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Order Flow - Finding cluster of stops on chart
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Jan 3, 2011 8:48pm
|  | Commercial Member | | | | Carnegie my friend, you are wise beyond your years. That is EXACTLY how you find the orderflow. Nice work.  | 
Jan 13, 2011 7:31pm
|  | Commercial Member | | | | Yeah, you guys probably shouldn't spend too much time looking at my trades. It's very impressive how far this thread has progresed, but it's important to realize that what your talking about are only the most basic aspects of Order Flow. I've been doing this stuff for over 5 years and what I do now is so far down the chain of understanding that it's probably counterproductive to look at.
I can tell you that your close to figuring out the stop hunting thing though.
As a side note, I find this thread extremly ironic. For the last couple weeks I've been writing extensivley about this subject for my book and it seems like every time I finish a component concept, I come on here and see you guys puzzeling out the exact process I just explained.
Knowing how it ends I know exactly what piece your missing, so I'll give you a hint:
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.
Once you manage to solve that, I suggest you start working on the concept of Episodic Volatility. It has opportunities that make stop hunting seem low rent by comparison.  | 
Jan 18, 2011 4:16pm
|  | Commercial Member | | | | You guys are so lazy sometimes...
Here. Chew on this for awhile. | 
Jan 18, 2011 6:36pm
|  | Commercial Member | | | | Sigh...
How about now?
NOTE:// Think about how price and liquidity interact across time. NOTE2:// I'm not putting this up here for the hell of it. I really need you guys to talk about it so I can make sure I explain it adequately in the book... | 
Jan 18, 2011 7:11pm
|  | Commercial Member | | | | Quote:
Originally Posted by eurotrash The market was where it was, then price moved. In the first image the liquidity was made of the dealer's liquidity at market, and liquidity from orders placed at and beyond the market. When price moved, all the liquidity from the orders between the original price and the new price were consumed. If price moves further in the same direction, there is liquidity from orders which have not yet been filled plus the dealer. If price falls back there is only liquidity from the dealer, and unlike the pending orders which will fully absorb any "demand"... | Good. Now what is the implication? | 
Jan 18, 2011 7:15pm
|  | Commercial Member | | | | BTW... did you notice the shift of latent demand to pending? | 
Jan 18, 2011 7:30pm
|  | Commercial Member | | | | Quote:
Originally Posted by eurotrash I did, but I can't say I understand what it is. I'm aware of what latent demand is but I can't see it being that due to the linear distribution - you can't possibly know its distribution, can you? | Depends... Who does the latent demand represent? It isn't tech because they are already represented. | 
Jan 18, 2011 7:33pm
|  | Commercial Member | | | | Quote:
Originally Posted by seagreen Good illustration but it's nothing new to me. The only implication i come up with is that fading is the best strategy. | Seems like a pretty important implication to me. Why so quick to disqualify that answer? | 
Jan 18, 2011 7:34pm
|  | Commercial Member | | | | Quote:
Originally Posted by seagreen I dont think red (tech) orders are stops, they are limits adding to the liquidity. | Yeah in hindsight, red was probably not the best color. You have it correct. | 
Jan 18, 2011 7:37pm
|  | Commercial Member | | | | Quote:
Originally Posted by auxesis In the first pic price was at a state of equilibrium, as price shorts, latent interest becomes market orders, (either by short pending order increase or manipulation of price as to attract interest) price is then attracted to the new order buildup in that direction until it finds a new equilibrium point.
As price moves away it leaves a vacuum, latent interest is already building behind the move.
??????????????? | Close enough... latent becomes both market AND limit orders, but the bold was what I was looking for.
Thanks kids.
BTW- you should now have everything you need to work out the liquidity disequilibrium problem. | 
Jan 18, 2011 7:53pm
|  | Commercial Member | | | | Quote:
Originally Posted by eurotrash A function of orders and time? The further way a given price is from the market, the more time for orders to be added there. Close to the market that potential is smaller, though some of it has turned into actual orders placed. | hmmm.. sorta... since you've all been very helpful, i'll give you some insight. Quote:
Originally Posted by The Book Latent order interest is simply an accounting of participants who can/will trade if price were to move to a specific price level, but due to the costs associated with managing orders, remain on the sidelines until it does so. To give you an example of how this manifests itself in the real world; imagine that you are a fundamental trader with an analysis which shows security A to be with 1.000. If price is currently hovering around 1.000, you likely have very little interest in participating in the market. However, if price suddenly moves down to .500 without a change in the underlying fundamentals, you?re going to have a great deal of interest in buying. In this example your desire to trade at .500 would be latent interest. Latent order interest is predominantly comprised of fundamental traders so it tends to remain constant as long as the information related to fundamental value remains unchanged. When new information becomes available, this curve will shift up or down to reflect the aggregate opinion of what that new information means for fundamental value. As a general rule however, the opinions formed by fundamental traders are slow to materialize. It may take a number of hours or even days for this new information to become properly digested. In the interim, the latent demand will curve will become somewhat wider and flatter due to the variability of interpretations regarding the data. | | 
Jan 18, 2011 11:18pm
|  | Commercial Member | | | | Quote:
Originally Posted by seagreen Important it is. I didn't say its not important, I said it's nothing new, I always fade (thanks to your valuable posts btw . The trick is that fading alone is not a strategy, you need to know when and where to fade. Fading the stops is a good way to trade, which again brings back the subject of the post. | All things in due time my friend. Look, I know you guys are trying to figure this stuff out and I have to say, I'm really impressed with how far you have gotten. I'm sure it would make an untold number of people happy if I would just come out and give you all the answers, but I don't know that I could even if I wanted to. To be honest, I "finished" my book like a month ago. After something like 8 months of diligent work, I managed to write down everything I understood about the markets. It explained in detail how to hunt stops and exploit market inefficiencies, how to read the order flow and how to view the market in the mindset of an order flow trader. When I sat down and read it start to finish, I have to admit, I gave myself a pat on the back for how clean and concise it all was. I genuinely felt that it was a work of art. Then I gave it to my girlfriend. After just 20 pages, she was so hopelessly lost that giving up was the only option. Now I'm not going to pretend that she is any master trader; she isn?t. But she has read all of baby pips and a few random trading books. I think I can safely say that she has about as decent an understanding of trading as the average forum member. And if she couldn't understand it, I would inevitably be disappointing large groups of people by releasing it. The question is, why is it so complicated? After all, I understood it perfectly? Well, after a great deal of thought, I had an epiphany about what it truly means to understand something. I don't know if anyone cares or not, but I'm going to share it because I think it will help put some things in context... Learning any complex subject requires an enormous amount of filtering. I think I've personally read ~50 books on trading, another 20-30 on economics, tens of thousands forum posts, and hundreds of articles on theoretical finance. For the life of me I can't tell you what even 1% of those documents said. But that doesn't mean that all that time was wasted. Every little thing I read made its way into my brain as an idea. Ideas are the general premises behind the things we learn. Everything in a complex subject has a connection to the larger body of knowledge. A good example of this is the idea of a moon. If you want to understand the moon, you have to know what a moon is, how it works, why it?s important, etc. If you know exactly what you?re looking for, understanding the moon and its relationship to the universe can be pretty easy, but seldom do you know what?s important at the outset. You have to learn a ton of useless shit to get to the meat of what is important for you to know. Of course even when you know what you need to know about the moon, you realize that you only have a sliver of the knowledge it takes to understand the universe. To understand the universe you need to study a bewildering quantity of ideas. From suns and starts, to gravity, and physics; complex math, string theory, planets, solar systems... the list goes on and on. Unfortunately, humans (no matter how intelligent they may be) just cannot actively retain all this information at once. In an effort to avoid overloading the brain, our subconscious mind has this miraculous ability to distill and index what we know into a simple concept. A concept is a unified understanding of how a number of ideas fit together. Once you have one, you can look at another body of ideas and figure out how those ideas relate to the concept you have already learned. That in turn leads to another concept. Moons orbit around an object, that object is large and orbits around the sun. The body of ideas related to an object that orbits around the sun is a planet. To bring this point home; notice how you knew exactly what I was talking about when I used the term moon. But if you really think about it, planets, asteroids and moons all have very similar component ideas, yet we can clearly distinguish what they are from each other. At some point in this process we find that as the concepts we work with grow more complex, we seldom utilize the miscellaneous information we used to form our earlier concepts. We still know what a moon is, but recalling the circumference of earth?s moon, or the quantity of moons in our solar system finds hard and harder to recall. The more we learn, the more details we forget. The point of all this is to say that understanding order flow trading is like understanding the universe. In order to establish the order flow concept in my mind I had to analyze and synthesize enormous quantities of data and the only way to achieve the level of understanding I have was to work with progressively higher level concepts. Somewhere along the way I lost the ability to tie many of the concepts I now utilize back to the concepts that aspiring traders deal with day to day. So when I try to explain order flow, it?s like trying to explain what the universe is to a 2 year old. That child has no idea what a moon is, or a sun, or galaxies? I can say that it is everything in the heavens, and that may give the child some idea of what it is, but does that child ?understand? the universe? No. Can they predict how some aspect of the universe is likely to form? No. How could they? And that?s the problem with threads like this. I can tell you how to hunt stops, but in and of itself, stop hunting is just a concept. To do it effectively, you need to know how liquidity works, you need to understand how price change works, you need to understand how to read order flow, gauge sentiment, exploit the information other traders are forced to divulge. And each one of those components is made up of an untold number of subcomponents that are required for what, when, how, and why those things are the way they are. Now I will say that I?m making great headway in doing this within the book, but the book is over 200 pages and it still isn?t at the point where someone like my girlfriend can understand it. How on earth am I going to cobble all that information into a few posts on a forum? Why am I telling you all this? I don't know... I guess I just want you all to understand that I?m not being cryptic on purpose; I genuinely try to explain things as I understand them. The disconnect is in the gross differences between the concepts I work with every day and the concepts most people here are starting from. Things like liquidity disequilibrium are well formed ideas in my head, but that concept has no reference point for anyone else. Putting the transitory pieces back in place after all this time is proving to be particularly hard. I?m sincerely make an effort to do so, but it?s going to take time. It?s probably also going to require reading the book when it?s done. When will that be? Soon. No, in all seriousness, when my girlfriend can sit down and read me book, understand how what she read can be used to earn a profit, and explain to me why?. That?s when it will be done. Anyway.. this post is a book in itself so I?ll leave it there. Luck be with you PS: I know this is somewhat disjointed and rambling. I?d take the time to clean it up, but already spend way too much time writing. Your just gonna have to deal. :P | 
Jan 19, 2011 1:09am
|  | Commercial Member | | | | Quote:
Originally Posted by grkfx Lets take this example: Market was at equilibrium. Now, lets say there is a shift in fundamental values to being more bullish.
What are the implications for the market and order flow and liquidity?
... | And thats just one factor that can be analyzed with this model. Think about how a large order hitting the book would alter the profile... or what happens pre/post news events.. or how a fast price change would interact with the slow conversion of latent interest to pending orders... or what happens when a central bank steps in to defend a price.. or how market makers act to maintain a balanced book... or or or... the list is endless.
In short, this is an extremly powerful tool for modeling the interaction between price and liquidity. Use your imagination and the ideas should start flowingin short order.
OK.. night all. | 
Jan 19, 2011 10:14am
|  | Commercial Member | | | | Quote:
Originally Posted by auxesis I hope people take this in context, having read Darkstar's earlier post. | Well, in or out of context, it's going to be hard to compete with the one I have.  | 
Jan 20, 2011 11:03am
|  | Commercial Member | | | | OK, so I have a fuckton of writing to do today (thanks for all your input BTW) but I can hammer out a quick post this morning... Quote:
Originally Posted by Carnegie I don't think the proper word for this is "lazy". Really I don't want to come forward as "the retail trader who never gave up"-bullshit but really I have been studying as a bitch and still I am not getting anywhere. I don't think it is a matter of laziness but rather it is a question that not many of us know WHAT and WHERE to look for things. | I don't really think any of you are lazy... I needed to motivate "someoen" to respond to the chart and I figured calling everyone out would incite the desired response. Quote:
For you this might seem obvious (i.e. what to search for) because you already know this. And in my mind, you must be some kind of a ultra code-cracker something in the way of Tom Hanks in the Da Vinci code.
Why am I saying this? Easy.. When I started reading T&E I found some stuff and immediately understood what he was talking about in the book, because these concepts have already been explained to me by you and other people. BUT HOW THE HELL DID YOU FIND THEM?
| This is probably going to come off as bragging but it helps to have an IQ in the top 0.045% of the population. Ofcourse in and of itself, that fact doesn't mean dick. However, when you combine it with 20 years of studying economics and ~20,000 hours studying finanical markets/trading, some things are just bound to come together.
When I started T&E didn't exist, but what you have to understand is that T&E didn't change the market, it simply explained in a uniform way how it has always operated. ANYONE could have written T&E or developed all this stuff about orderflow, they simply needed to spend the necessary time thinking about and reseraching the subject.
At this point T&E has vastly shortened the time it takes to understand fundamental microstructure processes, so what took me 10,000 hours to consturct, people like scottyb can do in a couple weeks. Unfortunately, for all the good that T&E has, it says nothing about how to turn that info into profits. To do that requires another 10,000 of hard work, thought, an dtrial/error.
Which brings us to the point of why I'm writing a book. Hopefully when its done it will act as a bridge between T&E and profitable trading, but that is by no means the end of the road. Stop hunting and the other ideas I'm trying to explain are only a few of the things that exist in the market. I have little doubt that 10,000 after someone reads it, a whole host of new ideas, systems, and concepts will be developed that make what I'm struggeling to explain seem like childsplay.
It's all a mater of perspective. Quote:
Originally Posted by PiptheRipper I have read that market orders demand liquidity and limit orders provide liquidity, but don't you also provide liquidity when you place a market order? ex. if Trader X buys his 1000$, don't he provide liquidity to Trader Y who wants to place a short order? | It has to do with the match rules on an exchange. Market orders only match against existing limit orders, so by necessity they demand the lquidity that limit orders provide.
It may help to think of it in terms of immediacy instead of the general desire to trade. Market and stop orders demand immediacy of execution while limit orders provide the option to do so. Its the option to trade that constitutes liquidity so when someone exercises that option, the liquidity is consumed. Quote:
Originally Posted by auxesis The main concept I think DS wanted to hammer down is the makeup of the market (order volume, placement or the lack there of (vacuum) , when price moves, what happens not necessarily the nuts and bolts of the transaction. | Good point.
One thing you guys should realize is that the liquidity model is not meant to directly correlate to situations in the real world. In the real world all those components will forever be fluctuating, so it would be very rare to see such perfect liquidity distribution on either side of the market.
The model is a tool for visualizing how price and liquidity interact across time. Its power comes from its ability to produce ideas about exploitable situations. Once you have something that should work in theory, then you can set about looking for situations where the phenomena you noticed within the model occur in the real market.
Its a 2 step process.
Luck be with you
Last edited Jan 20, 2011 11:11am
| Reason: bad formatting
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Jan 21, 2011 11:40am
|  | Commercial Member | | | | For my one quick post today...
The vacuum as I presented it does exist but it's on very short timescales. 1-3 seconds usually... never more then a few minutes. The market isn't THAT inefficient.
The vacuum on its own isn't an exploitable opportunity; it is merely a piece of the price change sequence. Its value is that it can be combined with other phenomena. The combination is what can become exploitable.
Luck be with you | 
Jan 22, 2011 12:21pm
|  | Commercial Member | | | | Quote:
Originally Posted by Carnegie | That would definitly create inefficiency. The more important question is, why would you assume the gap would be filled with new limit orders? Quote:
2. I've sent you an email to your website regarding the book. I'd love to have a copy.
| Your on the list. Quote:
3. Look further down.
As I look at USDJPY, I see price moves below round numbers like 5-10 pips more or less and then turns on a dime. This must be the vacuum you're talking about as price has nowhere else to go in search for liquidity but to turn the other way around.
| It is. Quote:
Originally Posted by Scotty B One thing that I've done in the past when studying orderflow is to sit down and make a fake market on paper. | Thats really what the liquidity distribution model is supposed to be used for. Quote:
Originally Posted by CindyXXXX I might just add that the whole purpose of a market is to find this price efficiency point in order to satisfy the maximum number of people, in a competitive market it happens naturally through a process called " the invisible hand" - beacause of the reasons I described above | Excellent explination.
One thing that is important to remember though; unlike a traditional product market, the satisfaction of the maximum number of participants results in the LOWEST transaction volume.
A product like an ipod priced at the efficient value will produce the highest quantity of ipods sold. However, financial market securities provide zero utility, so there is no value in acquiring properly priced units. As such, the demand drops to zero at the efficient value. | 
Jan 22, 2011 3:03pm
|  | Commercial Member | | | | OK, so in hindsight my ipod example was pretty shitty.
The point I was trying to make was that at the equilibrium value transaction volume will be much lower then it would be at a divergence from that value. This happens because the utility of a security is directly tied to the expectation of price change. There is no benefit from buying a properly priced security.
I wanted to make this point because on a number of occasions it has been said that volume is high when a market is ranging. This is not true. At the edges of the range, volume will be high, but while price remains within the confines, it will be substantially reduced. | 
Jan 22, 2011 3:26pm
|  | Commercial Member | | | | Quote:
Originally Posted by Deevz Since there is always a future in which the price of the security is different, its present value is NEVER the current price. | While I agree with your post in principle, this sentence is flawed. True value is the discounted present value of all known and knowable information about a securities worth. If you buy into the EMH, the current price should ALWAYS match true value. In practice it rarely does, but not for the reason this sentence implies. | 
Jan 22, 2011 3:42pm
|  | Commercial Member | | | | Quote:
Originally Posted by UnnamedPlayr Still working the same questions? 
"Finding a vacuum is very hard, it apperas and only under extrem conditions or after news events." | Not true. The Vacuum occurs after EVERY price change, but in most instances it is created and closed so quickly that it can't be detected with the naked eye.
News events and the like create excessive price change. Because the price change is large, so is the vacuum that it creates. Subsequently, it is more noticable. | 
Jan 23, 2011 5:30pm
|  | Commercial Member | | | | Quote:
Originally Posted by chriskins There is no order book, or centralised volume information. So not sure what you have but I would guess unless you work for a central bank or a huge IB then you have nothing that is exploitable. | Ahh, this tired ass argument again... Let me rewrite your post so the assumptions your making are more obvious: Quote: "The only way I can think to see order flow is by looking at the order book of a central bank or huge IB. Since nobody outside these institutions can see the order book, I don't see how order flow can be read." | Had you written your post like that you would have likely received a response pointing out why your assumptions are flawed. In the process, you would have grown more knowledgeable and avoided making your second deeply flawed post... Quote:
Originally Posted by chriskins Not sure a particular retail broker's volume is significant against over a trillion a day from the other participants. But if it works for you then go for it. | Lets rewrite it in the same light: Quote: "Hmm... Since you guys weren't dazzled by my brilliance when I said that you needed the order book of a central bank or huge IB, I can only assume that you are reading the order book of some retail brokerage. That being the case, I feel it necessary to point out that retail is only a small part of the $1trillion+ per day Forex market. Much more goes on outside retail, so one can only assume that looking at retail is a pointless exercise." | Never mind that its $4t now, or that retail traders tend to have the same motivations and utilize the same strategies as larger interbank participants, the simple fact is that looking at an order book of any type is not how order flow is read. Its read by deconstructing the logic processes of participants within the context of the execution limitations imposed by market microstructure. In any event, this thread is for aspiring order flow traders to work out how to do what you choose to believe can't be done. Your welcome to join the effort, but if all you want to do is point out how stupid it all is, maybe it’s best if you do so in your "deconstructing trading assumptions" thread. We have a great deal going on here and posts like yours do little more than muddy up the conversation. Luck be with you
Last edited Jan 23, 2011 5:42pm
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Jan 23, 2011 6:02pm
|  | Commercial Member | | | | Quote:
Originally Posted by chriskins I agree completely here, and that is why I was advising against looking at a few retail brokers data and trying extrapolate that to the whole market. | Fair enough. Sorry if I pounced on you. I just don't want the thread to devolve into another "this is all nonsense" argument. We had way too many of those with pipmongrel or whatever his name was... | 
Jan 23, 2011 6:06pm
|  | Commercial Member | | | | Quote:
Originally Posted by triger88990 Darkstar, have a question to ask you, if you have some time left for me
how do you see the forex market without the retail side?
how business will be conducted in term of search for liquidity
all the best! | The retail/insti dichotemy is a bit of a red herring. The fact is insti traders do the same things that retail traders do, just on a bigger scale. So if retail disapeared tomororw, you wouldn't notice much, if any, difference in the way price behaved. Liquidity would be lower, but there would be fewer orders chasing it as well... | 
Jan 23, 2011 7:08pm
|  | Commercial Member | | | | Quote:
Originally Posted by Deevz You think so? I'm a firm believer of that dichotomy, or the informed/uninformed, or smart money, however you call the model. The fact that there are traders out there that can be manipulating or tricking others into taking the other side of the market, thus the why retail traders are wrong most of the time. Every bit of evidence seems to point in that direction, in my opinion. | I'm not trying to imply that there aren't informed and uninformed traders out there. What I'm saying is that the line of demarcation isn't retail/institutional. There are informed traders in retail just as there are uninformed traders in insti, so eliminating retail isn't going to materially alter the distribution of wins and losses.
Remember, to get an institutional account doesnt require some magic trading skills or the passage of some complicated test. If you have the money and the desire, there are plenty of brokers who will set you up an account. Whether you make money or not depends on how you trade, not the type of account you trade with... |  | |
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