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Order Flow - Achieving the mindset

  • #1,201
  • Apr 4, 2011 8:17am Apr 4, 2011 8:17am
I know Carnegie, I know... believing in a system is much like believing in God, you might be sure of His existance, but when you start praying and cannot immediatly feel him, you can doubt of his existance.
It's just by your faith that you keep on doing what he tells you to do.

I'm not a believer, I don't believe in God, I don't feel like I can because I don't know enough. But I think that if I was a believer, I would never doubt.
  • #1,202
  • Apr 4, 2011 5:58pm Apr 4, 2011 5:58pm
Hey Grkfx,

Firstly I just wanted to personally thank you for all the wonderful posts you have made. My trading is now starting to take a better path now than what it was before reading your posts.

Since your post about sentiment/fundamental analysis it now looks like I need to design some kind of Model for assessing underlying economics of a country, so as to be able to create a bias to wards how I will trade that countries currency, and to decide if that currency is over/undervalued. By what I read in your posts I think I may be correct in saying that you also use something similar?

From what I've researched so far it would appear that to construct this model I would need to regularly input the results of the major economic releases. There also seems a need to keep updated on geopolitical events as these seem to overrule economic releases. The priority of this model would be to try and keep an eye on whats being priced in to the market.

Now firstly ask am I still on the right track? Also something I noticed is that within your post you mention pip values in your forecast. Are you able to calculate some kind of intrinsic value from your model or is it merely an opinion to whether to long/short a pair.

Thanks once again for your wonderful posts and all the help you've given.

All the best,

James.
  • #1,203
  • Apr 4, 2011 9:59pm Apr 4, 2011 9:59pm
Quoting redbaron1981
Since your post about sentiment/fundamental analysis it now looks like I need to design some kind of Model for assessing underlying economics of a country, so as to be able to create a bias to wards how I will trade that countries currency, and to decide if that currency is over/undervalued. By what I read in your posts I think I may be correct in saying that you also use something similar?

From what I've researched so far it would appear that to construct this model I would need to regularly input the results of the major economic releases....
I know you directed this at grkfx, but I'll throw in my $0.02...

You don't really need a model. Thats overkill and would likely lead you to very strong convictions that will often be at odds with the market.

Having said that, it does pay to keep apprised of the recent timeline of econ events. Many traders trade news and think of fundamental factors in terms of the latest release. Then they wonder why the market seems to randomly discount some releases while others can reverse long term trends. The thing is, one release doesn't actually mean that much. Its the TREND of releases that influences sentiment and subsequently engenders changes in percieved value.

Keep track of a three month moving average of manufacturing, retail sales, employment, GDP, Inflation, and home sales. If the average of these releases is improving month to month, you can project things forward and expect that most participants will see securities as undervalued. Conversely, if everything is pointing lower and you get a hugely positive number, it will probably be discounted as an aberation.

Knowing the directional bias is far more important then an estimate of true value.
  • #1,204
  • Apr 4, 2011 11:27pm Apr 4, 2011 11:27pm
Quoting redbaron1981
Since your post about sentiment/fundamental analysis it now looks like I need to design some kind of Model for assessing underlying economics of a country, so as to be able to create a bias to wards how I will trade that countries currency, and to decide if that currency is over/undervalued. By what I read in your posts I think I may be correct in saying that you also use something similar?
Well I am not sure what you mean by a model. I don't try to complicate things too much. I try to use as little math as possible. Assessing the underlying economics, news, and things like that can can be useful, but I usually like to make sure the market is sensitive to those pieces of information that you are looking at. Yes I like to use sentiment/fundamental analysis. But it means different things to different people. There is no one way to view sentiment/fundamentals, nor is there just one way to trade order flow based on it. I was just merely trying to explain the way I view the markets. Take from it what you can. Find the inefficiencies in the markets, but also find the inefficiencies in my arguments/posts as well, if you can spot them

Yes usually I like to stay plugged into the information flow and have a deep knowledge about what is going on around the world and with each country's currency pair that I like to trade.

As far as pip values. You will never be able to get an exact pip value. In theory it does exist. Don't beat your head against the wall trying to find it. It is not the panacea that you may think it is. Not even the big banks who have access to better order/information flow know the exact pip fundamental value. So I would not bother with that. It can lead to a road of frustration and unfulfilled expectations.

Usually what I like to do is this:

For example, I like to say if this thing, and this thing occurs, then the market should move 30-60 pips. And if this thing and this thing occurs, then the market should move 100-150 pips. And if this other particular order flow scenario plays out then the fundamental value has changed by approximately 300 pips in so and so direction, so the market should move that way fairly soon. Things like that. I like to generally have some sort of pip range that I expect a move to go. Of course that range can be extended/shortened on the fly, and within seconds as you take into account new information.

So for example I like to do scenario analysis. I do it every day, and sometimes every hour and every second. For example I would ask myself what would happen if the ECB did an emergency rate hike of 50 bps? What would happen if the ECB did not hike rates? What would happen if the ECB hiked rates and it leads to a drastic slowdown in growth and leads to another flare up in the sovereign debt crisis? What would happen if the Fed abruptly ends QE2? How would the liquidity distribution, order flow, expectations be adjusted in such situations? Do you think the fundamental value of currency pairs would change? And if so, by generally how much? How can stops/option barriers, etc play into these mispricings?

The market has so many questions you can answer. Trading is truly a work of art.

Hopefully that helps stimulate some thoughts.
Private message me for a link to my order flow website.
  • #1,205
  • Apr 5, 2011 1:15am Apr 5, 2011 1:15am
  •  Skylite
  • | Joined Feb 2011 | Status: What the eyes see the mind believes | 5 Posts
And given the above statements which do you think is easier to track and understand? The Euro, which is influenced by the interactions of 17 different economies all running at different speeds of which any 1 or more could be in the spotlight at any time, or any other currency which represents only 1 economy...
  • #1,206
  • Apr 5, 2011 5:27am Apr 5, 2011 5:27am
What a team! You guys rock thanks for all your efforts on this thread and others it's been really great...

Looks like I'm in for a night on excel... Can't wait.
Time hides Nothing
  • #1,207
  • Edited 5:51am Apr 5, 2011 5:38am | Edited 5:51am
Darkstar & Grkfx,

Thanks for the help guys I think I need to start at the beginning.

I just don't seem to be able to get to the bottom of order flow generators and everytime I seem to feel close to getting one then I end up getting seriously side tracked and over analysing it.

Going back over what Grkfx posted for research on what happened on March 1st 2010 & June 2010 I'm 99% certain that this orderflow was not actually generated by the actual deal but more by speculators anticipating the selling and buying of pounds for the deal or front running.

Now if my analysis is correct and this is an OF generator and we can play similar scenarios like this in the future.

My problem seems to be that the only the only things now that I can see to move the market is Traders adjusting there positions on economic releases and International takeovers. Now I know there is more, but banging my head against the wall for the past 5 minutes hasn't helped.

Economic releases are priced in before the event but the question is this 'pricing in' could start at anytime and is only relevant to what is going on in the world. If the US was being invaded then nobody would give a shit about an unemployment rate. So now with this in mind if I was to start looking at international settlement these are close to impossible to predict and that’s not taking to account that there is enough volume traded to move the market.

I really hope nobody takes my post as being sceptical because I really don't intend to be. The basic theory that DS and GRKFX can definitely be traded and I do not doubt that. My problem seems to be getting down to the actual generators of it. I've hunted high and low but just don't seem to be able to put my finger on it.

One thing I must mention is that after all the research I've conducted now is that I really want to trade like this as opposed to other methods. The theory really helps to prove this method as being concrete as it is based on the actions of participants and nothing else.

Any help or suggestions would be much appreciated.

Thanks Guys,

James.
  • #1,208
  • Apr 5, 2011 5:40am Apr 5, 2011 5:40am
Quoting Darkstar
I know you directed this at grkfx, but I'll throw in my $0.02...

You don't really need a model. Thats overkill and would likely lead you to very strong convictions that will often be at odds with the market.

Having said that, it does pay to keep apprised of the recent timeline of econ events. Many traders trade news and think of fundamental factors in terms of the latest release. Then they wonder why the market seems to randomly discount some releases while others can reverse long term trends. The thing is, one release doesn't actually mean...
True.. and I have been thinking about this very much. But I think I need some understand of how THE WHOLE market works.
Take right now for example, everything is bullish (that has with fundamental - not geopolitical) that has to do with EUR and they will raise rates on Thursday (to me currencies is only about interest rates.. so I keep asking myself the question all the time; how will this effect the decision making on interest rates?) so big timers should be buying every dip right.. So where are they now? Where have they been the last two weeks? As I look at the hourly chart, it kinda feels more like a large consolidation than a strong EUR uptrend.

I'm not questioning you here Darkstar but I wish you could point me in the right direction as you already see I am missing a large piece. What other things are weighing on the EUR causing it to not move up?

Cindy: Nice, I already did that! Look at FF first page, then look at retail sales (or whatever you want to choose) then look at the left. There is a chart-icon there. Press on it, you should find all the historical numbers!

Take care
  • #1,209
  • Apr 5, 2011 6:06am Apr 5, 2011 6:06am
Quoting Carnegie
Take right now for example, everything is bullish (that has with fundamental - not geopolitical) that has to do with EUR and they will raise rates on Thursday (to me currencies is only about interest rates.. so I keep asking myself the question all the time; how will this effect the decision making on interest rates?) so big timers should be buying every dip right.. So where are they now? Where have they been the last two weeks? As I look at the hourly chart, it kinda feels more like a large consolidation than a strong EUR uptrend.

I'm not questioning...
Everything is most certainly not bullish about the EUR... sovereign debt issues are always in the background and what has kept EUR afloat has been the hope of rate hikes. Which I would argue is getting to the point of being fully priced in by the market if not already so. The market is already very long EUR as it is so we have a point of market positioning weighing down on the EUR uptrend. Also oil profit reserver diversification will be a supporting factor for the EUR as long as oil stays firm. But now we are also having a pickup in US data albeit slowly even with hints of possible rate hikes in the future combined with the agreement by most Fed members except for Dudley do right that QE2 will be ended in June. The case for EUR longs isn't nearly as clear cut as it used to be IMO but it still has supporting factors which would explain its choppiness or rangeyness.

Currencies are not only about rates, they are about whatever the market decides to focus on.
  • #1,210
  • Apr 5, 2011 6:15am Apr 5, 2011 6:15am
If folks really want to look at country stats, then Oanda's EconStats maybe of interest.

http://fxtrade.oanda.com/analysis/ec...ont=breadcrumb
Don't wish it were easier, wish you were better. ~ Jim Rohn
  • #1,211
  • Apr 5, 2011 6:21am Apr 5, 2011 6:21am
This site might be helpfull aswell:

http://www.tradingeconomics.com
  • #1,212
  • Apr 5, 2011 6:21am Apr 5, 2011 6:21am
Quoting Deusomega
Currencies are not only about rates, they are about whatever the market decides to focus on.
Good one... Thanks for the links chaps.. I have been using that site a lot Greenhaze its a good one

There MUST be some sort of application out there for all this stuff that tracks real time data and allows you to cross reference different things... Hm I would pay money for this so I I'm sure its already out there... Any ideas? Like the Charts LasVahGoose was requesting yesterday, same sorta thing
Time hides Nothing
  • #1,213
  • Apr 5, 2011 6:28am Apr 5, 2011 6:28am
Quoting Carnegie
(to me currencies is only about interest rates.. so I keep asking myself the question all the time; how will this effect the decision making on interest rates?)
Thats part of your problem. The interest rate itself is immaterial. It's what the interest rate IMPLIES that matters.

There is no direct causal connection between interest rates and currency prices. Outside of retail forex, nobody buys currencies for the yield. In countries that have rising interest rates, there is (almost) always a strong expansion occuring in the underlying economy. Investors seek to shift capital to investments that produce the best net yield and doing so often requires the making of investments in the best growing economies. Unfortunately, before you can invest in a booming economy, you have to convert your funds into the denomination of your target investment. THATS what causes price improvement in the currency of economies with rising interest rates.

Its a subtle distinction, but it has profound consequences for how you approach the game.

On the subject of order flow drivers, remember... always ask yourself WHY participants would want to take a trade. Any answer to that question can be an order flow driver. Some will be more important than others, but at the outset you should just focus on discovering what they are. Over time you will learn which are important for a given moment and which are mere fluff. Unfortunately, there really is no other way to gain the understanding you looking for.

PS: I haven't been following the euro much lately, so I'll leave it to Grkfx to take thos equestions...
  • #1,214
  • Apr 5, 2011 6:40am Apr 5, 2011 6:40am
Quoting Darkstar
Thats part of your problem. The interest rate itself is immaterial. It's what the interest rate IMPLIES that matters.

There is no direct causal connection between interest rates and currency prices. Outside of retail forex, nobody buys currencies for the yield. In countries that have rising interest rates, there is (almost) always a strong expansion occuring in the underlying economy. Investors seek to shift capital to investments that produce the best net yield and doing so often requires the making of investments in the best growing economies....
Why do carry trades exist?
  • #1,215
  • Apr 5, 2011 6:54am Apr 5, 2011 6:54am
The thing I don't like about economic indicators is that every gobernment 'cooks the books'. So, I believe, you have to look beyond those numbers to see what is really going on. Jerk nuts at the Fed will say inflation is under control because it is 1 or 2 percent or whatever number they come with. But in the real world where real people live, people know prices of goods are going up 10, 20, 40%.

Just a random though on the whole economic indicator thing. Right now I'm happy with looking for order flow generators that TA provides. For me there is enough there to make some cash, even if you leave some pips on the table. I think like the thread says, it is getting in the mind set.

For me it would be, okay were are in an area of consolidation and you see bull and bears fighting it out, just a matter of time before one takes over the other. Watch for false breaks and bear bull traps, and then get in until a point is reached where people will want to get out of the trade, maybe an area where support turned resistance, etc.
Don't wish it were easier, wish you were better. ~ Jim Rohn
  • #1,216
  • Apr 5, 2011 7:04am Apr 5, 2011 7:04am
Quoting LasVahGoose
The thing I don't like about economic indicators is that every gobernment 'cooks the books'....
Yes but if you were solely trading on fundamentals correct numbers would be imperative. However from an order flow perspective it's simply good to know (I'm guessing) what investors and the like maybe thinking based on whatever numbers are put out there... Then if the shock does come, you have an idea of who is holding the bag and the implications this will have on prices...

Quoting auxesis
Why do carry trades exist?
The carry trade exists because of the implications of interest rate differentials, but the interest rate itself simply provides the ability to borrow cheaply and lend at a relatively higher rate... The real investment here is not in interest rates but in loan to borrowers in the denominated currency... The exchange rate is simply the middle man necessary in order to go from A-B (or YEN to Dollars)... The affect on the exchange rate in this transaction is simply the effect of spot speculation on this phenomenon combined with the necessary conversions needed for the real lenders..

I think this what DS maybe getting at. But don't quote me on that.. just having a stab.
Time hides Nothing
  • #1,217
  • Apr 5, 2011 7:10am Apr 5, 2011 7:10am
Quoting CindyXXXX
The carry trade exists because of the implications of interest rate differentials, but the interest rate itself simply provides the ability to borrow cheaply and lend at a relatively higher rate... The real investment here is not in interest rates but in loan to borrowers in the denominated currency... The exchange rate is simply the middle man necessary in order to go from A-B (or YEN to Dollars)... The affect on the exchange rate in this transaction is simply the effect of spot speculation on this phenomenon combined with the necessary conversions...
So the focus of a carry trade is based on the interest rates of the "carried" pair?

Do other markets use these?
  • #1,218
  • Apr 5, 2011 7:22am Apr 5, 2011 7:22am
Quoting CindyXXXX
oh man I asked you not to quote me on that I wrote that thinking you knew what a carry trade was I thought you were challenging DS's thoughts on interest rates etc...
Tis' exactly what I am doing. I believe I understand what DS was implying but, imho, there's times when the simple mechanics of the market can be an underlying force that moves it. The Yen was used as such. Identifying these opportunities can shed some light, as well as profitable trade setups.

regards,
  • #1,219
  • Apr 5, 2011 7:24am Apr 5, 2011 7:24am
ah ok sorry... Best leave it to the star, not much more I can add
Time hides Nothing
  • #1,220
  • Apr 5, 2011 11:34am Apr 5, 2011 11:34am
Quoting Carnegie
Take right now for example, everything is bullish (that has with fundamental - not geopolitical) that has to do with EUR and they will raise rates on Thursday (to me currencies is only about interest rates.. so I keep asking myself the question all the time; how will this effect the decision making on interest rates?) so big timers should be buying every dip right.. So where are they now? Where have they been the last two weeks? As I look at the hourly chart, it kinda feels more like a large consolidation than a strong EUR uptrend.


Take care...
True, the market is bullish but the hike is already fully priced in. Then we have Portugal and probably Spain problems which is bearish. Market is waiting for the actual release and ECB comments. I wouldn't be surprised if the we go to 1.44-45 after the release (if as expected) and then dip below 1.4
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