but I don't have much time now to discuss it...
Thanks Haxor.
Do discuss it when u have the time.
Quoting Scotty B
....I think in any avenue of life, studying (accumulation/absorption of data), is not fruitful until a person can break away for a time of reflection.
It hit me yesterday while golfing......
studying gets more fruitful after a few regular doses of rest & relaxation.
what usually happens is when the mind is relaxed (whether u are resting or relaxing via a hobby/sport etc) certain surprise AHA moments surface/creep up out of nowhere. This is precisely what u've experienced ,Sir.
Taken from the Dukascopy web site FAQ--What is a "Place BID/OFFER" type of order?
These types of orders allow users to act as liquidity providers by placing individual bids and offers right into the market. Bids/Offers are very similar to limit orders and used to buy or sell a currency at a specified price or better. But in addition to limit orders, Bids/Offers have several advantages. As all Bids/Offers are placed directly in the market, they can be taken by other liquidity consumers, thus allowing a trader to avoid a spread cost. The required margin for Bids/Offers is reserved instantly when the order is accepted, what means, less time is needed to process the execution. Bids/Offers also have a higher priority over limit orders placed at the same price. Additionally, users can specify the time period (Good Till Canceled / Good For / Good Till) allowed for the system to work the order. All together, these features make Bids/Offers valuable tools for intraday trading.


Taken from the book " Master The Markets" by Tom Williams...."

Sudden movements away from the cash price are usually caused by the activities of the specialists or
market-makers. These professionals are trading their own accounts and can see both sides of the market
(i.e. the buy and sell orders). If syndicates are in the process of selling or buying large blocks of shares,
they know these large transactions will have an immediate effect on the market, so they will also trade the
futures and option contracts in order to offset or lower risk. This is why the future often seems to move
before the cash."
Scotty for all your hard work that you have done, it has been great reading what you have come up with.

Golf is similar to trading for me, in that most of the time you compete against yourself even when you play against others.

I too have always thought that there MUST be something else behind the charts, as I am another one who has spent ridiculous amount of time studying them when I should have been playing golf instead!! but failed to find the missing piece.

Just wondering what the image of the woodworker was for..is that a clue?

Keep up the good work, perseverance will hopefully pay off in the end

cheers J
Quoting slimcat

Just wondering what the image of the woodworker was for..is that a clue?
Thanks for the encouragement mate. The picture was just a tease at those who KNOW. Don't read anything into it.

Scotty
Quoting Scotty B
Thanks for the encouragement mate. The picture was just a tease at those who KNOW. Don't read anything into it.

Scotty
Oh to be one of the ones that know. Problem is, some of us wont be capable of ever finding out. Wether capability lies on the sholders of drive or intelect is the question.
Living the adventure in my head.
Quoting Leonlorenzo
Oh to be one of the ones that know. Problem is, some of us wont be capable of ever finding out. Wether capability lies on the sholders of drive or intelect is the question.
I vote for the drive part of the equation. Check your PMs mate.
Quoting hensch
Something else, skfx, has given us the white space hint several times.

What I gather is that he's referring to accumulation/distribution areas where you can clearly see price retained in a range.
...and areas of least resistance
Quoting Scotty B

It makes perfect sense to unload in this place. Why? Well lets assume that liquidity is lacking in the buy side of the book. Why would it under normal market conditions be stupid for me to sell off my position at that point? Because I would work against myself when I sold and get a lower net profit on my long. There are many possibilites and exit stratagies I could use, but no matter what, given normal market conditions, it would be my goal to exit when I found a large liquidity pool on the buy side of the book.
I like what you are thinking here Scotty.

Would it also allow those buyers to HIDE their liquidation of buys within those liquidity pools to then reverse their position. Interesting thought. (Beam me up scotty!! )
Quoting supremeChaos
This involves FX Options.
1.44 is eur$ exchange rate (1.4406 is the high last Friday/late Thursday). it must have something to do with this.
13.5 level? i have no idea.
800mln is a value/amount in euros possibly involved in the transaction related to the barrier.
"barriers" can be literally looked at as barriers: something that hampers/prevents. in the above article, an Asian CB (Central Bank) has an interest for price (of eur$) not to touch &/or exceed 1.4450 (this Asian CB set up this 1.4450 barrier). every time price nears 1.4450, this...
That is interesting. thank you.
Don't wish it were easier, wish you were better. ~ Jim Rohn
using the currency EFT,reading on the level 2 can help to see big players and vol.,IF U LOOK AT THE CURRENCY EFT THE ARE ALL PRICE THE SAME (only for major fx pairs eur/usd,usd/jpy,etc......
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