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Order Flow - Finding cluster of stops on chart

  • #61
  • Jan 13, 2011 10:00am Jan 13, 2011 10:00am
Quoting Carnegie
Hey Scotty, glad you could join the discussion.



Yes I also thought about the sideways market being liquid because there are buyers AND sellers there, instead of in a trending market where there are either only sellers or buyers (now obviously not ONLY, but I think you get what I mean..). I have been thinking about "quantifying" my ideas, i.e. testing them but I don't really have any idea where to start. First of, what is a balanced market? Or even better, what is an UNbalanced market? How do I define this? How do I predict future orders?...
Buyers and Sellers always exist. Even in trending markets there are always the same amount of buyers and sellers. The question is which side is more aggressive and is going to start bidding up the market or dumping the market. What is going to cause one side to get up off rear end and start executing market orders? What is going to light a fire underneath certain market participants that would cause them to gladly cancel their limit orders and pay market prices instead?

Take today for example. I am sure there were certain market participants that would of liked to buy EUR/USD at 1.3050. Maybe some of them put in limit orders to buy around some dips. What would cause them to say, hey my limit orders are probably not going to get filled and I need to instead start executing market orders, like right now! What would cause other market players to say hey I am currently short, but I probably need to start covering really soon, like maybe right now?

Predicting future orders is all about knowing what will generate order flow. Get into the minds of the market participants that are generating order flow and moving prices and figure out what will cause them to start executing billion of dollars in aggressive orders.

You don't need candlesticks or any other chart for that matter to execute trades based off of order flow. Now a chart may be helpful, it could also be deceiving. If the reason for the market moving and order flow being generated has nothing to do with a chart, then you don't need one. Chances are when market moves 100 pips, 200 pips, the market players that generated billions of dollars worth of aggressive order flow didn't look at a candlestick chart and say, Ohh my god a bullish engulfing pattern, I need to buy 1 yard of EUR/USD right now! Chances are they did not look at a stochastic and say wow, there is divergence, I need to buy 2 yards of EUR/USD within the next hour! Chances are they are not going to execute billions of dollars based off of the charts showing a certain combination of moving averages have just crossed. Now I have seen a few market moves based off breakouts and things like that, but usually there are other things going on underneath, things that do not show up on a chart.

Stops are great and all, and I use them every day, but they are not the only order flow generator.

My 2 cents.

You are off to a really good start Carnegie, just know that there are still a lot of barriers in your way that you need to demolish. And that it will still require immense discipline and staying power to get you into the 5% of successful traders and then into the fraction of those that have an order flow mentality.
Private message me for a link to my order flow website.
  • #62
  • Jan 13, 2011 10:36am Jan 13, 2011 10:36am
Quoting relyt


So we can assume that banker A is looking for limit sell orders that will supply the liquidity he demands. Is he only looking for limit sell orders below the market, or would he also be interested in limit sell orders above the market? .
You would have to ask Banker A

Quoting relyt
but what if there aren't any nearby below the market?
This is the risk they take when they do this...its not a free for all, the big guys lose money sometimes as well


Quoting relyt

Obviously he would prefer the limit sell orders below the market (if he thinks he can push price down far enough to hit those orders)
He sure would, as a general rule as price goes down demand increases, it only logical. If you could buy a car for $4500 or the exact same one for $4499 which would you choose? There's many many people in the market taking profits getting stopped out etc ect but to get large amounts of liquidity a simple break of a support will surely trigger the SL of buyers as that's an obvious place where people would put there stops right?

What do YOU do when you're holding a long position in profit ans the market starts to drop... You get the temptation to sell don't you!

SO when a support breaks should we simply sell? HELL NO cause that may be the exact place the big guys want to buy simply because of all the sell stops there. In fact selling there may make you a victim of a buyer seeking liquidity. Its a game

Quoting relyt

I wish you would expand on this. I have been thinking about this type of scenario for the past couple weeks and trying to figure out if there are any implications to this, but I can't figure it out. Anyway, I understand if you don't want to elaborate.
The only reason I don't want to elaborate is because I simply don't know. Like for example maybe a company who suddenly converts their Yen to Euros wants to do it strategically and uses the same tactics a trader would to get the best prices they can.

Maybe another company doing the same thing simply isn't concerned about the prices they get and so dump it all at once but remember that these transactions go through banks... If you want to do an international money transfer you have to go throuygh a bank right? So ask yourself, if you're a bank and have just been given 40 million Euros to convert into yen what are you going to do?

Honestly I don't know much about this but using logic you can imagine that the bank may try and profit from this the same way they would with any other market transaction... I really can't elaborate much more than that as I simply don't know.
Time hides Nothing
  • #63
  • Jan 13, 2011 11:21am Jan 13, 2011 11:21am
@relyt

You are correct that Buyer A would want limit sells, but these limit sells would by definition be above the current market price. A limit sell is an instruction to sell at the limit price or better. If you place a limit sell below the market price, it would execute immediately since the market price is better than it.

With regard to the participant wanting to convert Yen into USD, it puts the bank in a favourable position to conduct a scalp trade. I really wish I could remember the semantics, but at the end of the day the transaction is in effect giving the bank a sort of option contract if I remember correctly.

Don't quote me on this, but the logic is:

 

  1. Participant asks Bank A for a quote
  2. The 'interbank market price' is say 90.50
  3. For Bank A to make a small profit on the trade (including transaction costs, etc.) it has to sell at 90.52.
  4. Bank A then quotes 90.52 as the exchange rate, to which the Participant agrees.
  5. If the market price goes up to 90.52, the bank will happily conduct the transaction, earning a small mark-up.
  6. However, this set-up is in the bank's favour, since the market price can also fall, and Bank A can then conduct the transaction (with a reasonable delay) for an additional few pips.

Could anyone verify?

@CindyXXXX

Quote
So... lets say for examples sake only 500,000 was available for sale at...
Sorry if I misunderstood, but I thought that Fat Finger Banker A (FFBA) was buying. If so, then I agree with the first bolded, underlined price; ie. price is moving up as his order gets filled.

However, in the second part, it says that price dropped away from his original entry price due to him being short? It also says that it would cost him as the market starts to go higher - but if he is long, this cannot be.

Quote
So this fat finger guy has offered LIQUIDITY and lots of it to BUYERS at very low prices.
If he is buying wouldnt FFBA be consuming liquidity from sellers at very high prices instead?

@grkfx

Quoting grkfx
Predicting future orders is all about knowing what will generate order flow. Get into the minds of the market participants that are generating order flow and moving prices and figure out what will cause them to start executing billion of dollars in aggressive orders.
Everyone should read this post a few times over if you're wondering exactly what kinds of questions will lead you in the right direction. Like CindyXXXX said, it's all a game, and by viewing it from the point of view of the most significant participants, we can position ourselves to play in their charades as well.

Regards,
xXTrizzleXx
  • #64
  • Jan 13, 2011 11:24am Jan 13, 2011 11:24am
Quoting xXTrizzleXx
@relyt

You are correct that Buyer A would want limit sells, but these limit sells would by definition be above the current market price. A limit sell is an instruction to sell at the limit price or better. If you place a limit sell below the market price, it would execute immediately since the market price is better than it.

With regard to the participant wanting to convert Yen into USD, it puts the bank in a favourable position to conduct a scalp trade. I really wish I could remember the semantics, but at the end of the day the transaction...
Nah I was talking about that guy last year who clicked billions instead of millions... He was selling I believe. I used 2 different examples which may have confused it. the Banker A guy in my example was buying.
Time hides Nothing
  • #65
  • Jan 13, 2011 11:27am Jan 13, 2011 11:27am
Ah I believe I get it now.

Thanks for the clarification

Regards,
xXTrizzleXx
  • #66
  • Jan 13, 2011 11:39am Jan 13, 2011 11:39am
Quoting Carnegie

Yes I agree with you but I commented this earlier, I don't have any idea where to start. Therefore I need more knowledge, got to get reading ya know I don't even know what a 'market compression' is?

Also, I don't know what to look for in order flow, and how the trades look.. So how could I define entry and exits?
You'll get there eventually, just keep on keeping on. All I meant by compression was consolidation. I mentioned standard deviation as an example of seeing consolidation numerically. If you see SD falling, it tells you that volatility is settling down and or, the prices are tightening up around the mean. I can't say what your trades will look like, that will be your final conclusion after you've studied.

Good luck,

Jim
  • #67
  • Jan 13, 2011 4:43pm Jan 13, 2011 4:43pm
Cindy and Trizzle:

Thank you both for your good comments and explanations. It seems as if liquidity really is the backbone of order flow trading.

Silly me, I have always turned to the next page when I read info about liquidity and volatility, had me a nice heads up there, thank you guys (don't know about you tho' cindy ).

Quoting grkfx
Predicting future orders is all about knowing what will generate order flow. Get into the minds of the market participants that are generating order flow and moving prices and figure out what will cause them to start executing billion of dollars in aggressive orders.
I have been thinking about this and to be honest it kinda scares me. And I'll tell you guys why, maybe you can explain to me what's wrong in my thinking here.

If order flow isn't about candlesticks or bars or anything in those 'manners'.. then WHAT is it? Are we looking for an area?


Let's say the idea is that we are looking for areas where order flow info tells us to short. How do you handle Risk/Reward? How do you not get stop-hunted ON YOUR OWN stop hunt? So if it's an area, what is the boundaries of it?
Many of you might wonder 'why is this guy talking about candlesticks all the time when it is order flow'.. well in all honesty, I don't know how an imbalanced market looks like, I don't know what to look for, so if it would be a candlestick in a certain area, that would be easy! Easy idea of where to place entry, stops etc.. See what I'm trying to say?

But in reality, my mind is telling me that it is impossible to be candlesticks or ANYTHING technical.. since we are HUNTING for the technical guys/girls (cindy..). So it really is a question for me to find out, where we're looking for!

Quote
You don't need candlesticks or any other chart for that matter to execute trades based off of order flow. Now a chart may be helpful, it could also be deceiving. If the reason for the market moving and order flow being generated has nothing to do with a chart, then you don't need one.

OK so this is what I was talking about, Gaston also mentions that there is info OUTSIDE of the charts. What is this info? Is it news? But order flow has to (by SOME means) be generated from a chart, because we're selling/buying from uninformed technical traders and watching what they're doing to profit form their mistakes, and this was exactly the idea with this post, what is IN THE CHARTS, regarding to order flow!

PS. Thanks for the encouragement and thank you for sharing your thoughts, they where very informative.


Quoting Scotty B
You'll get there eventually, just keep on keeping on. All I meant by compression was consolidation. I mentioned standard deviation as an example of seeing consolidation numerically. If you see SD falling, it tells you that volatility is settling down and or, the prices are tightening up around the mean. I can't say what your trades will look like, that will be your final conclusion after you've studied.

Good luck,

Jim
Aha allright sorry about tht one, English isn't my first language and I'm also not familiar with the maths/trading words.. yet

But Scotty I was thinking, how could you measure a consoliadtion "numerically" and how to do so with standard deviation? Have you done any studies with this (I assume you have..)?

Thanks everyone, take care.
  • #68
  • Jan 13, 2011 4:54pm Jan 13, 2011 4:54pm
Ok so we all know Darkstar would never give his trading ideas to anyone but only leaves bits and piece here and there, and since we cannot see what he does we can analyse it. (watch darkstar analize the market @ brazzers.com btw )

I'm sure many of you remember that Darkstar posted a thread called "Smexy trades". Well, in this trade he left TWO pictures of his two latest smexy trades. Now as said, he would never SAY what he did, but we can atleast take a look at what happened in the market when he entered.

I have attached an EURUSD 1HR chart (the one he had was OANDA 3HR) to this post.
There are three arrows in the picture. Two up and one down, obviously the two ups are long and the arrow down is closing posistion.

I can't read the chart (why he took the trades) as I don't understand yet what balance/misbalance is but from the 1HR it seems like he bought right on the low of the tail on the pinbar (the candlesticks is irrelevant).

When I change to the same chart in 15 min I realized something. They're all trades at round numbers.. Any ideas? Options?

The first LONG order is at 1.2150, second is sitting perfectly at 1.22. He closed the trade at 1.2450.
The only thing the second long order tells me is that it is an area that has been touched several times before, but what about the first trade at 1.215?

This is for me to understand. Take care everyone!

Oh and BTW. I just go my Trading & Exchanges book
Attached Image (click to enlarge)
Click to Enlarge Name: darkstar.png Size: 108 KB
  • #69
  • Jan 13, 2011 6:31pm Jan 13, 2011 6:31pm
Yeah, you guys probably shouldn't spend too much time looking at my trades. It's very impressive how far this thread has progresed, but it's important to realize that what your talking about are only the most basic aspects of Order Flow. I've been doing this stuff for over 5 years and what I do now is so far down the chain of understanding that it's probably counterproductive to look at.

I can tell you that your close to figuring out the stop hunting thing though.

As a side note, I find this thread extremly ironic. For the last couple weeks I've been writing extensivley about this subject for my book and it seems like every time I finish a component concept, I come on here and see you guys puzzeling out the exact process I just explained.

Knowing how it ends I know exactly what piece your missing, so I'll give you a hint:

Think about how price change and the distribution of liquidity interact. Your looking for a disequilibrium in that distribution which should give you a highly predictable outcome. Trade with the anticipation of that outcome and you have the makings of a high probability system.

Once you manage to solve that, I suggest you start working on the concept of Episodic Volatility. It has opportunities that make stop hunting seem low rent by comparison.
  • #70
  • Jan 13, 2011 8:28pm Jan 13, 2011 8:28pm
I've been following this thread with interest so maybe now is a good time to contribute.

Firstly, thanks Darkstar, your point about disequilibrium is very close to what I've been pondering for a while, particularly how price reacts to areas of lower and higher liquidity and how one might predict the locations of those areas.

Take a look at this chart, it is the H1 EURUSD showing today's action. I've marked up some order flow as I see it, which is probably wrong, but hopefully good for provoking discussion.

As I have learned, Market orders (stops) consume liquidity and limit orders provide liquidity. Using my basic and incomplete understanding of order flow, I have indicated the location of probable stop and limit orders (liquidity consumption and provision) based upon basic support/resistance TA. I also marked up two areas that I believe indicate a more extreme lack of liquidity that I have labeled "Liquidity Void".

Considering price change and price discovery dynamics, it is interesting what price did when it got to these so-called voids - it passed straight on through, quite rapidly. First, price passed through the area of the stops, which were consuming liquidity, and then proceeded directly to the next area of liquidity, represented by the limit orders.

Now my view of things here could be all wet, so what do you guys think?
Attached Image (click to enlarge)
Click to Enlarge Name: eurusd liquidity study - b.jpg Size: 111 KB
  • #71
  • Edited 11:26pm Jan 13, 2011 8:28pm | Edited 11:26pm
Quoting Darkstar

Think about how price change and the distribution of liquidity interact. Your looking for a disequilibrium in that distribution which should give you a highly predictable outcome. Trade with the anticipation of that outcome and you have the makings of a high probability system.
This post has gotten be thinking. I will try to put my thoughts on to paper after I attempt a Maths assignment.
  • #72
  • Jan 13, 2011 10:19pm Jan 13, 2011 10:19pm
http://www.forexfactory.com/attachme...1&d=1294978214
Quoting Carnegie
Hi guys,

This is what happened:
The market trended down strongly, then was in a consolidating or congestion, easily drawn by two horizontal lines.

Fair enough I thought, I put up an upper and lower horizontal lines which also created my boundaries.
As smart as I am, I put up breakout orders BOTH directions (I know, I'm a sharp, greedy little kid.. Trying to catch both movements!!)



What does that tell me?
That tells me that I am STUPID. That tells me that my entry was someone elses short and my stop-loss was someone elses take profit. It almost...
Hi Guys, thought I'd add something I learnt recently.
Like all newbies I first started trading breakouts, with similar results as Carnegie. I often thought after many losses if only I did the opposite I would be much better off. I since learnt that 80% of breakouts will often fail. So now I often will trade the false breakout, ie the re entry into consolidation. It limits my risk because I can use a tight stop if im wrong. When price moves back into consolidation all the breakout traders will need to cover, so there stops are triggered adding momentum.
p.s example is recent eur/usd
Attached Image (click to enlarge)
Click to Enlarge Name: FALSEBREAK.jpg Size: 112 KB
  • #73
  • Jan 13, 2011 10:56pm Jan 13, 2011 10:56pm
Quoting Darkstar
Think about how price change and the distribution of liquidity interact. Your looking for a disequilibrium in that distribution which should give you a highly predictable outcome. Trade with the anticipation of that outcome and you have the makings of a high probability system.
Let me ponder upon that for my first post in this thread.

A price move in any direction leaves a trail of limit orders behind it because of the mindset of most participants: they missed out on the move and, if the price comes back, they want to get in on it. One of the ramification of that is that, a good way to exit a position if you're a big volume trader at the end of a trend would be to support the price into a very low liquidity area, which requires little effort, and if herd behavior kicks in, the way back should be paved with fresh liquidity to make your exit.

Just speculating on this, of course. Don't take it as true.
“Nothing great in the world has ever been accomplished without passion.”
  • #74
  • Jan 14, 2011 3:36am Jan 14, 2011 3:36am
Quoting Carnegie
. (watch darkstar analize the market @ brazzers.com btw )
You just got me into trouble !
Time hides Nothing
  • #75
  • Jan 14, 2011 4:06am Jan 14, 2011 4:06am
Quoting Darkstar
Yeah, you guys probably shouldn't spend too much time looking at my trades. It's very impressive how far this thread has progresed, but it's important to realize that what your talking about are only the most basic aspects of Order Flow. I've been doing this stuff for over 5 years and what I do now is so far down the chain of understanding that it's probably counterproductive to look at.

I can tell you that your close to figuring out the stop hunting thing though.

As a side note, I find this thread extremly ironic. For the last couple weeks...
NP - TYVM
Time hides Nothing
  • #76
  • Jan 14, 2011 4:07am Jan 14, 2011 4:07am
Quoting Darkstar
I can tell you that your close to figuring out the stop hunting thing though.

Knowing how it ends I know exactly what piece your missing, so I'll give you a hint:

Think about how price change and the distribution of liquidity interact. Your looking for a disequilibrium in that distribution which should give you a highly predictable outcome. Trade with the anticipation of that outcome and you have the makings of a high probability system.
Now we're close guys, let's make this happen!

I'm thinking so much my brain is on overload, but how the hell am I going to use 'disequilibrium' in this?

Thank you.
  • #77
  • Jan 14, 2011 4:09am Jan 14, 2011 4:09am
Quoting Carnegie
Oh and BTW. I just go my Trading & Exchanges book
... and the weekend is coming up. Perfect timing!

It's been a good thread this week.

Many thanks, people!
  • #78
  • Jan 14, 2011 4:20am Jan 14, 2011 4:20am
Think about global money/liquidity shifting.
  • #79
  • Edited 7:26am Jan 14, 2011 6:27am | Edited 7:26am
Quoting Darkstar
Knowing how it ends I know exactly what piece your missing, so I'll give you a hint:

Think about how price change and the distribution of liquidity interact. Your looking for a disequilibrium in that distribution which should give you a highly predictable outcome. Trade with the anticipation of that outcome and you have the makings of a high probability system.
When liquidity is distributed evenly, then price won't change much, right? Because everyone who wants liquidity has it. If I'm thinking about that wrong, please let me know.

So we are looking for a disequilibrium in that distribution, but I don't know what that looks like other than a rapid price move in search of liquidity. But if that's what we're looking for, then how can we make sure it isn't a false break, like has already been mentioned? I'm sure I'm missing something here.

On a side note, it looks like there's a 83.00 dig option on USD/JPY expiring today and price is currently at 82.95. From reading Darkstar's posts, I know he started off trading USD/JPY exclusively. I wonder if he is in on that this morning or not.
  • #80
  • Jan 14, 2011 10:02am Jan 14, 2011 10:02am
I think I have an idea here.. Darkstar says we're soon there on the stop hunting patterns, and MAYBE, that has to do with all the intelligent explanations form all you guys + my chart about where stops are located

But this made me think.. Aren't there two (atleast what I know of) different stop hunting patterns?
Think about it, or maybe I'm wrong here but let me explain:

Stop-hunting pattern #1:

This kind of stop-hunting pattern is what happen to all the noobies. Let's say they want to short, so they get into a position short and places their stop at a round number, say 1.3400. What happens is that the market SPIKES up to 1.3405 (random number, just the idea that it spikes and stop hunts) and takes out all the stops at the round number.
What happens after this is that the market then trades down just as the noobie expected, but this time it does that without him/her on the trade.

This type of stop-hunting pattern SHOULD BE (in my mind) created by those who NEED the liquidity to dump their existing inventory to someone, i.e. the noobie whos short trade has a stop-loss triggering LONG, so he has to BUY from someone and that buying is going to be from the stop-hunter who dumps his inventory to the noobie.

This kind of stop-hunting pattern does look like this picture(I think):
Attached Image (click to enlarge)
Click to Enlarge Name: stophunt1.png Size: 100 KB


Let's say the noobie shorted on the bull bar just before the big pinbar. He placed his stop on 1.34.. He got stopped out by a stop-hunter, and his long order bought the stop-hunters (in this case really he is a LIQUIDITY HUNTER) inventory.
To repeat myself once again, the stop-hunter hunted these stop because he needed the liquidity that the stops had, so that he could dump his existing shares/currency into that liquidity. See how I mean?


Stop-hunting pattern #2

This is another type of stop-hunting pattern, it looks more like the breakout pattern. It is the reason why I started this thread so a picture is in the first page. Let's say we have a consolidation, and stops are just beneith the consolidation, and they are at a round number. To trigger the trending move down, the stop hunters trade down to the round number where they know that the technical traders who were long have their stop-losses. And their stop-losses are SHORT orders so this will result in price cascading down.

Attached Image (click to enlarge)
Click to Enlarge Name: stophunt2.png Size: 105 KB


Look at this picture, it is a bad example but it's just to make a point. Marked moved down there and then consolidated for a while, obviously there is some take profit there and let's say that some where long, their stops were at the round number 1.2250.
Stop hunters would trade price down to 1.2250 where they know the technical traders short orders sit causing the price to blast down.


These are my two ideas of two different stop-hunting patterns, and obviously, different mentality should be applied to both situations.

Am I correct in this or is T&E starting to make me fucked up?
Thank you, have a great weekend. I won't..
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