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  #16  
Old Jan 6, 2011 2:48am
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DIG is an abbreviation for Digital Option I believe, which would mean that as long as the strike price conditions are satisfied, then the option will be paid out. TC on the other hand I'm not quite sure.

And yes IFR News Feed can be chock-full of information, which can lead to the unfortunate dose of analysis paralysis.

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Old Jan 6, 2011 2:57am
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I'm watching it play out too.

Interesting to see the one-directional order flow as I believe DarkStar used to call it. Perhaps it can be used as a means to enter positions, with a greater probability of moving the stop-loss to break even to take risk off the table?

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Old Jan 6, 2011 4:05am
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How were you able to conclude that the digital option holder has to keep it below 1.3125? How can you determine the put/call nature of the option?
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  #23  
Old Jan 6, 2011 5:23am
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Quote:
Originally Posted by Monroe View Post
As someone already stated (you i believe).. news feeds, like IFR, give you the rumors and info.
Sorry for the ambiguity; I meant why below as opposed to above? I don't recall the nature of the order being stated. Perhaps I am just sleepy

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  #42  
Old Jan 10, 2011 4:45pm
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Hello Carnegie,

Here's my humble view on an attempt to propose a possible explanation for what may be occuring. Looking at the move before the consolidation, it was a bold downwards move. This indicates that there was an imbalance of buy orders and sell orders, the latter significantly outweighing the former, and thus pushing price down as liquidity is consumed to match these sell orders. To enable the sell orders to be transacted, someone must have been on the other end of the transaction, with an accompanying buy order, whether it be a limit buy (which tends to be the case with institutions of size) or market buys.

We know that the great majority of transactions in the spot forex market are of a speculative nature, and so we can conclude that most positions taken would not be for the delivery of the currency, but for speculatory purposes. Individuals and institutions would like to trade for speculative gains, but because capital is limited, stop-loss orders must be placed out of necessity.

I seem to think that the individuals on the buying end of a downtrend, are of two types; the weak longs and the short longs. The weak longs are those of limited capital, who are in essence trying to catch falling knives, and are inadequately capitalized to remain viable on that side of the market. The strong longs are the institutions of size, who can withstand the pressure of the prolonged downtrend, and are capitalized to manipulate the spot rate to some degree.

In a strong downwards move, we can thus imagine the the buy-stops of short participants to be trailing downwards and accumulating, while, lagging behind the price action, as it plummets further and further. The down-move is propelled by participants transacting short orders into available liquidity, as well as the execution of the sell-stop orders of the weak longs, pushing price downwards.

Insitutions of size will then be able to transact orders in the opposite direction, overwhelming the imbalance of sell orders, bringing price back upwards, until it exceeds their average position price which they have accumulated. Viewed as the exhaustion of the downtrend; a reversal, this move may be speedy, since it is facilitated by the execution of the buy-stops of the participants who were short and riding the downtrend, as well as the buy orders of other participants who believe this is the start of a new, genuine move. The buy-stops of the short participants, are guaranteed orders, which will add upward pressure to price discovery; they must be placed otherwise these participants stand to meet financial peril.

Upon surpassing their average position price, the institutions of size will then begin to distribute their accumulated long position. Liquidation of this long position will be facilitated by the new market orders coming in from participants jumping on the move.

When the position is offloaded, new short positions can then be established, and by giving price a slight nudge downwards, into the sell-stops of the market participants who have jumped on this move, price finds itself cascading downwards as these sell-stops are executed. Other participants jump in on the new downwards move, further exacerbating it, in a manner of positive feedback, similar to the way an impulse travels down a neuron. I believe this is a repetitive cycle, with large institutions constantly trading places between buying and selling, and profitting from those individuals who end up whip-sawed.

Note how indicators would do a lovely job of detecting the pseudo-up and pseudo-down moves as profit-taking occurs. Perhaps that is why whipsaw is so pervasive in systems based upon them?

But as is more likely than not, it's possible that my views are completely incorrect, and I would love to hear different points of view, as that is the only way I will be able to suceed at improving my order flow mindset.

PS. Essentially as DarkStar succintly summarises it, if one can form an educated guess as to where the stops are located, by rationalizing the situation from the point of view of the participants, then joining the fading move into these stops, is a high probability scenario.
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  #58  
Old Jan 13, 2011 9:33am
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I'll try to take a stab.

Quote:
Originally Posted by Carnegie View Post
First of, what is a balanced market? Or even better, what is an UNbalanced market? How do I define this?
In an ideally balanced market, buy orders and sell orders would be effectively matched, and slight imbalances would be remedied by plentiful liquidity at both the bid and ask. As a result, price would remain in a range. In an unbalanced market, the surplus of one side of the orders would result in the consumption of liquidity at either the bid or ask, (depending on which order type is in surplus) and provided enough is consumed, will cause price to shift in the direction in which it exerts pressure, until it is 'quenched' by liquidity at further levels.

Quote:
How do I predict future orders?
Short of a crystal ball, this would be a very difficult task to do, and would require you to know the intentions of a participant before the orders are placed. Sometimes however, information is divulged which we can use to make educated guesses as to where orders may lie.

Quote:
How does the market look when it is efficient/not efficient?
In my opinion, the efficiency of a market would be related to the ability of the market to facilitate the transaction of orders, such that they can be filled quickly without significant market impact; ie. your average position would be as close to the current market price as possible, and unloading positions would occur as close to the market price as possible.

Like CindyXXXX stated, it all comes down to liquidity, and thus I interpret efficiency to be a function of liquidity. Illiquid markets are characterized by high volatility, and generally 'messy' charts, while more liquid ones tend to have lower volatility, and are 'smoother'. Best comparison that comes off the top of my head, is comparing USD/CAD and EUR/USD in terms of their Daily Charts.

Quote:
How do I find the trades to capitalize on? Is it candlesticks?
It must be noted that candlesticks are really clumped up units of time, and may differ from place to place depending on what particular time off-set is used. The higher the timeframe, the less information can be obtained from candlesticks - unless position trading is your thing. However, the manner in which the candle is generated, can be viewed on increasingly shorter time frames, so that one can better gauge how price fluctuates throughout its development, responding to certain levels and rejecting others. Most times, the noteworthy things happen in the generation of the candle, and if you can spot them early, you get in before all those who either aren't aware, wait for it to be fully formed, or need confirmation from indicators. Their influence can then increase the probability of a trade moving in your direction, to reduce your exposure as quickly as possible.

Quote:
Now you see there are a million questions I have to ask before and in all honesty right now (without any knowledge) I don't even know if it's in or out.. So I really don't know what to test!
I know how you feel, and actually still feel this way; the best way to remedy it is to continue asking those questions. At the end of the day it benefits not only you, but several other aspiring traders out there.

Quote:
Yes but I think there is a difference in what we view in orderflow traders. I wouldn't like to trade the "classical" orderflow and what that means.. By that I mean I don't want to trade L2 + DOM etc. I want the orderflow mindset rather. So in reality, are we predicting future orders, or are we just following along the existing ones and watch how they develop?
It's my humble opinion that we do a little of both; we make educated guesses, and see how they play out as price moves, always remembering to keep a fluid adaptation, since anything can happen.


Quote:
Also, I don't know what to look for in order flow, and how the trades look.. So how could I define entry and exits?
Perhaps by putting yourself in the shoes of a large participant whose objective is to make profit, it may be possible to form educated guesses as to where such participants would enter/exit the market. Think about the constraints faced by these financial giants.

Would love to share more thoughts, but have a Math class to attend. I also hope others would chime in, to critique or give alternative points of view for my benefit.

Regards,
xXTrizzleXx

Last edited Jan 13, 2011 9:52am
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  #63  
Old Jan 13, 2011 12:21pm
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@relyt

You are correct that Buyer A would want limit sells, but these limit sells would by definition be above the current market price. A limit sell is an instruction to sell at the limit price or better. If you place a limit sell below the market price, it would execute immediately since the market price is better than it.

With regard to the participant wanting to convert Yen into USD, it puts the bank in a favourable position to conduct a scalp trade. I really wish I could remember the semantics, but at the end of the day the transaction is in effect giving the bank a sort of option contract if I remember correctly.

Don't quote me on this, but the logic is:
  • Participant asks Bank A for a quote
  • The 'interbank market price' is say 90.50
  • For Bank A to make a small profit on the trade (including transaction costs, etc.) it has to sell at 90.52.
  • Bank A then quotes 90.52 as the exchange rate, to which the Participant agrees.
  • If the market price goes up to 90.52, the bank will happily conduct the transaction, earning a small mark-up.
  • However, this set-up is in the bank's favour, since the market price can also fall, and Bank A can then conduct the transaction (with a reasonable delay) for an additional few pips.
Could anyone verify?

@CindyXXXX

Quote:
So... lets say for examples sake only 500,000 was available for sale at...
Sorry if I misunderstood, but I thought that Fat Finger Banker A (FFBA) was buying. If so, then I agree with the first bolded, underlined price; ie. price is moving up as his order gets filled.

However, in the second part, it says that price dropped away from his original entry price due to him being short? It also says that it would cost him as the market starts to go higher - but if he is long, this cannot be.

Quote:
So this fat finger guy has offered LIQUIDITY and lots of it to BUYERS at very low prices.
If he is buying wouldnt FFBA be consuming liquidity from sellers at very high prices instead?

@grkfx

Quote:
Originally Posted by grkfx View Post
Predicting future orders is all about knowing what will generate order flow. Get into the minds of the market participants that are generating order flow and moving prices and figure out what will cause them to start executing billion of dollars in aggressive orders.
Everyone should read this post a few times over if you're wondering exactly what kinds of questions will lead you in the right direction. Like CindyXXXX said, it's all a game, and by viewing it from the point of view of the most significant participants, we can position ourselves to play in their charades as well.

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xXTrizzleXx
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  #65  
Old Jan 13, 2011 12:27pm
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Ah I believe I get it now.

Thanks for the clarification

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xXTrizzleXx
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  #71  
Old Jan 13, 2011 9:28pm
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Quote:
Originally Posted by Darkstar View Post

Think about how price change and the distribution of liquidity interact. Your looking for a disequilibrium in that distribution which should give you a highly predictable outcome. Trade with the anticipation of that outcome and you have the makings of a high probability system.
This post has gotten be thinking. I will try to put my thoughts on to paper after I attempt a Maths assignment.

Last edited Jan 14, 2011 12:26am
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  #178  
Old Jan 19, 2011 4:56am
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Quote:
Originally Posted by seagreen View Post
Now all we have to do is find the fundamental value of the pair (which we don't even need to discuss since everyone can do it) and just fade any disbalances of price and fundamental value into the direction of the value (ok, I'm kidding, it's the perceived value)
Oh. My. Goodness.

I was actually about to fall asleep when I envisioned how this could be applied. This assumes there are no significant fundamental changes in the associated currencies of the pair though?

The way I'm putting this together, is that DarkStar's illustrations have given a model for taking advantage of the extremes of ranging markets. Let's assume that Market Mover A wants to buy below the perceived value of USD/CHF. Upon reaching the lower extreme of the range, we can assume that we will have participants who will be positioning themselves long, and would set their sell-stops below the range. Market Mover A has his buy-limit orders positioned slightly below this range, and to enable his order to be filled, quickly executes an sell market order of sufficient size to push price to these sell-stops, which when hit, will liquidate into his buy-limits. This will be further facilitated by uninformed traders, who think this is a genuine break-out to the downside. The speed of execution will be such that it is fast enough to avoid a significant amount of latent liquidity turning into pending orders, (which would make things harder for Market Mover A by essentially building a liquidity wall to his buy-limits). Market Makers would then need to adjust their bid/ask to take into account this changed liquidity situation, resulting in the production of the illustrated liquidity vacuum. When his order is filled, the sell market order previously open, is then closed by means of a buy market order equal or larger to the former, which gets price moving into Market Mover A's intended direction back to the perceived fundamental value of the currency. As price heads back upwards, the Market Makers would have to deal with the liquidity vacuum, by shifting their bid/ask quotes to account for it, to protect their inventories.

(note: Orders will be placed within the vaccuum, but I am making the assumption that the liquidity provided by them will be sufficiently small so that they can be considered insignificant, due to the small time interval over which this occurs)

On a chart this should look like a strong move upwards once more, even though the volume (size of the order) which caused it, may not seem proportionally large. Additionally, uninformed participants who were tricked by Market Mover A's pseudo-break out, would be squeezed. Their buy-stops, which they placed for protection, would, when executed - further empower the up-move, along with informed participants, riding the move back to the perceived fundamental value. They are in essence going to profit from the mispricing.

I may be viewing things from an angle that is..."too close to the situation"; too infinitessimal, but I'm hoping the logics of this are sound, and would like to hear others' interpretations so far.

grkfx, has essentially provided an excellent model for understanding the dynamics of trends - I would expound on my interpretation of it, but must finish my homework.

With the dynamics of ranges and trends covered, and understanding where the high-probability points of entries are, we should be able to anticipate a move to break-even quickly, such that our exposure time is reduced.

Everybody loves a free trade.
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  #422  
Old Jan 24, 2011 12:21am
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Hey guys, I've been a little hushed over the past few days because of school and other things happening preventing me from devoting as much time as I'd like to this analysis. The most Forex action I'm getting is literally 4x (mathematics) and the back and forth OANDA is putting me through to create a live account (finally of age ).

But I have been thinking.

And what surprises me is that the thinking process is akin to what grkfx mentioned would be a worthwhile way to spend some time - thinking of possible means of generating order flow. Knowing this, we can then use the concept of the 'vacuum' to provide us with a high-probability entry, which risk can be removed from quickly.

Interest Rate Differentials
I believe this is one of, if not the prime order-flow generator of a currency pair. Essentially, the interest rate differential - while it is possible can allow participants to earn an essentially risk-free income, (as long as the interest differential remains sizeable and in their favour) by holding the appropriate position in a currency pair.

Interest rate increases in a currency will stimulate demand for investments in that country, and will magnify the profits of current investments in said county, when/if the investor repatriates his profits to his/her respective country of origin. It also makes debt instruments of that currency more attractive to investors. These factors should result in a shift of money flows into this currency; buying. A similar argument for interest rate decreases, should result in a shift of money flows out of this currency; selling.

Government Bonds & Treasuries
I am of the opinion that if I was to be sufficiently capitalized, a government debt instrument would be an attractive, low-risk investment vehicle to have, as governments are not very likely to default on their debts. I am of the opinion that bond auctions then, should represent a shift of money flows into this currency; buying. A recent example of this can be seen by the reaction of EUR/USD to European bond auctions held recently around January 12-13, 2011 if I am not mistaken.

However, looking back at some other incidences, sometimes the currency pair fell as opposed to rising, usually blamed on factors such as a lack of bidder confidence etc. This exemplifies the unpredictable nature of the market, which calls for the need for a fluid adaptation, and also why I view getting risk off the table as quickly as possible (low exposure time) to be particularly important.

Indices
Indices essentially measure a basket of stocks, and are generally used as a measure of the economic activity of a nation. Indices such as the Nikkei 225, FTSE 100 and S&P 500 can provide clues as to the health of the Japanese, British and US Economies respectively. When these indices experience strong rallies, it tends to point to a stronger economy, and thus investors may be tempted to look to shift money flows into that economy. A similar argument can be made for dips in these indices.

Options
Options rumours are generated, most presumably at the interest of the options underwriter, to save him the expense of exercising a profitable option. With a region of sitting liquditiy identified, participants who desire to accumulate/distribute positions at more favourable prices, may be interested in exploited these vulnerable, exposed positions. The actions of speculators piggy-backing along for the move also has the effect of adding fuel to the flames in these sad, sad events (I sincerely feel saddened for the options holders, but business is business).

Futures (?)

People have been citing that the use of volume from central exchanges such as CME can provide us with clues to volumes in forex, but I am still unsure as to how the futures market (on its own central exchange) affects the forex market - can someone please clarify this for me?

Employment Figures
I am also of the opinion that positive employment figures show a sign of a healthy economy, which would attract money shifts into the economy, while negative figures would attract money shifts out of the economy.

These are just some thoughts which have been pondering through my head as I have very little access to charts to look for the 'secret S/R' as grkfx calls it lol.

Hope that I can get some feedback, especially with regard to the Futures, since I have the inkling that futures expiries, like options expiries should have some effect on the forex market (even though I am aware that the bulk of contracts are rolled over, some of them should be exercised, shouldn't they?)

Regards,
xXTrizzleXx
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  #423  
Old Jan 24, 2011 12:38am
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Quote:
Originally Posted by seeit View Post
Per Darkstar's reference to transitory volitility and Fundamental volitility.............


Transitory volatility trade setup... lets say the trend is up and the price retraces and consolidates in a nice range for a long time. The longer it ranges , the more traders have entered long and short with their stops on both sides of the range. The stops can be mental because as soon as price moves against the long or short players they will stop themselves out manually as their pain tolerance is met. So the setup is to enter the break of the range boundry...
I think the first part you have described, where you close your position just behind the stops, is in essence stop-hunting as I far as I can see it. Darkstar then suggested we look into episodic volatility, since they would make stop-hunting profits look pale in comparison.

I think the above reason for this is because in taking advantage of episodic volatility, we know that there is a high probability of the area behind the move being deficient in liquidity, enabling the retrace move to occur with greater ease than the former move - and it aligns us with the view of value traders, who try to keep price within a 'perceived range' barring the entry of new fundamental information into the market. We would thus have their sizeable liquidity behind us, which should provide some resistance to price moving greatly against our position.

Between extracting my profit over:
  • the edge of the range, to the stops proximal to the edge of that range, (playing the move up to the stops) and
  • just behind the location of these stops, to possibly the other end of the range (playing the reversal move from the stops),
I think the latter allows more pips to be reaped.

Take a look at the first 3 charts in this thread to see why I think this way:
http://www.forexfactory.com/showthread.php?t=193795

Just my humble opinion

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xXTrizzleXx
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  #447  
Old Jan 24, 2011 11:11pm
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Quote:
Originally Posted by relyt View Post
I'm going to quote somthing Darkstar said here in 2007.
Quote:
Quote:
Originally Posted by Darkstar
Our only option is to look for concentrations of liquidity and make assumptions about how prices will respond to those concentrations based on our understanding of market microstructure.
Quote:
Quote:
Originally Posted by Darkstar
Once you understand the mechanics you don't even need a chart.
Hey guys, I just wanted to add my input to these above quotes.

I believe that what Darkstar was alluding to is that you don`t necessarily need all of the information provided by a chart to trade in this manner, but that does not impact it`s ability to present information in a visually easy-to-glance-and-comprehend manner.

The chart is essentially a plot of price vs. time. If we can spot areas on the chart where price spends very little time, then these are possibly clues which can lead us to make informed guesses as to what the liquidity situation was at that point in time.

All we have to do is note the price region which exhibited this behaviour, and as price moves back into this area, we can observe the ticker. Let`s assume price is headed down to an area we identified as being demand-rich; price was only able to test the region momentarily. Looking back at Darkstar`s illustration of liquidity distribution, we can see that fundamentally, with all things being equal, the further price goes down, the more liquidity interest it generates, as it becomes more attractive to buy. The distribution of the liquidity barrier should make it increasingly harder to drive prices further down as it descents. We would observe the rate of change of price progressively declining, perhaps even stalling momentarily, and then moving into the other direction as demand overpowers supply.

The created liquidity vacuum behind the move will slowly become populated with an increasing amount of liquidity if price happens to spend a considerable amount of time at the identified demand region. These would serve to hinder the subsequent reversal move, making it increasingly expensive to orchestrate. Thus in order to avoid this, it is necessary to traverse this region as quickly as possible, and this can be identified by a precipitous reversal. This is why he also stresses that the speed at which one processes `orderflow` being of tantamount importance.

Think of how this would look on a candlestick chart - we would see price moving down to the region, and reverse quickly going back up, which should look like a pinbar. Perhaps this is the reason why the individuals at the J16 Price Action thread may have a slight edge, because it would appear as if they are indirectly trading `orderflow` through chart patterns.

There`s no way to predict at what point demand will trump supply and traverse the allegedly created `liquidity vacuum`. We can however watch the ticker and the relative rates of change of price to give likely indications of these events. On a chart, we may be tempted to draw support and resistance lines, and erroneously regarding these as priority points for price reversal, it may even end up leading us to see what we want, and not what we are observing.

So in essence, I am of the opinion that while you CAN perform this kind of analysis with a chart, it is not a NEED, for it can be done by simply watching the ticker, just as someone previously quoted - the floor traders of the older days used to.

It brings me to the fact of why I was so interested in the order-flow mindset in the first place. Using candlesticks will unfortunately package price action into conveniently sized chunks - it will be difficult to see where price stalled, where it began to precipitiously reverse, etc. by just examining the candle sticks. Of course one can move to smaller and smaller time-frames, but the best is the second-by-second one provided by the ticker.

When a pin-bar is formed on the traders`charts over at the J16 thread, they will enter on their platforms as just another mechanical trade. They will then look down the pin-bar, to the part furthest away from the price action - the tip. It is there that they will find Darkstar, Kim :P, grkfx, ScottyB, and all of us aspiring order flow traders waving at them, our positions already profitable, while they, their parents, neighbours, and domesticated animals enter at the bottom of the pin-bar, where the battle is already half-done.

Scott89,

To your chart I would add that retail traders have access to:
-Great leverage, which can exponentially increase profits if risk is managed, using a system which has an edge.
-No need to report to and satisfy investors.
-Stemming from number one, can take on more risk (%-wise) than a conventional institutional participant.
-Flexible position sizing, and the ability to obtain good executions with little market impact, allowing us to weave in and out of positions as we please.

A limitation about insitutional speculators also, is that they may be vulnerable to having their positions divulged a-la-options-defense style, since large quantities of money are at stake. Also positions need to be closed by these individuals from time-to-time, for example accounting purposes, or end-of-week,quarter or year squaring.

Not too sure about the central banks needing liquidity though.

Just my views,

Regards,
xXTrizzleXx
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