Order Flow - Achieving the mindset

I'm really not the one you guys should be listening to but I'll tell you this. Think first about the difference between the stock market and the FX market. Then think about the PARTICIPANTS in both markets.
There is an inherent inefficiency in the FX market.

Take care

All I'm saying is that the FX markets are much more random than people give them credit for.

They are not random if you know the reason behind them SEEMING random.

Take care doctor!

It might sound stupid and contradicting but that's my take on it.. Sorry for my english but if you think about what I am implying, maybe it makes more sense..
If you only look at the chart and nothing else then the move might seem random AND if you are trading it - you are trading randomness.
IF that is what you are implying doctor then I agree, but my take is that there is stuff you cant see on the chart.

Take care

If you knew exactly why it rained on Sunday it wouldn't have been such a shock when on Sunday it rained. But otherwise the 10 minutes of rain that came and went @ 12 pm on sunday may have seemed pretty random.

I guess it's what you define as random I mean if you mean unpredictable then this to me isn't the same as random the people moving the market are trading for very specific purposes so the price impact they create stems from a very logical and calculated place

IMO the market can only be random if people traded randomly and for no specific reason which is absurd when millions and billions of dollars are at stake.

But again it's what you define as random sure there's noise but without the noise markets would be too efficient to trade profitably in the first place

Discretionary Trading: Reading Order Flow

In response to an interesting debate over discretionary vs automated trading, I wanted to expand on some of the skills required for a trader to become a successful discretionary trader.

I think by far the best discretionary traders are floor traders. One of their most significant edge is the ability to read order flow and understand trader psychology. That being said, one of the most effective skill to possess in discretionary intraday trading is reading order flow. With a strong ability to read order flow, see trader psych and emotions in price charts, and the ability to understand the type of market... indicators are absolutely unnecessary. By order flow I mean the ability to read tape, level 2, and volume.

I wanted to focus this thread specifically on order flow. First lets discuss the level 2. Level 2 can be manipulative. However, one of the biggest clues level 2 shows in my opinion is the ability to see a heavy buyer or seller. Often you will see a thin ask but price unable to lift. Then when checking tape, you will see that alot of contracts traded at that price. This is short term resistance. What you are seeing is seller with a heavy line of contracts to sell and will not step off the ask.

A couple of games you might see: tape shows huge line of contracts trade at a specific price level (lets call this level X for now). On level 2, price appears to have enough momentum and volume to take out level X. However, someone is standing firm there not showing his hand entirely and even when price breaks that level X by one tick, you can see contracts getting dumped taking price back below X. What is this indicating?

First, lets say you are an insitution with 10,000 contracts you need to sell. Are you going to dump this at the market and cause an artificial selloff? No. You can get a much better entry by distributing throughout the day whether it be the entire morning session or in the afternoon. If youre sitting on an order from several hedge funds to short 10,000 contracts in total... you want to short into the rallies. So what you are going to do is to hold the ask at a desired level. You might even by a few contracts to support any decline... but you are going to be distributing alot more contracts than the fake support you are creating. So some games you can play is:
Hold the ask and then withdraw the ask causing an impression that the selling is over.
Instead of posting a monster 5,000 lot size at the ask, post 50. When buyers start buying at the ask, start dumping without exposing your hand on level 2. (obviously this is visible on tape)
Withdraw the ask and then buy 500-1000 lot just to bring price up by a few ticks. This fuels momentum as traders think resistance is over. Then dump another 2000-3000 to take price back to the breakout point.

Understanding order flow offers the ability to enter trades early. Do you see strong order flow coming in that has the potential to take out the high? Does it show that the pullback is likely to hold? Are you sensing a breakout from a consolidation with the sudden buying/selling interest you see on tape? Did the level 2 bid/ask just get thicker? Thinner? What do all these information mean?

In discretionary trading understanding this type of action and actually seeing it real-time offers a tremendous edge. However, this is just one skill set and there are many other skills I think is absolutely necessary in being a successful discretionary trader. Volume, tape, price action, trader psych are just some of it.

For traders, I have a question. When you look at a candlestick chart, what do you see? Are you able to see human emotion and trader psychology in price action? If the answer is no... youll need to gain more experience and practice. For those that are struggling with trading, once you are able to see the psychology behind each price bar, you will realize that trading is about people and taking money from their mistakes. It has nothing to do with numbers, indicators, and news. How traders react to news is far more important than whether the news was good or bad. You dont need to be the first one to act... all you have to do is determine which side is going to win and just hop on board. (at an early point)

Happy trading

My definition would follow the usual, viz

random [ˈrændəm]adj1. lacking any definite plan or prearranged order; haphazard a random selection
2. (Mathematics & Measurements / Statistics) Statisticsa. having a value which cannot be determined but only described probabilistically

So, from time 'x' and projecting into the future, the movements of the FX markets show extreme randomness.

The fact that you can explain what happened AFTER the event does not change this.

I wanted to add a few things.... bids and asks getting withdrawn are not always traders playing games. This can easily be due to uncertainty, fear, or nervousness regardless of whether the person was a private or insitutional trader. How many times have we placed a limit order just to withdraw at the last minute due to uncertainty?

Regarding market profile and order flow, I personally do not have a tight correlation between the two. Market profile is more of an understanding of auction theory to me instead of a rigid trading methodology. For example, this is how I would use MP in my trading. Lets say prices break the previous day low swiftly on stop runs and momentum shorts. However, order flow slows and the tape surprisingly shows diminishing sellers. All of a sudden a burst of buy orders, short covering, and momentum longs enter the market and the order flow is twice as fast on this move up compared to the move down. As a matter of fact, the tape shows a burst of buying emotion with order flow showing most contracts being traded at the ask. You ask yourself... okay, if we break into the previous day range I am going long for a possible rotation back into the previous day POC or VAH. Why? Because this tail it left below the previous day low is rejection and value must be higher. (market profile concept) So I wouldnt even hesitate and throw in a market buy order once price breaks into the previous day range again.

I think specific setups are nice to catch and wait for because they line up perfectly with the tools traders use whether they be support and resistance, internals, indicators, etc... However, understanding order flow allows one to enter based on momentum and gut instinct. (important you realize u have a solid instinct and not impulse)

Lets say prices decline to test the low of day. I am observing tape and level 2 to determine whether to fade this move or play a breakdown. I see temporary support with buyers trying to keep prices up. However, tape and level 2 shows a thick ask as prices move up by a few ticks. In other words, sellers are still trying to dump contracts. Order flow tells me this is weak and that we are likely to break the low. Hence, I would short at 1-3 ticks above the previous day low. For new traders, you might wonder why in the world would you do that? I am comparing the action on level 2 and tape on the leg up vs leg down. (the leg can be anywhere from 3-10ticks)

Happy Trading.

Listen fabreu, I'm really sorry for coming off at you but you really need to look at the thread and understand that we are not talking about order flow in the traditional sense. We dont have L2 and shit in FX and with this method we dont need it.
I am sure in time (if you read the thread) you will know what we are talking about.

Anyway its nice to see you are making an effort but maybe you should point out that Future from traderslaboratory.com posted that one..

Take care

I sorta feel like we're going in circles here. If you want to learn order flow then stick at it and things will slowly fall into place but if you don't believe in it in the first place then you should be on "the market is random thread" cause otherwise your wasting your time and sidetracking the thread

As for hindsight personally analyzing things that have already happened do nothing for my equity curve but they help me to put a logical understanding behind an otherwise seemingly random event. This inturn opens my eyes to how things may operate and generates new ideas and insights I never thought of before. I'm of course learning too
.
There was a great post by GRK the other week about planning for certain situations weather they happen or not. You should give it a read

If you believe the FX market is random, then for you it is. This is an endless debate, and has nothing to do with the scope of this thread. There are reasons behind any significant move in FX. Just because YOU do not know of those reasons before the fact, does not make Forex random. It is only random for the one that views it as such. I am not implying that it is possible to predict every move, or even most moves. But there are times, when with the right information and understanding of the market participants, it is possible to make very accurate trading decisions. The goal of this thread is achieving the proper mindset to be able to correctly identify those times and capitalize on them.

Just to add my .2 cents... I believe the market is NOT random. If anyone thinks it is, I don't know why you're trying to trade it. Perhaps for entertainment as a gambler?

There have been studies on this, and strategies deployed by people who make money based on the fact that it's not random. How much have these random theory guys pulled?

Price movements=Traders placing orders

Find out when there placing orders no more random market!

I like a comment made by Larry Harris on the same thing he said that (can't find it) something along the lines of in an intensive study into the markets many analysists came back and claimed that the market followed a random walk he then added that if anyone could prove otherwise they most likely would have kept their findings private and capitalized on it

MR Harris put it better but you get the point

Thanks for the info. I am digging pretty hard on the barriers,etc. I think the answer to your question a while back to the when to play the barrier lies in the expiration date and time. The research has been somewhat elusive because the purchaser of the option decides on the expiration date following some rules of course one of which it can't expire the same day it is written. So I am inclined to believe that most would expire the following day given how much the market flucuates. Of course I am digging into this.

Good day

Well, that's only part of the story.

Anyway, I don't want to sidetrack the thread any further and I've said my bit. Some will agree and some won't. I don't have a problem with that. I'm happy trading news and do it profitably, though I'm always happy to entertain other ideas too.

One thing I do find funny though is that whenever anyone posts anything counter to almost any thread, fans of the OP become very defensive and in some cases quite aggressive. The persuit of knowledge is best achieved through rigorous debate rather than a simple reliance on faith. And I see more faith on FF rather than rigorous debate.

But enough chat, I'll keep you from prayers

dr_who,

Firstly I am not challenging your beliefs at all I think its important to discuss new ideas as new opinions can also be formed on the back of these and I certainly do not mean to be aggressive.

Now I really don't think this thread would warrant a discussion on Random/Non random events but from your last post you say that:

"I'm happy trading news and do it profitably"

Most economic news releases happen around about the same time every month. Typically the market has already factored this information within its price before the event, however without going into politics before a news release there is a lack of liquidity and so during a news release it is even easier than normal to move price around hence why we often see a large price spike sometimes not representing the released news. The myth that forex is a Liquid market is absolute BS and its even more illiquid during the releases.

Now in my paragraph above I have just given you a few non random variables about the market that may be exploitable. Now to put it from a different aspect, have a think about your News trades and who is taking the other side of your trades. In other words who's Loss is your Profit or vice versa.

Carnegie: If this post is too off topic please feel free to delete it.

All the best,

James.

There is a big difference between trying to spark a debate and trolling...

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