Order Flow - Achieving the mindset

OK so many of you have read the order flow - finding cluster of stops on chart, and that's lovely. But I guess I started off in the wrong direction. It appears to not be on the chart, but behind it.

The order flow thread about finding cluster of stops on A CHART got overextended really, even though it has some MIGHTY good information. What some of the guys have said there takes off plenty of time of the learning curve.

This thread I want to be about what's behind the move. What makes the price inefficient? What does disequlibirum mean and how does it affect prices?
Basically, it is everything that moves the price, but it's not allowed to be showed on a chart. Pure discussion. I want your ideas on equilibrium. Disequlibiurm. Balance. Imbalance. WHAT MAKES PRICE MOVE?

I might shoot one off right now. I don't have a fucking clue why price moves and why sometimes it spikes up and moves down, can it be price inefficiency? Tell me about it. If so, what made that particular participant (let's say..) bid up the price of the currency so high? And why? if it wasn't the real value?

I have noticed sometimes that on the 5/15 min chart we have spikes up in price, from nowhere.. price moves 20-25-30 pips up on one single candle (sometimes more.. but for some reason.. NEVER WITH A RETRACEMENT ) and then the move get's faded 100% and sticks around the same area it moved up from. Then it usually trades in the other direction. I.e. if it moves up and gets faded, it continues to move down.. Why is that do you think? And no, it's not because of RSI.

This thread is about achieving the mindset of an order flow trader. And you are not allowed to post a single chart.
Hopefully this thread will make me THINK about what is happening and draw a conclusion in my mind, and then test my premises on the market.

Take care, and I hope I am not taking to much of your time, whoever you are. But understand that I really want to learn and there are several others who really want to.

SUBSCRIBED!!

Also, I'd like to contribute with some links to some Darkstar's posts:

About Orderflow Mindset
http://www.forexfactory.com/showthre...92#post3827892
http://www.forexfactory.com/showthre...45#post3570645

What to search with an Orderflow Mindset (second part of the post)
http://www.forexfactory.com/showthre...23#post3555823

Stop-hunts and option barriers
http://www.forexfactory.com/showthre...71#post3567471

A model to analyze the market with an Orderflow Mindset
http://www.forexfactory.com/showpost...&postcount=173 (grkfx)
http://www.forexfactory.com/showpost...&postcount=175


This last one, to me, is very interesting.
What you have to do is to think to market participants and what they are willing to do BEFORE and AFTER something big happens
This is to me the essence of a market analysis with an orderflow mindset. I would call it "Orderflow Analysis"

Another little pearl before I leave:

Toyota needs steel from Mittal. So they sell yen to buy usd, causing a rise in USD/JPY. Then they convert those dollars to rupees, causing a drop in USD/INR.

It could be explained as simply as smart money fading obvious levels of entry in a given direction (trend), relative to TF (or trading session).
Oops i forgot, all that involves charts.
Don't listen to me, i don't know, I'm just guessing.

Great thread, was worried everyone had gave up? I am reading through T&E for the second time so I am actively studying this stuff.

If we look at a live example, cable today dropped 200 pips in a short space of time (20-30 mins). This was due to the news about the UK economy. Its now in a tight range.

I want to say I am just starting this style of trading and am on demo, I am trading just to explore this stuff and will likely lose so don't think this is a valid trade. However am long (demo) as I think we will see a move back up to 1.5900.

I see what you're saying.. you're really sharp. Thanks for the chart.

Not really, just learning like you. Trying to get my head around order flow trading. I have had some aha moments then feel I don't know anything.

One thing I would like to know from the the order flow guys, is it possible to trade without being glued to the screen all day? Using trailing stops, limit orders etc? Or is is a case of waiting around then getting in and out quickly?

True! In this case.. it's orders. But applying it to the market is something else, how can we use this? How do we know WHEN Toyota is about to enter the market? That's what I am looking for! Keep it simple as you said capitalist!

I'll answer to that question with a darkstar post. Read through it all please!

http://www.forexfactory.com/showpost...&postcount=516

- environmental disaster
- change in trade policy
- technical traders
- terrorist attacks
- bursting bubbles
- boom & busts
- panic
- greed
- systemic failure
- regulatory changes
- social engineering
- war
- new technology
- new financial vehicels
- pump & dump
- corporate takeovers
- excessive speculation
- carry trades
- energy crises
- shifts in risk appetite/aversion
- world growth/decline
- central bank intervention
- governmental/economical/financial shifts
- trade wars/protectionism
- quantitative easing

Don't forget these charts. I think they could be really helpful.

Carnegie, you said no charts, but these kind of charts are OK though, right?


I'm studying my ass off to understand it all. Will report if I find something useful.

Sorry I missed the no charts bit, should I delete it?

Nah, just leave it. But no more charts, I think

I don't see how that could be possible. We just have to accept that there will always be a large element of uncertainty in the markets. The mind hates this fact because it craves certainty; but we have to rely on probabilities I think, and accept that you can always be hit by a black swan.

I see order flow trading as waiting patiently for a situation when the odds are heavily in your favour then striking at just the right time. The key is knowing when the time is right.

Large importers/exporters are probably always in the market, just like I am with my carry positions. They don't enter and exit, they just adjust their existing positions and the size and location of their limit orders.

Hey everybody,

Because some of you are having difficulty understanding how price moves in the simplest sense, I've created a spread sheet to model how liquidity is taken when stop orders execute. This model represents any market order, but I am using stops to show how liquidity is consumed at multiple price levels when a high volume of market orders hits the market(stops).

The spreadsheet always shows the after affect of stop orders. Assume that the stop price was $40 for buy stops, and $39 for sell stops. You will notice that the price moves up (for buy stops) to which ever price level finally fills all the market orders and vice verse for the sell side.

In real life, each of the depth levels would show 0 after the liquidity there was consumed, so ignore the depth numbers behind the market after it has "moved". This is the temporary "vacuume" that Darkstar was talking about. After the liquidity is consumed, traders must repopulate the price ladder with limit orders, or price will have large ticks between the bid and ask. Because the FX is so liquid, this rarely happens for more than 5-10 ticks at the extremes. Usually it's just 1-2 pips on the interbank. News times are the exception as you have all probably read.

In the spreadsheet you don't need to input anything into the fields. Just press the F9 key and the sheet will give you a new example. It's programmed with random numbers to show differant situations, some more volatile than others. In the sheet, you are getting both a buy stop and sell stop example at the same time. In real life it would be possible for a buy sell situation to happen like you see in the spreadsheet, but usually it's a one sided demand that occurs, meaning the stops don't spread the market two ways at once. Also, in the FX market, the majority of dealers are operating via a robot, so the temporary empty price ladder condition might only last for micro-seconds. Furthermore, in the real market, when the tape shows a print even at the first limit order ($40 or $39), the robots will often immeadiatley cancel their limit orders higher up the price ladder so they don't get stuck with the risky inventory. This makes the volatility even worse. This doesn't always happen, sometimes the dealers will increase their limit sizes to be easily filled by the stops.

The last thing I want you to keep in mind is the limit orders themselves. Assume in the spreadsheet that the demand you are seeing is all stoploss orders. This means that the traders who issued stops are out of the market, but now you have a whole new batch of sellers or buyers who entered with their limit orders. If the market moves too quickly through their limit prices, they may have to issue stops to. If they don't have enough time to slowly trade out of their inventory with limit orders on the other side of the market, they will create further cascades in price by executing market orders. This is what happens when the market consolodates. Everyone is entering with mostly limit orders, then one side gets squeezed out of the market and has to execute stops. The participants who were right the market will very possibly use those stops to liquidate at a profit.

I could go on for days and days, but I hope this helps some of you understand the basic micro structure.

**Edit**

For some of you this spreadsheet will show errors. For it to work you need to make sure you have the Analysis add-ons installed in excel. They are under tools>Add Ons

One other thing I want to mention in regard to this model is the differance between the chart and the market. As you progress through your trading education, don't look at the price you see on the chart and quickly place an order based on that price. ALWAYS look at the quotes. That is a very silly statment to make, but if you're not paying attention you may be paying a very wide spread. The chart is just a visual representation of the tape. The price on the chart only represents the last transacted price, not the current market. If you remember back to my earlier posts, I define the market as the current bid and ask. That's not my personal definition, BTW, that is a standard textbook description of the market.

You might see on the chart that "the price" is 1.3000, while the market is 1.2995b/1.3005a. I think you all get the gist of what I'm saying. On some charts you can have a choice of which price you see. Oanda will dispaly both the bid and ask, or just the average price which is the default setting. I beleive Meta Trader shows the average price as well.

Thanks ScottyB,

Great spreadsheet.

I am in the process of writing a program to simulate order flow (I am a developer for an investment bank) to look at different scenarios. Obviously it will be a simplified model but think over time it could be something that helps see the mechanics of order flow.

I may be wrong, but I think MT-4 displays the bid price.

Jim you've been watching futures too much! Retail spot fx doesn't show the last transacted price, if you see a single price then it's either the current ask, bid, or midpoint.