Order Flow - Achieving the mindset

Hey guys,

I can understand why there would be a correlation between say Oil and USD/CAD or Gold and AUD/USD, but how would one go about explaining correlations between pairs such as GBP/USD and EUR/USD, from an order flow perspective? Is it simply the USD backbone? Is there exploitable potential in correlations? Perhaps identifying situations of divergence?

Just thinking aloud,
xXTrizzleXx

In my observation, when eur-gbp pair is trading in small range, then, eur-u and gbp-u go move in the same speed aganist usd.

But, when e-gbp is swing up, then, eur-usd often move fast aganist usd, and cable move in slow, small pace.

So, need to check e-gbp to select which e-u or g-u to trade.

Thanks Dragan53.

BB_strategy is a good, useful strategy for order flow trading during open session.

We need more order flow trading strategy to practice, and bid out market makers.

yes... I do the same type of thing with EG. But as far as EU/GU correlation... I wouldn't put much weight on that.

it doesnt occur often,but when it does,it goes 50pips
from my experience its best to trade london open on m1,because its really fast

to bidthem out we really have to shadowy,and do the same as they do,beat them at their own game,so they dont notice our stops
i personally dont use any stops on london open,i just exit when i feel like i got in the wrong direction



today i entered short as i saw that the last 20 minutes of london were up,but my experience told me that it needs to be 40 min,evrything else is unexpectable
lost 17,then entered buy on hope of good news on euro employment data,as asia and london open were bullish and news hasnt come out yet profited 18

Been following the thread for a while, and the last few post particularly. You guys do know that the E/J, G/J, and E/G are not "traded" pairs like the E/$, $/J, and G/$ but are derived, right? If you know this, then you understand when to trade them and when not to trade them. Just asking...

Yes thats why they are called crosses, thanks for coming.

Just seen this on IFR.

1.9-2 Billion Coupon purchase.

BOSTON, Mar 1 (IFR) -
Operation Date: 03/01/2011 Operation Type: Outright Coupon Purchase Release Time: 10:15 AM Close Time: 11:00 AM Settlement Date: 03/02/2011
And this is from the fed site.The purchase or sale of Treasury securities on an outright basis adds or drains reserves available in the banking system. Such transactions are arranged on a routine basis to offset other changes in the Federal Reserve’s balance sheet in conjunction with efforts to maintain conditions in the market for reserves consistent with the federal funds target rate set by the Federal Open Market Committee (FOMC). The purchase or sale of Treasury securities on an outright basis adds or drains reserves available in the banking system. Such transactions are arranged on a routine basis to offset other changes in the Federal Reserve’s balance sheet in conjunction with efforts to maintain conditions in the market for reserves consistent with the federal funds target rate set by the Federal Open Market Committee (FOMC).

I wonder how that may affect the dollar?

I've been waiting a long time for this =)

Just checking. Your discussion above seemed to indicate something else. Good trading to you!

The world has changed a bit. They are derived on some dealing platforms, but on most ECN's they are truly traded. I mean, what's the difference between derived/traded when someone sells G/J big on an ECN, and the dealing banks adjust both G/U and U/J as a result (thus the "derived" influences the "majors" in this case, not the other way around)?

BTW, E/J is not a derived pair anymore for a long time (due to Japanese companies doing business in Europe, which creates a natural market).

And it doesn't even matter if it's synthetic or not. All it matters if you can trade it or not. In the securities market statistical arbitrage is all about finding co-integrated synthetic baskets. The do not see themselves as second class citizens because they trade "synthetics".

That's probably because you misunderstood what I was saying about how I use the crosses.

Good trading to you as well.

I believe following condition make today movement:
1. Today is 1st day of monthly. The market won't run to too far. Breakout set the senitment for this month.
2. Top sky of euro, cable are all new highs - resistance.
3. Friday US nfp is coming. A lot of bank's models are waiting for this data to work out direction bias.

The real fundamental drivers under market are often top business secret of big guys. They never talk about until a trend run over 2/3 course. Then, they talked, all media talked, and they are ready to exit. This is fx fundamental running mode in years and years. Actually, big guys manage and control media very well, otherwise, their positions may be jeopardy.

They may give out some small news A to push market a bit, then. give another small news B to push back market.

What is the fundy drivers which big guys use to bid euro or bid usd at moment? "Top secret" !!! It may be within DarkStar's new book.

One is sure we will know after this trend complete in future.

Thanks Adal for this info. I am interested to build a EA to do HFT. Before, I think HFT trade on high volume time to bid and trade each bars when price move and jump. Ok, HFT is used in quiet time. Do you mean Asian session's 4 hours? or after London close US later session 4 hours?

Hey Guys,

Just wanted to voice my thoughts so far over having an Order flow mindset.

One thing that has become apparent from this thread is knowing who the participants are and knowing how they operate and on what basis they operate. I think that alot of these are either offering a service or are speculative or maybe even both. Another thought is that the service offering participants are the ones who will be time Dependant ie They have to do a trade immediately, whereas the speculative participants can time there entries a little more precisely.

Out of the two groups I would say that the speculative traders being hedge funds Pension funds etc would be the hardest ones to try and "sniper" there order flow. The reason for this is because I think that these type of participants all view what a currency is worth in many different ways.

Now moving on to the participants who merely offer a service of currency exchange. These participants work as an intermediary between Multi national companies and there debts. One of these could be the example like Darkstar used in his "Structure of Forex brokers" thread.

Quote:
The guy who buys a shiny new Eclipse more then likely will pay for it with US Dollars. Unfortunately Mitsubishi’s factory workers in Japan need to get their paychecks denominated in Yen, so at some point a conversion needs to be made.

Darkstar mentions these type of service providers by saying.

Quote:
The lion’s share of Forex transactions are done as a function of international business.

If most Forex transactions are done as a "Function" of international business then my thinking is that I need to focus on the participants offering these services and the schedules they work on. For example if we knew when the dollars for Mitsubishi's workers pay cheques were being changed in the fx market, then I could review market conditions around the time of that transaction and base a trade on what effect that will have on price. Thinking along the same lines it easy to come up with hundreds of reasons for trades similar to these being made as world trade is enormous. So from my research it now appears that I need to be more concentrating on those participants who are making trades as a function of international business. Here are a few names I'm starting to look at:

Travelex
Moneycorp
HiFX
Worldfirst Uk Ltd

My next step is to try and figure out when and how these companies are making there transactions and also by which methods (Spot,Forward) and also the timescale they have to make them. Maybe I can break in to there offices, however I don't think that would help! If I do end up finding this information then there will be several if not hundreds of strategies to form from this information. Now I am starting to see the "Technical analysis fallacy" in a far clearer light and it is making me question a lot of systems within Forex Factory. There is a reason for every price movement in every market and that reason is Order Flow not a chart!

If anyone has ideas similar to mine please speak up. Many hands make light work. :nerd:

Best of luck,

James.

Quoting redbaron1981

Disliked

My next step is to try and figure out when and how these companies are making there transactions and also by which methods (Spot,Forward) and also the timescale they have to make them.

Ignored

Most bank-to-corp transactions are done with forwards. The banks then hedge the risk of that forward through an offsetting position in spot. This is why discussions about notional volume are so horribly misguided.

To give you an example of the process... Mitsubishi needs to lock in an exchange rate for a $1m payroll 30 days out. They contract with Bank A for a $1m 30 day forward. Bank A doesn't want to hold the risk, so they hedge the forward with a spot transaction with Bank B. Bank B is a market maker and they don't want to hold it either. Subsequently it's offered up to ECN Broker C where Speculator D assumes the actual risk. At a minimum the $1m in actual interest would became $3m in notional volume.

So yeah a majority of forex transactions are a function of international business, but that’s only because a majority of notional transaction volume is artificial.

To address your larger question/assertion: while its true that business transactions are a large part of the volume, that doesn't necessarily mean that they are a big driver of price change. At the end of the day there was only $1m in net transaction demand, so only $1m in net liquidity will be consumed. Without a reference point for how large this transaction is in comparison to the rest of the market, it's impossible to estimate how large the impact would be, but I think in most scenarios the price impact of international business orders would be quite small.

You can confirm this for yourself by scanning IFR for large commercial demand and watching the price impact as that demand is filled.

I was meaning that they trade short term - almost all orders are under 4 hours, and most of them under 10 minutes.

Sorry to bring some bad news to you, but for HFT you need at least a million dollars to spend on programmers, infrastructure and trading account. For example, they use 10 Gigabit network cards which cost over $3.000.

I think this is what they refer to as the inter-dealer Hot Potato effect in micro-structure studies.

They could also simply try to match it off against another customer with the an opposing direction of the same deal, I guess much like a MM broker handles there books internally on the smaller trade sizes, matching off clients.

Glad to hear the book is in finishing touches DS.

Darkstar,

Thanks for your response and glad to hear your books nearly finished, hope my name is still on the list. After reading your reply it becomes obvious that I have to start to focus on the larger corporate transactions. Grkfx's homework was to find out what happened to the GBPUSD on the 1st March 2010 and 1st June 2010. Heres what I found.

1st March 2010.

Britain's Prudential will buy AIG's Asian arm for $35.5 billion in the insurance sector's biggest deal ever, helping the bailed-out U.S. group repay a big chunk of its taxpayer debt. (Ibtimes)

Speculation Britain could revive its asset buying programme, after the Bank of England said last week it might take such a step if the economic outlook worsened, continued to weigh on the pound along with expectations of a sterling outflow from Prudential's (PRU.L) purchase of the Asian unit of AIG (AIG.N). (Reuters)

1st June 2010.

Sterling made a recovery against the US dollar today on speculation of an imminent announcement from the Prudential that it is abandoning its AIA takeover.

Prospects of the deal being called off saw the Pru price jump 6% to 572p, and sterling rise to $1.459, from $1.450, as the currency was buoyed by demand from international investors needing sterling to buy the UK insurer's shares. (Guardian)

HONG KONG/LONDON (Reuters) – UK insurer Prudential has abandoned its plan to buy AIG’s Asian life unit for $35.5 billion, leaving management under fire and the company facing a $659 million bill for failure.

Prudential’s move to drop out was widely expected after bailed-out U.S. giant American International Group refused to cut the price, turning down a last-ditch effort by Britain’s largest insurer to appease shareholder concerns.

“We listened carefully to shareholders over the price and initiated a renegotiation of the terms with AIG. Unfortunately, it has not been possible to reach agreement,” Prudential’s chairman, Harvey McGrath, said in a statement.

“We are therefore withdrawing from the transaction.” http://blogs.reuters.com/clara-ferreira-marques/


So these are the size of transactions we need to be aiming for to climb on the back of, as I am fairly certain that market impact could not be avoided with a transaction so large. The next thing to look out for is how an order off that size would have been made and how we could have had pre warning about it. In these two cases it seems that the market started to move on speculation alone and no actual $35.5 Billion ever hit the market. "Buy on rumor Sell on news" certainly comes to mind.


Deals like the Prudential one above do not come around every day but is there enough large size corporate deals carried out daily to be able to trade off or are we as order flow traders only able to work on the knowledge that there maybe large orders placed in defense of option barriers and push into them.

The more and more I think the more I see the chart becoming useless apart from reference purposes.


James.

Ps Darkstar if you need a proof reader let me know

whoa, someone actually did the work? I'm impressed