Order Flow - Achieving the mindset

You guys want another potentially helpful exercise? Do the following:

Find your favorite posts on the forum, for order flow trading or w/e, whether it is from me, or from DS, or from whoever.

But don't just read it 20 times. Actually take a pen and paper and write out the whole post yourself. Write it out 5 times or 20 times, or as many as you want. By taking the action of you actually writing down order flow posts/trades, it helps to ingrain it within your subconscious and helps you get into the minds of the traders who wrote the posts. That should help you attain the orderflow mindset faster.

Hey Grkfx,

As you know I've been trying to find my Order Flow generators. Now I've been studying deep into this and have come across a few findings. Looking in to the the "Efficient Market Hypothesis" has revealed a few nuggets of information. Here is the definition quoted from Wikipedia:

There are three major versions of the hypothesis: "weak", "semi-strong", and "strong". Weak EMH claims that prices on traded assets (e.g., stocks, bonds, or property) already reflect all past publicly available information. Semi-strong EMH claims both that prices reflect all publicly available information and that prices instantly change to reflect new public information. Strong EMH additionally claims that prices instantly reflect even hidden or "insider" information. There is evidence for and against the weak and semi-strong EMHs, while there is powerful evidence against strong EMH.

Now I would say that forex falls within the semi/strong EMH, but the main observation is that the market changes its pricing according to what information is available to it. Now to try and find the exact moment the information starts to be priced in is not impossible but there is a far easier way to trade. As Darkstar states there are times when the market is not efficient. One of these situations could be where a release is made and the result is not what was forecast for it. In this case the market instantly becomes inefficient and a correction is made as the market becomes efficient again and represents the available data. So the further off from forecast the release is the more sharper the correction is. I am still new to these ideas and have still to research this fully but I would say that it is quite possible to predict with a certain degree of accuracy exactly how far the market will move once the data is released. The main risk to trading like this is that if using market orders your likely to get a bad fill but even with this risk there is still a lot of pips to be made. There is also a chance that you could be trading an event that nobody is interested in and I think that experience could help solve that problem.

Now when thinking about the principles as described above it opens upa whole wealth of opportunities and non of them are chart based, ma crosses, fibs etc etc If I'm onto something here then I just can't believe that it has taken me this long to figure this out. I've had that carrot dangled in front of me so many times on all these order flow threads and just never realized it.

I hope this post helps a few of us out and once again a big thank you to DS & GRKFX.

Good luck,

James.

I remember studying EMH when I was first starting. Didn't get anywhere. Instead I think about order flow and liquidity and what will cause prices to move. I just throw that EMH in the garbage and think about what the market is pricing in now, and what will shatter those expectations.

No market is efficient. If it was, then all the markets would be stuck in a tight range forever. Now there are breakouts and things, so the market can't possibly be efficient. How can the market be efficient when we are dealing with human emotions. Human beings are never always efficient. You can take a look at some top hedge fund managers and see how horrible their timing is on some of their trades.

If the information was priced in correctly, then the market would instantaneously within 1 second gap to the 'proper fundamental valuation' then stay within a 5-10 pip range as the fundamental value was instantaneously adjusted. The market sometimes adjusts to the right value immediately, other times it does not. You can look at all the news releases that could of sparked multi hundred pip moves to prove my point. If the market was efficient, those multi hundred pip moves spread out over a few days/weeks would of never happened. If the markets were efficient there would of been one sharp gap as the market repriced itself and then the market just would of sat there in a tight range.

Yes I like to get an estimate of where the market can move, but as I stated in one of my previous posts, that valuation can change on the fly.

The chance of trading an event that nobody is interested in can be minimized and brought to zero with proper planning, research, and always thinking about what will truly generate order flow.

Yes sometimes it takes a few months for the realizations to hit you. Humans, we are such inefficient beings. It takes us a few months to realize certain things, how could the markets possibly be efficient?

You don't need charts, ma crosses, fibs, or any of that. If it does not generate order flow and cause price movement, PURGE it from your chart and your mindset. Now figuring which things move price and which things don't, well that can be tricky at times, but it is a worthwhile challenge.

I had an exercise in one of my posts of getting rid of all your charts, and shutting down your computer, and just thinking about the market and what will cause it to move.

Now I do have a lot of tricks up my sleeve, but there is only so many ways one can say it. Figure out what is truly generating order flow and moving the markets, then figure out what will cause the market to move in the future. Figure out 'why' the market will move.

People who place trades, usually expect something to happen to cause the price to move in their favor. Some people wait for a moving average cross, others hope for blind luck, others wait for a round number, others use complicated algorithms, others use support and resistance. The closer you are to the actual true reasons why the market moved, the closer you are to the true reasons why the market will move in the future the better your chances at predicting where the market will move in the future.

If you go look up some of the greatest trades in history, you will notice a pattern. The people placing those trades, expecting something to happen that was going to generate order flow and move the market. They were not betting billions on a moving average crossover, or stochastic signal, or expert advisor. Everyone has a reason for a lot of different things. The question is, will it generate order flow and move price?

If the semi-strong or strong theories are correct, what information did these two moves reflect?

Grkfx,

I would say that the market works on peoples perceptions of what future events will lead too.

The EMH was just used to help understand the concept. When a result comes out not as expected there is almost always a correction. I've been through a few years of data and the price moves nearly always represent the data that was actually released.

I guess what we need to look at is exactly what events will move the market. I'm thinking NFP may be a good candidate.

Eurotrash:

This is quoted from Forex live but I would love to hear your opinion.

"The yen hit a record high against the dollar on March 17 on
unfounded speculation about such repatriation flows, leading to
coordination foreign exchange market intervention by the Group of Seven
industrial nations the next day to drive down the yen’s value."

Now the speculation I would say could be classed as information. The information was the fact that Japan was suffering after an extreme disaster and Repatriation flows could well be started. There was a rumor about the intervention and I wonder how many market movers were positioned for it.


All the best,

James.

Hi James,

On the first arrow, the market fell about 300 pips in about 10 minutes, then recovered fully within hours. Nothing had changed during that time, no new information - either the market was not fully reflecting information at 79.50, or it was not reflecting information at 76.50 ten minutes later. And then why did it go right back up?

The real reason for the fall, imo: http://www.reuters.com/article/2011/...71J2YO20110316
In short, "a host of stop-loss and option-related selling, which in turn caused a cascade of algorithmic sales" in a low liquidity environment.

Same for the intervention (second arrow), sure people could have been speculating or preparing for the intervention, but ultimately when the BoJ intervened and sold the Yen, the market would have moved regardless of whether anyone had information about it or not.

Or take the fall in cable July 21, 2010, 100 pips in 60 seconds and a full recovery 25 minutes later. That was supposedly caused by someone mistakenly selling £3 billion at once.

Obviously these are rather exceptional circumstances, which I've used merely to highlight the effects. My point is that any form of the EMH is flawed for the following reasons:

1. Price discovery, which is the mechanism by which the market makes its moves, takes all types of order flow into account (that is, from all sources).
2. People trade for reasons other than information/expectations about the market or value. (For example, TA.)

Put these two together, and you have a market that will move simply due to order flow. As grkfx said, if the order flow is being generated by some weird astrological pattern, or by moving averages, and it's of sufficient size, then it will move the market. Even if it doesn't move by a large amount before more "informed" traders push it back, it still moved in the first place and that is not reconcilable with the EMH. Now, obviously the market does reflect information and expectations, but it is not as efficient as any version of the the EMH suggests.

Euro,

Thanks for that response. It was very interesting to hear what actually caused it.

Seems I've drifted way off track again. Back to the drawing boards.

Regards,

James.

PS Excuse my stupidity I'm really trying hard at this : )

grkfx... must be a nice guy. But how many times does one have to repeat himself before he says, "fuck it... I tried".

Btw, carnegie's orderflow mindset thread... 89 pages.... damn. I always thought the title of the thread was great, but surprised it's still flowin'...

Thanks for the kind words.

I would not be where I am without all of Darkstar's posts that he made many years ago.

So it is my turn to give back a little bit more, before I move on to other things.

no doubt. when I started not that long ago, a few of your posts were around at the time as well, not many, but a few. And those old posts by DS are gems...

DbPhoenix’s writings on price movement:


1. Prices rise and fall because of an imbalance of demand/supply. There must be a buy to every sell; it is the net buying power that counts, not individual buy or sell initiative. I have previously focused on individual “buy up/sell down” ticks registered on the ticker, looking for the big lot transactions that precede price movement, in a market of thin volumes and apparently obvious manipulation. In a liquid market, price action is king.

2. There must be a catalyst for every price change. Most catalysts are a response to news. Rational and irrational initiatives are mostly in response to news. Interbank forex dealers do a lot of news-based trading (or so it seems at the bank I work at; not sure about others). However, I imagine a “news vacuum” where trading following the first price change is substantiated by the precept that “prices discount everything”. Then, we can allude to Keynes remarks on the beauty contest – and prices can, in absence of news, move to discount, solely, expected human reactions.

3. In such a vacuum, price alone acts as the signal to all participants. In a practical setting, with uncertainty in the very short run a result of imperfect information or ignorance, prices and its derivatives may be the sole signal to traders. Support and resistance (S&R) lines, swing highs and lows, trend-line breaks are all technical information that by themselves can perpetuate or end a trend, because they may be the only information available or comprehensible to traders in the short run; swing points and S&Rs are major “indicators” of price movement over the short term.

4. Discounting also means that trends and prices collapse unto themselves as pre-emptive profit-taking sets in. This may lead to mid-trend reversals – at which point latecomers can enter and reinforce the trend.

5. Certainty equates to very strong price movement. E.g. marubozus immediately following news releases in the Forex market evidence strong conviction/little uncertainty. Prices are resisted/supported at “grey” areas where most traders hesitate to take either side of a trade.

6. Again to invoke Db/Wyckoff, tightening price range means converging opinion; widening means uncertainty. High volumes belie conviction, low volumes the opposite. Thick volumes and low price ranges are markers of potential S&R; the spans between consecutive long candles may mark inconsequential price levels.

7. Volumes are strong at S&R because two differing opinions are, for the moment, in balance. By implication, prices can go either way at S&R – S&R are distinct from mid-trend reversals in that the impulse behind the trend is not met by at least an equal opposition (which profit-taking is unlikely to be). The S&R are of relative import. Another possible distinction: trends, S&Rs and reversals must be defined in the context of time. To do so:

7a. The S&R are price levels at which trading is expected to “hesitate”: higher trading volumes may be generated, and prices may be in limbo for some time. (If prices remain tightly range-bound for some extended time period, the next move must be borne of a conviction of a certain scale. A sustained price movement may ensue from a breakout of this “spring board”. There is the real-time risk of false breakouts with prices collapsing back into the fold). S&R demarcate a tradable “time frame” within which

7b. prices are expected to progress from an expected S&R level to the next expected S&R level in a series of higher/lower prices i.e. a higher/lower trend subjected to

7c. price reversals that goes against the trend temporarily, either due to profit taking or contra-trend trades.

7d. (Hence the common talk of “probability” in trading literature, and warnings not to predict/forecast trends – S&R, trends, reversals are framed by the trader to facilitate decision-making. The probability of success rests on the individual’s selection of frames)

8. Valuation must be relative and to traders, prices are the only measure. News or price movements are always measured looking backwards. Hence the importance of previous S&Rs in indicating future ones.

9.At the end of the day, prices are an expression of the herd’s opinion about its future value. To indirectly quote Wyckoff through Db, then,

The first step for a trader is to determine the current trend of the market.
The second step is to determine one's place in the current trend.
The third step is to determine the proper timing of one's entry into whatever it is he's trading.

I read the reference to the current trend as knowing what is foremost in the others’ mind, against which reaction towards all news and price movements are compared. E.g. good news in a bear market means expectation of a short play on the upside at best. The prevailing climate of publicly held opinion is the impulse for the major trend.

The second step is then what others have been purposefully marked as important technical points – S&R, daily/weekly/momentary high/lows, trendlines etc.

The third is then to define the setup, entry/exit decisions.

For those of you that havent tried OrderBookFX yet, I'd seriously suggest you give it a try. They have a free trial. They have their own viewer and also an MT4 indicator, which, once you've set it up to filter out the noise , will give you a great deal of info regarding order flow.

Wow! Great thread (can I be so bold as to say it is possibly my favorite on the forum?!) Keep it up! Thanks

Ok guys I get the hint. I'm just not getting it!

Got to back to my normal job on Thursday so I won't be posting anything for about 2 months or so shame really because I've been off for 6 months an have still not figured it out. : (

I'm going to take all the posts in here along with Darkstars posts away with me to read through as the Internets crap offshore. Who knows maybe I'll make a breakthrough well I'm away, Maybe I'll just never get it. If theres anything anyone else could recomend me reading I'd love to hear it.

Thank you Grkfx and DS along with all the other members who have posted here, even if I never understand it I can say I know a shit load more now about the market than what I did 6 months ago. Maybe DS's book will sort me out.

All the best,

James.

Well, I think it sounds like you do get it James, but then sometimes I think you're looking too hard into certain things maybe? I know you're trying hard, this I can tell. Stick with it, keep working on it. That's what I do.

Also, I don't think it's good to try and make it things happen within a certain time period, just add's pressure. Maybe some work good like that though.

Take care and wish you the best.

Just an FYI for anyone who missed it, I started adding all my Classic Forum Posts to the blog. I figured if you guys were going to read them over and over again, it might make sense to organize them neatly in one place.

that's friggin' awesome....

and nice collection so far.

Good post. Was doing this today on another forum and thought where did I read this advice...???

I think part of the problem is the foundation that needs to be laid before one can read the posts in this forum that give away the clues. Without that foundation, it's not just going to pop out at you. grkfx is posting partial ideas (heck, maybe even the whole idea!), but his thoughts have the influence of all his previous experience. So to him it makes complete sense, and perhaps to some of you others. But a lot of us here are still working on building that foundation, so it may take a little while before the light goes off!

I'm in no hurry, still trying to build up that foundation.

Jimmy,

I think what your saying is true but I just wanted to give my $0.02.

Teaching is something I have a have a lot of experience. Before becoming a commercial diver(See avatar) I used to teach diving to all realms of society from people who had no previous experience at all. The courses I used to teach went up to very advanced levels of training and was both practical and theoretical based.

I can honestly say from this that "sometimes" the easiest people to train are people who haven't even picked up a book about diving before starting. But what I would say is more important is a structured method of learning and without putting a dampener on things i've not seen any threads on FF that can offer this.

It would be very easy to design a structured program to train traders. I have actually used the methods I learned of teaching divers to teach other subjects and the results have been very positive. Maybe when I get back home I may put a few thoughts together in another thread.

Good luck guys.