Hmm.. Interesting that is what you wrote there, it seems as if liquidity really does play a major part in the order flow mindset.
Now my idea from this is that maybe there is liquidity at a certain place, maybe a support area or something, then major banks will trade to that area in order to execute their order there.. Would this be possible?
So in reality, we are looking for where the most likely "order-flow" area is, and trading toward that direction? But what happens when we're there??
Anyway I have another question that has been bugging...
Hi Carnegie,
As you know, there is no true order information available for spot fx aside from the market depth or level ll on the interbank. Unless you're a bank or a big player, you're not going to get access to this information.
I would agree from a microstructure standpoint that a sideways market is highly liquid zone. As trade moves sideways, more players take a side and those who are wrong are inevitably squeezed out. This is a fine idea in theory, but you need to find a way to test your premise, see what the numbers really are.
My views continue to adjust as I learn more. If a trader has a chart pattern that is profitable over the long term, he/she is an orderflow trader in a certain sense, that is he/she can successfully predict future orders in some way.
My only advice would be to figure out a systematic way that quantifies your idea. For example, how do you define market compression? How do you define an entry and an exit? I would be careful not to rely on a manual/visual approach. I'd suggest looking at something like a simple standard deviation indi in your tests--what better to see compression?
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Yes I agree with you but I commented this earlier, I don't have any idea where to start. Therefore I need more knowledge, got to get reading ya know I don't even know what a 'market compression' is?
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?
You'll get there eventually, just keep on keeping on. All I meant by compression was consolidation. I mentioned standard deviation as an example of seeing consolidation numerically. If you see SD falling, it tells you that volatility is settling down and or, the prices are tightening up around the mean. I can't say what your trades will look like, that will be your final conclusion after you've studied.
Good luck,
Jim
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Back to the original thread topic in terms of "stop clusters"
I find it interesting when people start talking about stops they always focus on the obvious swing high swing low and trenline "outskirts"
The money is in the middle not on the outskirts... If you've ever watched the volume around the S/R levels you will see that the leaset ammount of money is exchanged at these levels. The big money is accumulated closer to the centre where liquidity is plentifle.
Actually....
This is true only to the untrained eye. Most traders would be shocked to know how little volume it takes to turn a market around. It's not necessarily how much is traded at the peaks of S/R, it is WHO is placing the orders at those peaks that causes a market to turn around.
Remember, FX is a dealers market. When they've traded with an informed trader, they themselves will often immediately speculate on that very information. They will also stop dealing on the side in which the informed traders "hit" them. This does a couple of things, and is the beginning of a chain of events in which the private information that originated with the informed trader is disseminated throughout the market after each party trades on that information and equilibrium is reached.
One of the most important things that happens is that liquidity dries up in the direction of the informed trader's trades. So if informed traders are buying, the available size at the asks will decrease, thus accelerating a price move in that direction.
The original dealer who provided liquidity to the informed trader will speculate on the information inherent in the informed traders trade by buying at another banks asking price, netting out his bad inventory and acquiring a profitable position at the sake of his competitor. After his position is established or simultaneously, he will cancel his remaining asks.
When he cancels out his asks, other bank's trade robots will see this and follow suit, and the waters of liquidity are parted like Moses and the Red Sea.
This whole order flow conundrum has more to do with understanding how private information is communicated in an opaque market, on which are written many graduate papers.
The key question is: how does one go about identifying an informed trader short of being the dealing bank who trades with them? There is more than one correct answer, and you're unfortunately not going to find it specifically without paying for quality data. You can to a certain extent answer it unspecifically with a price chart.
Jim
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So a dealer can move a market without affecting volume>?
It's not that he's affecting volume per se, it's that he is taking away liquidity by canceling his limit orders and by off-setting his adverse selection risk by consuming someone elses limit orders. After trading with an informed trader, the dealer has to cancel his limit orders, or informed traders will continue trading with him- making his inventory situation worse.
When limit orders are canceled because of informed traders trades, liquidity is thinned out and because of this prices change quickly to reflect the information inherent in the informed traders trade.
But, taking your question at it's value, yes a dealer can move a market without affecting volume whatsoever. Why? Well, what is volume? Traded orders. What is the market? The bid and the ask. If I am a dealer for example and I am quoting EU at 1.2550 bid/1.2555 offered, and I then cancel my 1.2555 offer and replace it with an offer at 1.2570, I just moved the market up on no volume at all. Nothing has actually traded, but if someone comes along and wants to buy, you are going to see an instant spike on your chart with only one transaction/tick. The fact is though, the market was already "up" at 1.2570 before you saw it trade on the chart. This is why a lot of the old floor traders can sit and trade on quotes alone, and why robots watch and trade on information gleaned from a quote book/market depth screen.
Because computers deal at lightning speed, you need a computer to watch the orderbook for you. Humans are obsolete in the trading world, especially in the order flow trading world.
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But a dealer is a liquidity provider in its self right? So isn't it not about limit orders but more about simply taking away available liquidity at certain prices in the way of simply marking the price up or down by either off loading or buying back inventory.
I know I'm prob wrong this was just my thinking
It's about both. By canceling his existing limit orders he is taking away liquidity, and by offloading his bad inventory (losing position) on someone else, he is further removing liquidity. This creates a domino effect as other dealers find themselves in the same boat as the first dealer who traded with the informed. This is why there is so much volume traded in the interbank. If you're not trading, then you don't know who is informed at any given time (there is no time and sales). The only real way to gather market information is to continually trade. As you can see, even when a dealer trades with an informed trader, if he is the first one to trade with him it's really a valuable opportunity despite the adverse selection he is exposed to.
I'm simplifying most of this, it's much more complicated in practice but you get the gist. In real life it it extremely challenging to identify who is informed and who is not, who is bluffing who is serious. It's all a game.
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Technically speaking he only moved his market. If the others dealers...
We are in the same boat, Adal. It's the hedge funds, sovereign money, ect. that basically strong arm the markets where they want them to go. Money is power.
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[i]"Louie
Or, if one pays attention to the price action via the longer wicks in...
I'd say that is certainly one aspect of it. This has a lot to do with the mechanics behind pin bar situations as opposed to clean trending markets. Basically, is there real time support or resistance behind a move or does the move fall on it's face? A strongly trending market (sharp slope) with small pullbacks indicate a strong bid re-population, while a strong move that collapses on itself shows no professional interest. Large traders have to average in anyways, so if values are shifting, the pros will have robots that quickly enter bids or asks throughout the move. I believe this is what creates the almost surgically straight trend lines seen on certain smaller time frames.
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Yes, this makes sense to me. If this is one aspect of it, do you think there is a way for the disequilibrium to be identified on a chart and be able to separate it from a lack of professional interest? Or, is there any need to separate it as they both seem to cause the same effect on small time scales.
There seems to be an aspect that has not been discussed much and that is the Option barriers that I see all the time on Thompson and have piggy backed trades to to them, with very good success. Could this be a form of that latent liquidity?
No, I don't think you can differentiate between a move that will experiance negative feedback (be reversed) with only a chart, I could be wrong. Because fundamental information is so asymmetric, it would be impossible to know who is really making a move happen unless you had actual order information (time and sales), or you knew for example that a barrier was being knocked out.
The knocking out of a barrier, when values have not changed creates a stochastic effect in the market. The market is incentivized to make a round trip. Those who are hunting the barrier will be after the depth that the barrier defenders create with their stops, and value traders are incentived to fade the move entirely. Now that these option defense plays are becoming common knowledge for retail traders, I'm sure they are stale news in the bigger picture. I'd imagine that the competition to get filled by those stops is pretty fierce and that only a few participants actually get the benefit. For example, if you are Joe Schmoe at hedgefund X and you get word of a barrier at 1.2300, and you are the first to hear about it, you're going to most likely enter pending orders in the book between 1.2290-1.2305ish, and should the barrier be knocked out and defended, you'll be one of the first to be filled by the stops. By the time we hear about it, it's sort of a done deal. As small retail traders, we sort of take liquidity for granted, we are not trading the option defense play for liquidity's sake. So, by the time the move happens, you will have value traders averaging in through the move, you'll have traders who don't get filled by the stops who are then incentivized to submit market orders after the barrier is knocked out, and a thin book behind the whole move that will create a pin bar and retail trader John's chart.
I'd expect a swift move to 50% of the move where many of the value trader's will begin entering profit at their average price and where many of them will have their bids to net out of their positions at a profit. The stoplosses of those who bought the breakout will help fill the value traders bids along with the sales of everyone who was originally buying towards the barrier. I hope I'm making sense here.
Now, imagine a move where fundamental values truly have shifted (higher for example). You ussually see long bars with tiny retracements i.e. there is no negative feedback trading. This is because of all the bids propping up the market, along with a lack of professional profit taking. The implication is that value is higher, until the pattern breaks. Once the market hits a prolonged period of hawking sideways, you know the pros are averaging out and that we are near value.
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One thing that I've done in the past when studying orderflow is to sit down and make a fake market on paper. I'm currently programming/building a fake market that will match fake orders for my own studies, I may share that later on.
Basically, make up trader A, B, C, D, E, F, G,... use a simple price ladder of 1 unit per tick. "A buys 3 from B @ 5," keep track of everyone's position and take note of how price jumps around as you go along. This easy exercise gives you a feel for how liquidity is supplied and consumed, and also gives insight into how the market is just a calculator.
Doing this really helped me think and led me down some interesting paths. Just a suggestion.
Jim
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Thanks for the paper, you're never short on info and helpful links.
I'm thinking a lot about the Gold bubble we are currently witnessing. Think of the immese amount of built up open interest that will have no one to sell to when there are no more buyers to draw in. No one will want to touch it. When it crashes, it's gonna be messy for a lot of people. The gold crash will be a monumental opportunity for those who can time it right. I see/hear more and more "BUY GOLD NOW!!!!" commercials, we've got to be getting close...I'm thinking 2012 will do it in. If things don't get better quickly, America is going to vote out Obama and put a republican in office. I beleive it will be a political pin that pops the balloon.
Also, I agree about the commercial component of the market. Osler and Lyons talk a lot about this. I beleive they say above the three month time frame you can expect world business (fundamentals) to have a meassurable influence on a market, at least when veiwed from common fundamental models.
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Thanks for the paper, you're never short on info and helpful links.
I'm thinking a lot about the Gold bubble we are currently witnessing. Think of the immese amount of built up open interest that will have no one to sell to when there are no more buyers to draw in. No one will want to touch it. When it crashes, it's gonna be messy for a lot of people. The gold crash will be a monumental opportunity for those who can time it right. I see/hear more and more "BUY GOLD NOW!!!!" commercials, we've got to be getting close...I'm thinking 2012...
One more thing about bubbles...
The beautifal thing about them is that while they are difficult to predict, once they are before your eyes you can sit back and watch a gross inefficiency develop.
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I agree. The "incentive to carry" is a very important factor. Your other ideas are valid as well. The more incentives/disincentives you can identify the better.
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Guiana? I Spent two years in Japan, but never made it to France
I made some great friends in Japan, 2 of whom I would probably consider my new best friends.
Oh, I thought you were someone else. An old buddy of mine from years past. We spent some time together in the tropics. Maybe this will jog your memory a little bit, you know, just in case you are the Jimmy Jones I remember.
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Yeah, that Harris paper is a good one. The author of this paper is the Larry Harris of Trading and Exchanges, for those of you who care to know. I highly suggest all of Harris' work. There is more to be found with a google search, while you are at it look up Richark K Lyons and Carol Osler.
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