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Order Flow - Achieving the mindset

  • #201
  • Feb 6, 2011 7:29am Feb 6, 2011 7:29am
Some cool posts of discussion I gotta be a part of

Quoting Carnegie
How do we "know" (once again I say this.. we will never know) if it is informed traders or uninformed traders? Let me show you how I view this and this is obviously 100% wrong but I need to clear my psychological issues as Darkstar says.

My understanding.. Dealers face this very problem. As price moves away from market value, they don't know who is informed and who isn't. The only way is for them to trade with an informed client asap (who takes advantage of their mispricing) to which they'll change who they distribute liquidity to based on their new knowledge.

Quoting Carnegie
Let's say we have a sharp move up from nowhere like 30-40 pips, how do we know if it's informed traders moving the market?
In my mind 100% of the time it would be an informed trader, because no uninformed trader would have that kind of money (this may sound stupid but think about it.. if you're uninformed, that means you are usually uninformed therefore you lose and if you lose you do not have money) so the move will be caused by orders just as you say however, it will be caused by an informed trader.
My mind works the other way around.. I tend to believe sharp moves are the 'uninformed' trading if nothing has changed with the percieved value. Yes, retail position sizes are smaller but if there's a lack of liquidity and an abundance of one-way orders that demand it, price will move that way. Think a group of uninformed (stops/breakout traders for example) that all put in market orders.


Quoting triger88990
"Random" is a word invented by people to describe irrational and unpredictable behaviors. Randomness doesn’t really exist in nature. Every thing can be explained even if we don’t know the explanation for it.
If prices reflect current values then trading would be random since price is not over or underpriced and no one would be able to profit from informative trading. The most efficient markets are ones that move randomly. But ya, thats a whole other topic of discussion.


Quoting CindyXXXX
Correct me if I'm wrong but....

In the end are the words "informed" and "uninformed" misleading?

In my understanding an informed trader is simply one who poses a threat...
The terms may be misleading because each of us have a different definition of the terms.

I agree, the small informed retail trader is not a threat right now, but how long of informative trading will it take for him to become a large informed trader..

A dealer would have to trade with an informed to know who he is, BUT a dealer isn't going to put out a $1B for an ask size and get thier inventory rocked. Instead, they may offer a very large size and see who chomps on it. By doing so they can then move their next offer size and/or price to compensate for their potential risk exposure to yet a another 'informed' trader on the same side of the market.
  • #202
  • Feb 6, 2011 7:43am Feb 6, 2011 7:43am
A lot of us assume that because of adverse selection dealers quote wider spread to informed traders and tighter ones to uninformed ones.

But a recent paper (found on this forum) suggests that this might not be the case: http://dl.dropbox.com/u/190212/ff/fx..._discovery.pdf

Our first contribution is to provide evidence indicating that adverse selection is not of great relevance to the spreads dealers quote to foreign exchange customers.

Customer spreads are not positively related to trade size and are not wider for the customers considered relatively informed.

Indeed, our econometric analysis indicates consistently that customer spreads are widest for the trades least likely to be informed. Specifically, spreads are widest for the smallest trades and they are wider for commercial customers. Adverse-selection theory would predict that financial customers pay wider spreads than commercial customers because dealers consider financial customers – hedge funds and other asset managers – to be fairly savvy while they consider their commercial customers – firms that participate in international trade – to be uninformed. Empirical evidence confirms the dealer’s perception that financial customers are relatively well informed.

Our second contribution is to highlight three factors in the literature that could explain why spreads vary inversely with a trade’s likely information content. The first, fixed operating costs, can explain the negative relation between trade size and customer spreads. Unlike the other two factors, however, it cannot explain variation across customer types. The second factor is the transitory “market power” dealers gain from their information about current market conditions. Since it can be costly for customers to seek out the best quotes, an individual dealer has market power during the moment of communicating with the customer, even in a market with hundreds of competitors. Since commercial customers are typically less informed about market conditions, this could explain why dealers extract wider spreads from commercial than financial customers. The third factor is the strategic advantage dealers can gain from vary spreads to optimize information flow, rather than passively accepting information flow as assumed in adverse-selection models.

we suggest that foreign exchange dealers strategically set narrower spreads to informed customers to gain information from which to profit in subsequent trading. This advantage is especially pronounced in liquid two-tier markets like foreign exchange, where dealers can exploit the information gathered from customers quickly and at low cost.
  • #203
  • Feb 6, 2011 8:09am Feb 6, 2011 8:09am
Quoting Adal
Scotty, the interbank isn't anymore what it used to be - the premier place for finding liquidity.

It's hard to call ECN's second tier these days. Hotspot daily volume is 75% of EBS's one, and growing rapidly. EBS is not built for HFT, Hotspot is, that why it's growing.

http://forexmagnates.com/hotspot-may...er-1-trillion/
http://online.wsj.com/article/BT-CO-...02-713230.html

If DB's algo is present on EBS, FXall, Hotspot, Integral, mediating and arbitraging the liquidity between all these venues, hitting...
Thanks for the links, Adal. A word to the wise, never mess with Adal!
  • #204
  • Feb 6, 2011 8:17am Feb 6, 2011 8:17am
Quoting grkfx
Go look up and read what happened to the GBP/USD on 3/1/10 and on 6/1/10
I see what you are talking about now after some help. Tipped me about looking at fxlive.

The interesting thing here is how to read that a deal might go thru causing GBP to move down, yet still it moves up in the latter date. So we're selling GBP to purchase other currencies.. yet still it moves up.. cool

There is one thing though that still doesn't fit inside my brain.. It's the news.
We all have and understand the news AFTER it has happened.. So that means that we need to discover some other way of "knowing" that something is going down.
  • #205
  • Feb 6, 2011 8:20am Feb 6, 2011 8:20am
Scotty B,

How about changing your title:

"Order flow is like the sun: You cannot look at it, but without it you cannot see anything else"
  • #206
  • Feb 6, 2011 8:41am Feb 6, 2011 8:41am
Quoting Carnegie
The interesting thing here is how to read that a deal might go thru causing GBP to move down, yet still it moves up in the latter date. So we're selling GBP to purchase other currencies.. yet still it moves up.. cool
I see what you are saying Carnegie but you need to think more before you post.
Think about the implications of inefficency and dealing, and then think about what would cause traders to trade (i.e. order flow mentality) and then think about what you have read in T&E.

This is my take on why price moved up even though order flow was pointing to GBP moving down.
The simple answer is that when the selling was finished, the move was faded and brought back to "fair" value once again.

If we have someone buying JPY and selling GBP to buy a company then T&E would most likely say that it is uninformed participants (asset exchangers) and since this uninformed participant actually has allot of money and is not interested in SPECULATING in the currencies but only exchanging the currency; the pound moves down and therefore AWAY from it's real value. When everybody in the streets "know" that this uninformed move is finished.. Just fade it right back to where it came from. This is the order flow mentality.. this will cause orders!! The inefficiency will cause orders!

I think I'm on overload.. there is too much right now
  • #207
  • Feb 6, 2011 8:43am Feb 6, 2011 8:43am
Quoting Carnegie
There is one thing though that still doesn't fit inside my brain.. It's the news.
We all have and understand the news AFTER it has happened.. So that means that we need to discover some other way of "knowing" that something is going down.
Maybe a crystal ball?

You want to find some system, which will get some numbers from magic book, that tells where ccy will move. Actually I think that there is no system. For me order flow trading is about generating ideas and putting them to test. Look at first page of newspaper, you see a riot coming - short it. You see a new law that says, you can only use specific kind of gas for heating in your house - long the gas producers. No magic, just generating ideas and trading according to them. If one doesn't work another will.
Of course news is only one source of ideas. Other sources are economic factors, monetary policies, commodities prices, etc.

Everything here is my humble opinion and I'm not really that experienced to say that they are true. But this is something that I see when reading through Order Flow threads. Wannabes trying to figure secret source of data which tells where banks has their orders awaiting.

Please point flaws in my reasoning as hopefully it will change my perspective.

Take care.

EDIT:
Now your second post is really what I'm talking about. You generate idea, that price moved away form it's value and trade it that way.
  • #208
  • Feb 6, 2011 8:59am Feb 6, 2011 8:59am
Quoting Carnegie
We all have and understand the news AFTER it has happened.. So that means that we need to discover some other way of "knowing" that something is going down.
I'ts called insider trading (plus commercial espionage). Ask George Soros. He knows all about insider trading.
He was looking for the card so high and wild hed never need to deal another
  • #209
  • Edited 9:55am Feb 6, 2011 9:04am | Edited 9:55am
Quoting Macocha
Maybe a crystal ball?

You want to find some system, which will get some numbers from magic book, that tells where ccy will move. Actually I think that there is no system. For me order flow trading is about generating ideas and putting them to test. .

. Wannabes trying to figure secret source of data which tells where banks has their orders awaiting.
Exactly (My opinion too) - NP.
Time hides Nothing
  • #210
  • Feb 6, 2011 9:08am Feb 6, 2011 9:08am
Quoting Macocha
You see a new law that says, you can only use specific kind of gas for heating in your house - long the gas producers.
This doesn't work. Because there are hedge funds out there who will start buying the gas producers when this law is just a draft. Each time the probability of the law passing will increase, they will buy more. If the probability decreases, they will sell.

The only way to profit from this is to find out about the news at the same time as they do - for example when FDA announces the approval of a new drug. But even then, they will be in front of you by a few seconds and you will very likely buy the top (check out DNDN in 2007 and 2009 to see what I mean)

Something similar: http://en.wikipedia.org/wiki/Risk_arbitrage
  • #211
  • Feb 6, 2011 9:52am Feb 6, 2011 9:52am
Quoting grkfx
If you guys are looking for examples and want to do some detective work and search for yourselves I will give you a clue.

Go look up and read what happened to the GBP/USD on 3/1/10 and on 6/1/10

Dang my big mouth talking too much again. Time to hibernate for a bit.
Here is what was going on with sterling around that date:
http://www.reuters.com/article/2010/...62132020100302

"Underlying sentiment is bearish due to the same themes - uncertain politics, poor economic performance, an uncertain monetary policy outlook and concern about debt. It's hard to see anything positive for sterling at the moment."

Now, you have to learn to distinguish the really important/significant news that will shape the market sentiment from the BS news and also you have to follow your own instinct/experience.

Sometimes you're going to have news/events contradicting each other, take for example the awful sterling GDP reading last week, but as it turned out, it seems that the inflation expectations have been a stronger force.
  • #212
  • Feb 6, 2011 10:00am Feb 6, 2011 10:00am
Quoting Adal
This doesn't work...
I stand corrected. This maybe wasn't best example, or maybe it was good example to illustrate that some ideas simply doesn't work. In that case go and make some new ones.

I see stop hunting as an idea too. You see market is headed for the stop dense area. You create an idea and trade accordingly. Basically what I'm trying to convey is what Darkstar said earlier: that trading is an art.
  • #213
  • Feb 6, 2011 10:19am Feb 6, 2011 10:19am
Quoting Macocha
I stand corrected. This maybe wasn't best example, or maybe it was good example to illustrate that some ideas simply doesn't work. In that case go and make some new ones.
But you will lose money with each non-working idea. That's why it's best to learn from the experience or research of others, and avoiding wasting time and money on non-trades. Jim Simmons once said that they don't even talk about methods that used to work, but don't work anymore, because they want their competition to waste time and money trying them.

When you say that trading is an art you probably mean that it's not possible to put it down to clear rules. This also means that it's non-testable. You don't know if it failed only when you tried, or if it would have also failed in the past (thus being avoidable with backtests).
  • #214
  • Feb 6, 2011 10:39am Feb 6, 2011 10:39am
Quoting grkfx
If you guys are looking for examples and want to do some detective work and search for yourselves I will give you a clue.

Go look up and read what happened to the GBP/USD on 3/1/10 and on 6/1/10

Dang my big mouth talking too much again. Time to hibernate for a bit.
For any of you Europeans, I meant to say March 1, 2010 and June 1, 2010
Private message me for a link to my order flow website.
  • #215
  • Feb 6, 2011 10:42am Feb 6, 2011 10:42am
Experience of course plays enormous role in finding what kind of ideas work and what doesn't. And for sure it saves your money to learn from others mistakes.

Quoting Adal
When you say that trading is an art you probably mean that it's not possible to put it down to clear rules. This also means that it's non-testable. You don't know if it failed only when you tried, or if it would have also failed in the past (thus being avoidable with backtests).
Exactly. This is because world is ever-changing. Today shorting some ccy when storm or tsunami is about to hit shores of some country may work, in 20 years when said country is guarded against it, it probably won't work.
  • #216
  • Feb 6, 2011 11:26am Feb 6, 2011 11:26am
Quoting grkfx
For any of you Europeans, I meant to say March 1, 2010 and June 1, 2010
Lol that explains a few things ta
Time hides Nothing
  • #217
  • Feb 6, 2011 11:47am Feb 6, 2011 11:47am
Look what happened to the Euro when the portuguese bond auction was announced.

It was a fundamental event that caused order flow.
  • #218
  • Edited 9:26pm Feb 6, 2011 12:07pm | Edited 9:26pm
I think i need to take a break from the thread. Some of you guys are much further along in the thought process, and your presenting and discussing information that is confusing me!

-- I am finding the Dealers chapter of T&E quite interesting. Reading how dealers might try to rebalance their book if they feel they may have just traded with an informed trader brought up some price action that used to perplex me before (I think I am thinking about it correctly).
  • #219
  • Feb 7, 2011 7:11am Feb 7, 2011 7:11am
Hey guys,

Today I have done something stupid. I took a trade that went against me and hit my stop. The good thing is that this was a demo trade (as usual) and the even better thing is that it was a loss and that means that there is more stuff I need to learn and ask about.

I know charts are illegal, but this one has the value of TIME (because of order flow/news reading) so I'll put one up with my entry and stop.

In hindsight, as I look at the chart, it looks like a usual stupid fucking breakout trade.. That went really wrong.

Now you may ask why did I take this trade? Well, the intentions were good and it was based on order flow, however, the mindset behind it was obviously not correct.
As I strolled through forexlive.com and read the news I had a "sense" that the bias was toward USD, therefore, the trade EURUSD was short i.e. selling Euro buying Dollars.

Here is some of the news (just so you can understand what was going around in my mind):
1. AUDUSD Slips Slightly In Early European Trade (hedge fund selling has been noted this morning)
In my mind, if you sell aud you have to buy usd thus causing USD order flow.

2. ACB Buys EUR/USD (Around 1.3590 in recent trade)
This one is actually interesting, you may ask why the hell I didn't reverse my trade as someone was BUYING eur and SELLING usd thus causing order flow INTO euro.
My reasoning was to look at the time and price.
The time was 08:17 GMT and price was 1.3590. When I took my trade 13.05 GMT price was 1.3540 i.e. 50 pips lower.
In my mind this was clearly bullish USD order flow as their trade went wrong and they will have to be stopped out (= reverse position) or just plainly sell their position. Once again, this would be USD order flow right?

3. BIS Buys EUR/USD
-UPDATE: Real money notable seller of euro this morning. Buy orders clustered 1.3540/45, stops below.
Same this as above. at 07:52 (news time) the price was around 1.36. That means that their trade went wrong also and they would have to sell their position = USD order flow.

Now this in my mind was obvious to take a LONG USD trade because all participants BUYING euro where incorrect in their trades and therefore should reverse their position i.e. start shorting the euro and buying back USD (which was my intention).
You may ask once again why my limit entry was at 1.3535?
If someone has buy orders clustered at 1.3545 and stops below, in my mind it should have been a sort of a price cascade. But in this case it was not.. It was a stop hunt I believe and I should have faded it.

Atleast I learned much from the trade and I will learn even more when you guys comment on it.
Sorry for the chart btw. It was more about showing the time and price of everything rather than showing S/R bla bla areas.

Take care lads, looking forward to your ideas and comments.
Attached Image (click to enlarge)
Click to Enlarge Name: orderflowstop.jpg Size: 199 KB
  • #220
  • Feb 7, 2011 8:41am Feb 7, 2011 8:41am
Quoting Carnegie
Hey guys,

Today I have done something stupid. I took a trade that went against me and hit my stop. The good thing is that this was a demo trade (as usual) and the even better thing is that it was a loss and that means that there is more stuff I need to learn and ask about.

I know charts are illegal, but this one has the value of TIME (because of order flow/news reading) so I'll put one up with my entry and stop.

In hindsight, as I look at the chart, it looks like a usual stupid fucking breakout trade.. That went really wrong.

Now you may...
Its common during this period, vulnerable to manipulation. Your direction played out eventually. Be very careful of traps in this time period during the day.
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