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Behind Price-Orderflow
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Jul 5, 2010 8:50am
|  | Member | | | | 1st post for me Quote:
Originally Posted by Darkstar It took you and I years to learn to trade profitably because the age old wisdom is littered with garbage. From indicators to algorithms to economic theory, the hours we wasted learning useless crap is incalculable. Had we started with the single premise that we would only study things which would cause a majority of participants to place trades, we could have shaved years off our learning curve. And that?s why I'm here. | Sorry to interrupt this 3d (it's the first one I managed to read entirely on FF... perhaps the last).
You wouldn't be in position to understand and to apply your method if you didn't learn those things before. Doing what you're doing requires a precise understanding on different strategies (altough most of them produce OF that cluster in the same spots).
@scotty: you don't need to see photons to know they're there. You can see their effects (light). Same goes for trading. You don't need to see T/S or L2. All you need is to know what they did (or are going to do): That's all you need. And remember, T/S and L2 is full of decoys. Ask me how I know  Long gone are the days of Wyckoff, and Jesse Livermore, although knowing their methods is something you must have.
As for the others, I can say: Use the force, Luke! | 
Jul 6, 2010 2:52am
|  | Member | | | | Quote:
Originally Posted by pipmutt I think the problem is that no-one has that information, the game by it's very nature is one of secrecy, we can only speculate as to the what and when. Sure we can try and get inside the heads of players and anticipate their next move but I think it's an impossible task to try and profit from what we believe, or probably more the point what 'they' want us to believe. Bluff and double bluff, painted charts, probing different levels, and heaven knows what other 'tricks'. We're at a distinct disadvantage, even institutional traders... | Pip, I'm a long-time stocks trader (15 years and counting). In stocks you have accurate T/S and Levels and you can use computers to quantify OF and execution/cancellation of orders. Everything is "clear" at least when compared to FX. Guess what? Stock pros have come up to all sort of gimmicks to hide their intentions in the clear and even having a L2 book, a T/S etc (and there're markets where T/S are much more accurate as well as L2 as opposed to US market), you can't be always sure what's going to happen.
The outcome is that OF-T/S-L2 has some predictive value, but that value is very limited in time and expires moments after being obtained (that is: your window lasts seconds or fractions of the second, hence the need for good execution).
What you need to do is move to the next level. You must absorb all information that is given to you and then "sync with the market". Man I know this will sound as voodoo, black-magic, witch-hunting etc to most of you, but when you get there you'll understand.
Like a pro piano player, you look at the music sheet and don't need to read each and every note. You can "feel" what the composer wanted from you: and you execute. Learn the music, forget the music, play!
Same goes for trading. You float in the ocean of information, rumors, charts etc. You must sync with this ocean. You must feel what others are doing and you must know where to put your bets to profit from other people actions. Let me say it again: You don't focus on the market. You focus on people. People generate orders. People are driven by their emotions. People use techniques to help them control their emotions, so you need to understand those techniques too.
I think this is what DS refers to when he talks about a state of mind. It's not easy to obtain and it's only partially mechanical. Some of it is on a subconscious level somewhere inside our brain (which btw is the best neural-net computer you can get). This state comes from a deep understanding of all the ingredients that make up the market. Market mechanics, order placement, S/R, and different strategies all make up for this.
So how can you do it? I can give you direction. It's not much different to what you have already read thousands of times.
Take a chart of a cross. Look at different time frames. Identify S/R levels (you don't need to draw them, just paint them in your mind). Think about M/A, Fibs, high/lows and other potential areas. Orders tend to cluster around these areas. You don't need to see orders. All you need to know is that they're there (being in the L2 book, in the brockers private books, in the heads of the traders doesn't matter... they're there even if they're hidden). Experience and knowledge can help you.
Now watch what price action is when price reaches those areas: Is there an acceleration ? Is there hesitation ? What the speed is ? What the direction is ? Is there oil poured on the fire ?
Look at different TF and try to feel what each trader might be thinking when starring at the same chart. Would they be buying ? Selling ? Panicking ? You get the idea.
That's all. KISS. Now go and profit. | 
Jul 6, 2010 3:39am
|  | Member | | | | Quote:
Originally Posted by pipmutt In what sense are you saying "quantified"? | I guess he's looking at specific quantities (orders, ticks, pips/minute etc) when price reaches a specific level. | 
Jul 6, 2010 6:49am
|  | Member | | | | Quote:
Originally Posted by pipmutt I must admit it is beginning to sound a bit like someone else mentioned, "Feel the Force, Luke!", or something out of a kung fu B-movie! I can believe ESP in some things but in financial markets? Really? | I guess that was myself. I cannot explain it, but at some point your mind connects the dots and all becomes mechanical. You know where most orders could be, you wait to get there and watch the action. You can enter beforehand (anticipating a move). If the move does not concretize you'll be out in no-time. If it does concretize you profit.
Example: DS was mentioning that you need to find the gaps. Gaps (as I understand them) are areas where price moves between one consolidation level to the other. there's no stopping inside the gaps because everybody is looking to do something at the next level (either take profit/stop a loss anything will go: the focis is a that level only). Everybody is focused at the level and that is why orders cluster there. Knowing where those levels are comes from experience: You don't draw anything on charts. You know roughly where these levels are because you've seen so much of them. Charts/patterns are all the same after a while you watch them. So in a way: "you feel them". Pros feel them too. Their algorithmic trading might be more precise, but this comes to your advantage: levels are more clear for humans to see.
As I state above: S/R, trendlines, ma crosses are all things that are there for everybody to see. you don't need to plot them. These are powerfull instruments because everybody knows them and watches them: hence you get the order clustering.
I'm saying the same old thing, but focus is different: you anticipate other people moves, as they're predictable: they'll buy the break. they'll short a broken support because this is what everybody teaches. that's what tutors/sites are all about.
But once you learn other people techniques, you must anticipate them, as I stated. | 
Jul 7, 2010 7:51am
|  | Member | | | | Quote:
Originally Posted by Cyrus This, as opposed to short term flush outs we see fairly regularly in the short term... interestingly, but not surprisingly, I find that these moves are also fractal in nature... I've yet to fully experience and be able to trade what DS or SKFX's uni-directional moves one side gets squeezed very badly, but I'm looking forward to the next 'level up'. PVPN, if you'd like to shed some light on this here it'd be interesting. =)
Could I also ask how you started thinking in terms of orders? I think most of us here started off as TA people and I am... | If you come from stocks you see orders all over the place. Orders are inserted, cancelled, executed all the time. You just have to relate this flow to the other conditions in the market (i.e. technicals, news, rumors etc).
FX is a little harder because you don't see the orders, but only their effect. It's no big deal: if price is rising buyer are more eager than sellers. It's as easy as that. Also, FX is much more TA frendly than stocks (imho).
I'll repeat myself: Just look at charts and the way price behaves near key areas. Focus on what other traders could be thinking near these areas and watch the resulting action. If price is reaching a resistance what is it doing ? Is it hesitant ? Is it accelerating ? Do you think others are shorting ? If so what are they going to do if short fails? Were could be their stops ? And further questions like: Is the move sustained ? Is it impulsive ?
These are all questions I ask myself and act accordingly.
Remember: there's no "single" strategy: you need to know them all and decide which one is prevailing at every single moment. | 
Jul 9, 2010 4:14am
|  | Member | | | | Quote:
Originally Posted by Pdat100 Well, I'm looking for some empirical results that might shed light on how far and how long a broker can push and maneuver price away from some theoretical temporal interbank average before it reverts back. Maybe a distribution histogram or something. We?ll keep looking? | I don't think it would be safe for a broker to push their price too-much away from the interbank rate. What they will do is to widen their spread, but making sure their spread is "around" the bank rate. This is the only way they can do it safely. This also means that it cannot be exploited by retail traders as they have to buy on the ask and sell on the bid.
Arbitraging between different brokers is possible, but I don't see it feasible because of the costs involved.
Hence, I wouldn't try to do such a thing as there are much more easier ways to milk the markets. | 
Jul 10, 2010 4:52pm
|  | Member | | | | It may seem obvious, but raising prices attract buyers. Falling prices attract sellers.
When somebody is "making the market" he needs to raise price to sell (removing supply or buying himself to generate impression of strength). When buy orders pour in, he can unload at better prices and without depressing the price.
The same goes when somebody needs to buy (establish a position).
In FX (where the book is hidden) I wouldn't be surprised to see falling prices and buyers hitting the offer or rising prices and sellers hitting the bid.
It would be a clear sign for other professionals to stay away and not get in the way of whoever is manipulating price (I call it professional courtesy). When the pro is out/in his position, price can go to it's original direction.
This doesn't happen in stocks (at least so clearly) as operators must use more stealth techniques (being the market centralized and regulated).
Added: So, what you focus on is where are areas where it would be cheaper for the MM to induct orders by moving price. | 
Jul 11, 2010 4:20pm
|  | Member | | | | Quote:
Originally Posted by redpine Just curious what you mean by "where the book is hidden". Level II quotes? I actually access Level II and rebuild the books on my machine. I realize it isn't the complete market, but the same is true in equities. So what book are you talking about?
Dan | Dan, I would be interested if your reconstruction of L2 helps you with explaining some of the price returns you observe and to what %.
My take is that only a small fraction of the orders account for most of the effects on price and I think this fraction might be easily hidden/hard to obtain or distinct from the other orders.
Hence, my approach is that I don't try to discover this "flow" but simply assume it's there from the way price behaves and if confirmed by some models I run on a continuous basis. | 
Jul 12, 2010 2:48am
|  | Member | | | | Quote:
Originally Posted by redpine I originally started looking at imbalances in book orders about 4 years ago. I ended up going down many other fruitless tracks since them, but now am back to book orders. A single day of EUR/USD Level II quotes consists of about 850,000 entries. That's a lot of data and very hard to analyze. | I do almost the same in equities. My program tracks all visible limit orders action and relates this to price returns and the tape. It works for scalping. The "long tail" of earnings comes from decoding the real intentions behind the orders, and this is the real battlefield.
Unfortunately, my research in FX is not on par with what I do in stocks.
Perhaps you can try to relate greed/fear with order action (insertions/cancellations) and price location referred to supports (static, dynamic and fibs). You can drop in the mix some common indicators (major MA crosses, MACD etc). You can gain a brief glance in the future and likely price movements and this would be useful for scalping. The long tail (and real earnings) however will be somewhere else. Quote:
Originally Posted by redpine I'm trying to take "DATA" and look at the market as a series of events delineated by something other than time.... | This is much in line with what I have had in the back of my mind for years. I think most of the trading systems fail because they assume that the market is some sort of regression on the input variables (linear or not) and hence ignore the state.
One thing I have on my list is to make (or use) an algo to automatically discover states and transitions. My guess is that there are too many states for a human to try to identify them and connect them with the proper links.
If I remember correctly there was something similar in DrDobbs some years ago.
I hope this is enough to get you started. I would be very interested in your progress. | 
Jul 13, 2010 6:52am
|  | Member | | | | Quote:
Originally Posted by redpine Interesting. That is one of things I have on my TODO list for looking at Time Sales and Level II data. Try and figure out Market orders, when an order is moved and when an order is canceled. I believe it will give a better clue into the motives of the traders in the market. | Unfortunately it's working less in the last years than it did before. Most of it is noise. Orders are inserted and deleted all of the time. The key is summarizing and relating orders that move between the levels.
I've found that some of the orders are there just to provide some depth to the market in key moments and when a little push in either direction is necessary.
Like I said, it's a little noisy and fine grained: commissions are costing too much requiring you to use big blocks from my side too: However I'm not able to replicate most of the block-splitting strategies because of the costs involved (cost of trading to a dealer is infinitely smaller than the cost of retail). As soon as you post a block-trade MM come and get you, just to turn bank in seconds (at least this is my experience in equities now). | 
Jul 14, 2010 6:48am
|  | Member | | | | Quote:
Originally Posted by Craig | Thank you. I had forgotten about that resource. |  | |
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