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How to flow with the order flow? 23 replies

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Attachments: Order Flow - Finding cluster of stops on chart
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Order Flow - Finding cluster of stops on chart

Quoting Darkstar
Seems like a pretty important implication to me. Why so quick to disqualify that answer?
Important it is. I didn't say its not important, I said it's nothing new, I always fade (thanks to your valuable posts btw . The trick is that fading alone is not a strategy, you need to know when and where to fade. Fading the stops is a good way to trade, which again brings back the subject of the post.
Quoting eurotrash
A function of orders and time? The further way a given price is from the market, the more time for orders to be added there. Close to the market that potential is smaller, though some of it has turned into actual orders placed.
hmmm.. sorta... since you've all been very helpful, i'll give you some insight.

Quoting The Book
Latent order interest is simply an accounting of participants who can/will trade if price were to move to a specific price level, but due to the costs associated with managing orders, remain on the sidelines until it does so.

To give you an example of how this manifests itself in the real world; imagine that you are a fundamental trader with an analysis which shows security A to be with 1.000. If price is currently hovering around 1.000, you likely have very little interest in participating in the market. However, if price suddenly moves down to .500 without a change in the underlying fundamentals, you’re going to have a great deal of interest in buying. In this example your desire to trade at .500 would be latent interest.

Latent order interest is predominantly comprised of fundamental traders so it tends to remain constant as long as the information related to fundamental value remains unchanged. When new information becomes available, this curve will shift up or down to reflect the aggregate opinion of what that new information means for fundamental value.

As a general rule however, the opinions formed by fundamental traders are slow to materialize. It may take a number of hours or even days for this new information to become properly digested. In the interim, the latent demand will curve will become somewhat wider and flatter due to the variability of interpretations regarding the data.
Nice, that explains it. Thanks.
  • Post #164
  • Quote
  • Edited at 9:05pm Jan 18, 2011 8:55pm | Edited at 9:05pm
Implication: So if price moves one way quickly (say up), then reverses quickly (down), MarketMaker is offering liquidity he is unable to pass on. So if price keeps going down he has to liquidate at some stage at a price worse than he is offering or be on the wrong side of tanking market. This would accelerate the price reversal.
Latent volume as DS explains it is similar to classic models of static supply and demand curves in microeconomics, where supply is proportional to price while demand is inversely proportional to price. This is where the fundies are trying to buy low and sell high.

I say static because these curves can also shift, in which case the situation is reversed. Price is directly proportional to the SHIFT in the demand curve and indirectly proportional to the SHIFT in the supply curve. This is where the trend followers come in. Panic sellers dump more as price falls, and bandwagon buyers pile on as price rises.

This second phenomenon doesn't seem to be reflected in your model DS, unless it's just supposed to be the red tech orders?
Quoting Darkstar
hmmm.. sorta... since you've all been very helpful, i'll give you some insight.
Now all we have to do is find the fundamental value of the pair (which we don't even need to discuss since everyone can do it) and just fade any disbalances of price and fundamental value into the direction of the value (ok, I'm kidding, it's the perceived value)
Quoting Darkstar
You guys are so lazy sometimes...

.
I guess thats one word for it - Awesome posts thank you
Time hides Nothing
Quoting seagreen
Important it is. I didn't say its not important, I said it's nothing new, I always fade (thanks to your valuable posts btw . The trick is that fading alone is not a strategy, you need to know when and where to fade. Fading the stops is a good way to trade, which again brings back the subject of the post.


All things in due time my friend.

Look, I know you guys are trying to figure this stuff out and I have to say, I'm really impressed with how far you have gotten. I'm sure it would make an untold number of people happy if I would just come out and give you all the answers, but I don't know that I could even if I wanted to.

To be honest, I "finished" my book like a month ago. After something like 8 months of diligent work, I managed to write down everything I understood about the markets. It explained in detail how to hunt stops and exploit market inefficiencies, how to read the order flow and how to view the market in the mindset of an order flow trader.

When I sat down and read it start to finish, I have to admit, I gave myself a pat on the back for how clean and concise it all was. I genuinely felt that it was a work of art.

Then I gave it to my girlfriend.

After just 20 pages, she was so hopelessly lost that giving up was the only option.

Now I'm not going to pretend that she is any master trader; she isn’t. But she has read all of baby pips and a few random trading books. I think I can safely say that she has about as decent an understanding of trading as the average forum member. And if she couldn't understand it, I would inevitably be disappointing large groups of people by releasing it.

The question is, why is it so complicated? After all, I understood it perfectly?

Well, after a great deal of thought, I had an epiphany about what it truly means to understand something. I don't know if anyone cares or not, but I'm going to share it because I think it will help put some things in context...

Learning any complex subject requires an enormous amount of filtering. I think I've personally read ~50 books on trading, another 20-30 on economics, tens of thousands forum posts, and hundreds of articles on theoretical finance. For the life of me I can't tell you what even 1% of those documents said. But that doesn't mean that all that time was wasted.

Every little thing I read made its way into my brain as an idea.

Ideas are the general premises behind the things we learn. Everything in a complex subject has a connection to the larger body of knowledge. A good example of this is the idea of a moon. If you want to understand the moon, you have to know what a moon is, how it works, why it’s important, etc. If you know exactly what you’re looking for, understanding the moon and its relationship to the universe can be pretty easy, but seldom do you know what’s important at the outset. You have to learn a ton of useless shit to get to the meat of what is important for you to know.

Of course even when you know what you need to know about the moon, you realize that you only have a sliver of the knowledge it takes to understand the universe.
To understand the universe you need to study a bewildering quantity of ideas. From suns and starts, to gravity, and physics; complex math, string theory, planets, solar systems... the list goes on and on.

Unfortunately, humans (no matter how intelligent they may be) just cannot actively retain all this information at once. In an effort to avoid overloading the brain, our subconscious mind has this miraculous ability to distill and index what we know into a simple concept.

A concept is a unified understanding of how a number of ideas fit together. Once you have one, you can look at another body of ideas and figure out how those ideas relate to the concept you have already learned. That in turn leads to another concept. Moons orbit around an object, that object is large and orbits around the sun. The body of ideas related to an object that orbits around the sun is a planet.

To bring this point home; notice how you knew exactly what I was talking about when I used the term moon. But if you really think about it, planets, asteroids and moons all have very similar component ideas, yet we can clearly distinguish what they are from each other.

At some point in this process we find that as the concepts we work with grow more complex, we seldom utilize the miscellaneous information we used to form our earlier concepts.

We still know what a moon is, but recalling the circumference of earth’s moon, or the quantity of moons in our solar system finds hard and harder to recall. The more we learn, the more details we forget.

The point of all this is to say that understanding order flow trading is like understanding the universe. In order to establish the order flow concept in my mind I had to analyze and synthesize enormous quantities of data and the only way to achieve the level of understanding I have was to work with progressively higher level concepts. Somewhere along the way I lost the ability to tie many of the concepts I now utilize back to the concepts that aspiring traders deal with day to day.

So when I try to explain order flow, it’s like trying to explain what the universe is to a 2 year old. That child has no idea what a moon is, or a sun, or galaxies… I can say that it is everything in the heavens, and that may give the child some idea of what it is, but does that child “understand” the universe? No. Can they predict how some aspect of the universe is likely to form? No. How could they?

And that’s the problem with threads like this. I can tell you how to hunt stops, but in and of itself, stop hunting is just a concept. To do it effectively, you need to know how liquidity works, you need to understand how price change works, you need to understand how to read order flow, gauge sentiment, exploit the information other traders are forced to divulge. And each one of those components is made up of an untold number of subcomponents that are required for what, when, how, and why those things are the way they are.

Now I will say that I’m making great headway in doing this within the book, but the book is over 200 pages and it still isn’t at the point where someone like my girlfriend can understand it. How on earth am I going to cobble all that information into a few posts on a forum?

Why am I telling you all this? I don't know... I guess I just want you all to understand that I’m not being cryptic on purpose; I genuinely try to explain things as I understand them. The disconnect is in the gross differences between the concepts I work with every day and the concepts most people here are starting from. Things like liquidity disequilibrium are well formed ideas in my head, but that concept has no reference point for anyone else. Putting the transitory pieces back in place after all this time is proving to be particularly hard. I’m sincerely make an effort to do so, but it’s going to take time. It’s probably also going to require reading the book when it’s done.

When will that be?

Soon.

No, in all seriousness, when my girlfriend can sit down and read me book, understand how what she read can be used to earn a profit, and explain to me why…. That’s when it will be done.

Anyway.. this post is a book in itself so I’ll leave it there.

Luck be with you

PS: I know this is somewhat disjointed and rambling. I’d take the time to clean it up, but already spend way too much time writing. Your just gonna have to deal.
Quoting Darkstar
All things in due time my friend.

Look, I know you guys are trying to figure this stuff out and I have to say, I'm really impressed with how far you have gotten. I'm sure it would make an untold number of people happy if I would just come out and give you all the answers, but I don't know that I could even if I wanted to.

[color=black][font=Verdana]To be honest, I "finished" my book like a month ago. After something like 8 months of diligent work, I managed...

You can't imagine how many people here wish they were your girlfriend.
Quoting seagreen
You can't imagine how many people here wish they were your girlfriend.
haha - I had a reply along those lines but bit my tongue


I think Elvis has left the building but I was just pondering over a ciggarette what this disequilibrium might be. and

Equilibrium:

is where supply meets demand and therefore the maximum number of sellers and buyers can transact at a price they both agree on.

A move up in price will casue a move along the demand curve upwards and a susequent shift of the supply curve to find a new equilibrium

A move down in price will casue a move down along the supply curve and then a shift of the demand curve to find new equilibrium.

A change in fundermental factors will casue a shift OF the entire curve (supply or demand or both) meaning that as fundemental factors change it will actually change the size of the number of willing buyers or number of willing sellers in any given market. This is representeted by the latent supply and demand. Ceteris Paribis chuckle chuckle

So.. using DS example of the move down in price this will of course casue the quantity demanded to increase as is dislayed by the latent bars increasing away from price... If a change in price happens and THEN a change in fundermental factors this equilibrium is thrown out of proportion and price is now in DISEQUILIBRIUM and price will venture higher or lower whatever the case to reach a new equilibrium.
Time hides Nothing
Quoting Darkstar
No, in all seriousness, when my girlfriend can sit down and read me book, understand how what she read can be used to earn a profit, and explain to me why…. That’s when it will be done.
Well then I hope she never gets it.
Quoting Marv
Well then I hope she never gets it.
Maybe. What fun is a contest of knowledge if everyone knows? Makes the game tougher for those who knew first.
“Nothing great in the world has ever been accomplished without passion.”
  • Post #173
  • Quote
  • Edited at 12:57am Jan 19, 2011 12:37am | Edited at 12:57am
Quoting CindyXXXX
A change in fundermental factors will casue a shift OF the entire curve (supply or demand or both) meaning that as fundemental factors change it will actually change the size of the number of willing buyers or number of willing sellers in any given market. This is representeted by the latent supply and demand. Ceteris Paribis chuckle chuckle

So.. using DS example of the move down in price this will of course casue the quantity demanded to increase as is dislayed by the latent bars increasing away from price... If a change in price happens...
Lets take this example: Market was at equilibrium. Now, lets say there is a shift in fundamental values to being more bullish.

What are the implications for the market and order flow and liquidity?

1. The Latent orders that Darkstar talks about, become market orders and limit orders.

2. Some market participants judge the fundamental shift to be imminent and great, resulting in execution of huge market orders into the market

3. Some market participants judge the fundamental shift to be fairly imminent, and decently sized, resulting in a smaller batch of market orders hitting the market.

4. Some market participants who were short and realize the fundamental shift need to cover, either through market orders, or waiting for a small retracement limit orders. This further reinforces the surge of market orders, and reinforces the bids at the support levels.

5. Other market participants who think there is a fundamental shift, but are not willing to commit market orders yet. Lets say they had bids which were 500 pips away, but now pull their bids higher to 100-200 pips below market. This reinforces bids at the key retracement points and support levels.

6. Other market participants who are oblivious to the fundamental shift place trades which are lower probability than what they realized(but are oblivious to it), and cause above average losses to their systems. They turn into uninformed traders and provide liquidity to the informed traders who correctly saw the change in fundamental values.

7. Market participants who correctly saw a fundamental change in values, but are not willing to commit market orders just yet or limit orders, but instead want price to go up to validate their analysis and then will generate market orders. This is where the buy stops accumulate above the key resistance points.

8. Other market participants who were already heavily long, and correctly saw a further change in fundamental values reinforces their conviction in their trade. These market participants who would have normally had take profit sell orders now decide to pull those sell orders, and reset them higher up, or decide to reduce the size of their standing limit sell orders. Results in a general thinning of the offers in the market, further adding fuel to the bullishness as buyers search for enough liquidity to place decently sized trades.

Now I hope you guys get the idea. I can probably add another 100 things to that list, but it is up to you to make sense of it and harmonize it with your personality. I can't do that. I can just stimulate thought.

Now the other question is how do you determine change in fundamental value? Or how do you determine when fundamental values will quickly reverse? Or have been falsely interpreted? Or grossly misinterpreted?

That is for you to figure out. It will make you a far superior trader if you figure it out yourself.
Private message me for a link to my order flow website.
Quoting Deevz
Maybe. What fun is a contest of knowledge if everyone knows? Makes the game tougher for those who knew first.
Exactly.
Quoting grkfx
Lets take this example: Market was at equilibrium. Now, lets say there is a shift in fundamental values to being more bullish.

What are the implications for the market and order flow and liquidity?
...
And thats just one factor that can be analyzed with this model. Think about how a large order hitting the book would alter the profile... or what happens pre/post news events.. or how a fast price change would interact with the slow conversion of latent interest to pending orders... or what happens when a central bank steps in to defend a price.. or how market makers act to maintain a balanced book... or or or... the list is endless.

In short, this is an extremly powerful tool for modeling the interaction between price and liquidity. Use your imagination and the ideas should start flowingin short order.

OK.. night all.
  • Post #176
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  • Edited at 2:01am Jan 19, 2011 1:09am | Edited at 2:01am
Quoting grkfx
Now I hope you guys get the idea. I can probably add another 100 things to that list, but it is up to you to make sense of it and harmonize it with your personality. I can't do that. I can just stimulate thought.

Now the other question is how do you determine change in fundamental value? Or how do you determine when fundamental values will quickly reverse? Or have been falsely interpreted? Or grossly misinterpreted?

That is for you to figure out. It will make you a far superior trader if you figure it out yourself.
Insipiring thread and inspiring post thank you. I agree figuring it out my/our selves would be far more worthwhile than having it spoon fed.

Personally I can say that its very hard to learn when you dont know what you're meant to be learning if that makes sense, which has stopped me in the past. I think this thread has gone a long way to finally answering that ... the fun begins.

Cheers

Quoting Darkstar
OK.. night all.
Tks and G/N
Time hides Nothing
Guys please try not let the cat out of the bag, there are many eye overfly on this kind of threads.

all the best!!
Quoting seagreen
Now all we have to do is find the fundamental value of the pair (which we don't even need to discuss since everyone can do it) and just fade any disbalances of price and fundamental value into the direction of the value (ok, I'm kidding, it's the perceived value)
Oh. My. Goodness.

I was actually about to fall asleep when I envisioned how this could be applied. This assumes there are no significant fundamental changes in the associated currencies of the pair though?

The way I'm putting this together, is that DarkStar's illustrations have given a model for taking advantage of the extremes of ranging markets. Let's assume that Market Mover A wants to buy below the perceived value of USD/CHF. Upon reaching the lower extreme of the range, we can assume that we will have participants who will be positioning themselves long, and would set their sell-stops below the range. Market Mover A has his buy-limit orders positioned slightly below this range, and to enable his order to be filled, quickly executes an sell market order of sufficient size to push price to these sell-stops, which when hit, will liquidate into his buy-limits. This will be further facilitated by uninformed traders, who think this is a genuine break-out to the downside. The speed of execution will be such that it is fast enough to avoid a significant amount of latent liquidity turning into pending orders, (which would make things harder for Market Mover A by essentially building a liquidity wall to his buy-limits). Market Makers would then need to adjust their bid/ask to take into account this changed liquidity situation, resulting in the production of the illustrated liquidity vacuum. When his order is filled, the sell market order previously open, is then closed by means of a buy market order equal or larger to the former, which gets price moving into Market Mover A's intended direction back to the perceived fundamental value of the currency. As price heads back upwards, the Market Makers would have to deal with the liquidity vacuum, by shifting their bid/ask quotes to account for it, to protect their inventories.

(note: Orders will be placed within the vaccuum, but I am making the assumption that the liquidity provided by them will be sufficiently small so that they can be considered insignificant, due to the small time interval over which this occurs)

On a chart this should look like a strong move upwards once more, even though the volume (size of the order) which caused it, may not seem proportionally large. Additionally, uninformed participants who were tricked by Market Mover A's pseudo-break out, would be squeezed. Their buy-stops, which they placed for protection, would, when executed - further empower the up-move, along with informed participants, riding the move back to the perceived fundamental value. They are in essence going to profit from the mispricing.

I may be viewing things from an angle that is..."too close to the situation"; too infinitessimal, but I'm hoping the logics of this are sound, and would like to hear others' interpretations so far.

grkfx, has essentially provided an excellent model for understanding the dynamics of trends - I would expound on my interpretation of it, but must finish my homework.

With the dynamics of ranges and trends covered, and understanding where the high-probability points of entries are, we should be able to anticipate a move to break-even quickly, such that our exposure time is reduced.

Everybody loves a free trade.
Quoting CindyXXXX
Insipiring thread and inspiring post thank you. I agree figuring it out my/our selves would be far more worthwhile than having it spoon fed.
I agree. What DS has shared already should be enough to get everyone started in the direction that will help their trading. If it hasn't, maybe they weren't meant to have this information?

Darkstar, if you continue refining your book to the point that anyone can pick it up and make profit from it, do you worry you've let the cat out of the bag? I'm sure your own personal trading is way beyond that, at this point, though. I would be thrilled to read your book as it is. Part of what makes order flow so awesome is the self-discovery process that takes place.
the hell magic,to understand this ill read ur book,the echange book and all different book just to get the understanding

keep up the good work ds,cant wait 4ur book,its like harry potter for us traders
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