Order Flow - Achieving the mindset

Quoting chriskins

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Buy and Sell stops are market orders once they are hit, so they are not limit orders, you might get a worse price than you specify.

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Quoting seagreen

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Stop orders consume liquidity, limits provide it. The curve represents liquidity, so there are no stops here. Sometimes stops are called limits and this brings confusion.

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Quoting Carnegie

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Hmm that is actually very intersting. I have always wondered why stop-loss orders and stop orders become market orders when triggered. Wouldn't it be better if they were limit orders?
See limit orders is the exact price, but stops are market orders and therefore they can be much below/above what price you wanted to get out at.

Thanks

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Quoting scott89

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Dude, as I stated in the other orderflow thread, limit orders execute ONLY at the exact price you want; the problem is, what if the order doesn't have enough time to get filled? it just doesn't get filled and you can't get out of the market. A market order, on the other hand, can be executed at a different price, but it is almost sure that it can be executed.

Here's my post about it in the other thread POST

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Quoting scott89

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Dude, as I stated in the other orderflow thread, limit orders execute ONLY at the exact price you want

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Quoting scott89

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what if the order doesn't have enough time to get filled?

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Quoting Carnegie

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We need to define what "fundamental value" is. I see many of us, including me, saying fundamental value here and there, inefficiency in price bla bla. But none of us really knows where to get the "fundamental" value of a currency. How do we know what the value is to the different participants?

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Quoting EmeraldEyes

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Read Chapter 10 again.

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Quoting Scotty B

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Market orders execute immediately, or immediately when liquidity becomes available (a limit order). Market orders pay the spread, limit orders do not, unless you've submitted a marketable limit order.

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Quoting seagreen

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It is not flawed, it only represents liquidity supply. Stops represent demand for liquidity and in this model they could be a part of the force making the shift.
To make it simple just keep in mind that everything to the left from the current price is sell orders, everything to the right is buy.

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Quoting Scotty B

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Market orders execute immediately, or immediately when liquidity becomes available...

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Quoting EmeraldEyes

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Which is how 'stop-hunting' is only one dimension of an order flow trader's playbook.

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Quoting scott89

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The problem, to me, is that I don't know what' I'm looking for. Is it a formula? A pattern? A bhaviour? Is it external information, psychological insights, anticipation of others? What IS IT that we're looking for?

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Quoting EmeraldEyes

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We're trying to acheieve the mindset of an order flow trader as stated by Carengie in his OP. This concept is a discussion of advanced market mechanics thus why he's asked not to post any charts since each individual's perception of what it looks like will be different. Its difficult to correctly explain such mindset through a forum.

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Quoting Peke5

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Thanks for everyone, nice discussion here about order flow.

Yeap, I think also that everything necessary has been said here. It is now up to you. Open futures account demo and start watching euro futures. Open also time and sales window and level 2 and put volume indicator to the chart. Open even 1 tick chart, or 1 second, or anything fast. That way you see orders being executed and how price react to them. Everything about order flow can learn and find out for yourself via watching markets. It's thousands of hours screentime. Just start to figure...

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Quoting Jack Schwager interview Bill Lipschutz

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How did you become successful as a currency trader without any previous experience? ====

Foreign exchange is all about relationships. Your ability to find good liquidity, your ability to be plugged into the information flow-it all depends on relationships. If you call up a bank and say, "I need a price on ten dollar [$10 million] mark," they don't have to do anything. They can tell you, "The mark dealer is in the bathroom; call back later." If I call up at 5 P.M. and say, "Hey, Joe, it's Bill, and I need a price on the mark," the response is going to be entirely different: "I was just on my way out the door, but for you I'll see what I can do."

Is having contacts important in order to be plugged into the news? ====

Absolutely. Those of us who did well were generally the ones who were accepted by the interbank circle. The traders who stayed aloof tended to be the ones who couldn't make any money trading foreign exchange. These traders would end up calling a clerk on the Mere floor [the Chicago Mercantile Exchange, which trades futures on currencies-an active but still far smaller market than the interbank market] and would say, "So, how does the Swissy look?" What is a clerk going to know about what is actually driving the international currency market? I would be talking to bankers throughout the day and night-in Tokyo, London, Frankfurt, and New York.

Were you trading off of this information flow? ====

That's what foreign exchange trading is all about.

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Quoting Jack Schwager interview Bill Lipschutz

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In the interbank market, don't the dealers sometimes inadvertently quote a currency off by one big figure-for example, the real price is 1.9140 and they quote 1.9240. Do you hold a dealer to the quote even if it's an obvious mistake? ===

The convention is that there has to be an honest attempt. Let's say that some news comes out and the market is moving like crazy. You may not even know what the big figure is. Assume a dealer quotes 1.9140, and you think the price should be 1.9240. The convention is to say, "1.9140. Are you sure? Please check your price." And if the dealer responds, "Yeah, yeah, yeah, I'm sure. Do you want to deal or don^t you?" then the price should stand.

==== Has this happened to you? ====

Yes, and I can tell you that every time that it has happened, the other institution has come back and
either wanted to cancel the trade or split the difference.

==== And what did you say? ====

I refused, because I had asked them to verify the price.

In exchange-traded markets, do you believe that stops have a tendency to get picked off? ====

As you know, I do very little trading on exchanges with trading pits. The vast majority of my trades are done either in the interbank market or on the Philadelphia Exchange, which uses a specialist system. However, in answer to your question, I can teU you a story about a fellow who was at Salomon in the late 1980s. He had been trading a market that had gone into a narrow range, and trading activity had dried up. During this period, a lot of stops had built up right above this trading range. One day, this trader's clerk on the floor calls and says, "Listen, the talk is that tomorrow [a day on which the liquidity was expected to be substantially below normal because of a holiday affecting the cash market] they're going to gun for the stops above the market." At that point, the stops were relatively close-about 40 or 50 ticks higher. The next day, this trader's plan is to sell the market heavily once the stops are hit, because he believes such a rally would be artificial and that the market would be vulnerable to a subsequent sell-off. During the morning, the market trades sideways and nothing happens. Then around 1 P.M., prices start to move-down.

==== You did say that the stops were above the market? ====

That's right. Anyway, the market moves down 50 points, 100 points, and within a few minutes the market is down over 200 points. What happened was that the floor traders went for the stops below the market, which were 200 points away, instead of the stops above the market, which were only 50 points away. The reason was that everybody was ready for the rally to take out the stops on the upside. Therefore, everyone was long, and the direction of greatest price vulnerability was on the downside. During the sharp break, my friend realizes that the market is way overextended on the downside. He
screams at his clerks, "Buy 'em! Buy any amount they'll sell you. Just buy 'em1" He was bidding for hundreds of contracts between 100 and 200 points lower, and he was only filled on fifty, even though the market traded down over 200 points, with a couple thousand lots trading at those levels.

==== What happened to his bid? ====

You've obviously never traded on the floor of an exchange. In a trading pit, it's possible for the market to trade at several different prices at the same moment during periods of rapid movement. They were looking right past my friend's floor brokers, who were bidding higher. It was a fast market. [When an exchange designates "fast market" conditions, floor brokers can't be held for failing to fill orders that were within the day's traded price range.] A fast market gives the floor brokers a special license to steal, above and beyond
their normal license to steal. I'm not making any allegations, because I can't prove that any of this happens. It's just my opinion that situations like this sometimes occur in some open outcry markets.

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Quoting Jack Schwager interview Bill Lipschutz

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Are there any other trades you can think of that were particularly memorable?

I can tell you about the one time since I first started trading that I was really scared. In fall 1988, there wasn't much going on in the currency markets. The D-mark had been in a very tight trading range. As was very typical in those types of low-volatility periods, our position size tended to grow as we tried to capture smaller and smaller price moves and still produce the same results. As a result, our position size at the time was larger than normal. We knew that Gorbachev was going to make a speech at the UN, but we didn't know what he was going to say. At the time, I was short about $3 billion against the D-mark.

==== Three billion! Was that the largest position size you ever traded? ====

I've been bigger, but that was a very large position. The market had been trading in a narrow 1-2 percent range, and I had expected that sideways price action to continue. Then Gorbachev made a speech about troop reductions, which was interpreted by the market as meaning that the United States could also cut its armed force commitment- a development that would be beneficial for the budget deficit. All of this was considered very bullish for the dollar. The dollar started moving up in New York, and there was no liquidity.
Very quickly, it was up 1 percent, and I knew that I was in trouble.

==== One percent of a $3 billion position is $30 million! Did this loss transpire in just one afternoon? ====

It transpired in just eight minutes. All I wanted to do was to make it through to the Tokyo opening at 7 P.M. for the liquidity. If you really have to buy $3 billion, you can do it in Tokyo; you can't do it in the afternoon market in New York-you can't even do it on a normal day, let alone on a day when major news is out. My strategy was to try to cap the dollar in New York. Normally, if you sell several hundred million dollars in the afternoon New York market, you can pretty much take the starch out of the market. I sold $300 million, and the market went right through it.
The people on my desk didn't really know the size of our position, with the exception of Robert, who was my number two man. I looked at Robert and said, "That didn't slow the market down too much, did it?" He grimaced and shook his head slowly from side to side. I realized that I couldn't cover these positions. I was really scared. I remember thinking: This is the bullet that finally catches me in the back of the head.

Tom Strauss, the president of the company, sat about fifteen feet away from me. (Gutfreund was not there that day.) I got up and walked over to Strauss and said, "Tommy, we have a problem." He looked at me and calmly said, "What is it?" I answered, "I'm short the dollar and I've misjudged my liquidity in the market, I've tried to hold the market down, but it's not going to work. And I can't buy them back."
He very calmly asked, "Where do we stand?" "We're down somewhere between seventy and ninety million." "What do we want to do about this?" he asked. I distinctly remember being struck by the fact that he used me word we, not you.I said, "If I try to buy some back, I may get a little here and a little there, but it won't amount to very much, and we'll just end up pushing the market further against us. The first liquidity is Tokyo." "What's the plan?" he asked.
I answered, "When Tokyo opens, I have to see where it's trading. My intention now is to cover half the position at that time, and go from there. He said, "We've had a good mn on this. Do what you need to do." That was the entire conversation. It was over in two minutes.
In discussing this episode several days later, Robert said, "I never saw you look like that." I asked him what he meant. He answered, "You were as white as a. sheet." My perception of what was going on around me at the time was, of course, quite distorted because I was so focused on that situation. I was later told that, for the entire afternoon, there was virtually not a word spoken on the desk and that Robert didn't let anybody come near me. I was oblivious to all this at the time.
Continuing our conversation, Robert said, "I don't know how you went over to Strau-ss."
"Why?" I asked. "What would you have done? It was me only thing I could do; I had to inform Strauss about what was going on."
Robert responded, "Ninety million. You were down $90 million! Do you understand what that means?" I asked, "What would you have done?" He answered, "I would have put my coat on and walked out of here. I would have figured that was it, it's over, I'm fired." Now, I don't Iknow if that's what he really would have done, but it never occurred to me to walk out. The idea that I had possibly just lost my job never entered my mind. This was a firm that bore me and nurtured me; it was just inconceivable that that could happen. The first thing I thought about was the position. The second thing I thought about was making sure that management knew about it. In absolute consistency with the firm's approach, as exemplified by Tom Strauss's response, there wasn't going to be any negativity in our conversation. It was a measured discussion, but if there was going to be any analysis of what went wrong, it would be after the situation was resolved.

==== What eventually happened to the position? ====

By the time Tokyo opened, the dollar was moving down, so I held off covering half the position as I had previously planned to do. The dollar kept on collapsing, and I covered the position in Europe. I ended up with an $18 million loss for the day, which at the time seemed like a major victory.

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Quoting Jack Schwager interview Bill Lipschutz

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==== How is large size an advantage? You're kidding. ====

No, I'm serious. If a big buyer comes in and pushes the market 4 percent, that's an advantage. He still has to get out of that position. Unless he's right about the market, it doesn't seem like large size would be an advantage. He doesn't have to get out of the position all at once. Foreign exchange is a very psychological market. You're assuming that the market is going to move back to equilibrium very quickly-more quickly than he can cover his position. That's not necessarily the case. If you move the market 4 percent, for example, you're probably going to change the market psychology for the next few days.

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Quoting Jack Schwager interview Bill Lipschutz

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==== Bottom line: If it weren't for the bid/ask spread, would the banks make money on their trading operations? ====

Probably not in conventional position trading in the way you think of it. However, there is another aspect of directional trading that's very profitable. Take Joe Trader. Day in. day out, he quotes bid/ask spreads and makes a small average profit per transaction. One day a customer comes in and has to sell $2 billion. The trader sells $2.1 billion, and the market breaks 1 percent. He's just made $1 million on that one trade.

==== In a lot of markets that's illegal. It's called frontrunning. ====

It's not illegal in the interbank market. He's not putting his order in front of the customer's; he's basically riding his coattails.

==== So he does the whole order at the same price? ====

Generally, the first $100 million would be the bank's. That's just the way the market is.

==== Is there any difference between that transaction and what is normally referred to as frontrunning?====

Yes, it's legal m one market and illegal in the other.

==== That's the answer from a regulatory viewpoint. I'm asking the question from a mechanical perspective: Is there an actual difference in the transaction? ====

The real answer is no, but I'll give you the answer from a bank's perspective. When I allow you to come in and sell $2 billion in the foreign exchange market, I'm accepting the credit risk and providing the liquidity and facility to make that trade. In exchange, you're providing me with the information that you're about to sell $2 billion. That is not a totally unreasonable rationalization.

==== How do you move a large order like $2 billion? How do you even get a bid/ask quote for that amount?====

I'll tell you what happens. Let's say an order comes in for $500 million or more. The dealer stands up and shouts, "I need calls!" Immediately, among the dealers, junior dealers, clerks, and even the telex operators, you have forty people making calls. Everyone has their own call lists so they don't call the same banks. They probably make an average of about three rounds of calls; so there are 120 calls in all. All of this is done in
the space of a few minutes. The dealer acts as a coordinator- the bank staff shouts out bids to him and he calls back, "Yours! Yours! Yours!" all the time, keeping track of the total amount sold. A large bank can move an amazing amount of money in a few minutes.

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My idea was that you most likely should be able to see inefficiencies and a misbalance in supply and demand just by looking at the chart.. But the question is how to go about this

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The way I'm seeing this is all about price, and the chart trends and consolidates as a function of a 'war' if you like to call it. If demand wins the war against supply there is a inbalance and we have a trend until they meet at another area to fight on (consolidation). Now this is really economics course 1 and I need to study more, because there is no way this can be applied to trading.. Not in this simplicity.

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Carnegie my friend, you are wise beyond your years. That is EXACTLY how you find the orderflow. Nice work.