Thanks for the great thread! This is what is going on as a constant subplot under the surface. I think this type of analysis would be regarded as "technicals driven" price movement.
pipmutt: I'd be interested in seeing a better example chart - or just give time & currency and I'll look it up if you don't have time to post a chart.
A question for you guys: what is the minimum timeframe that you see this type of "orderflow" on or do you see it on all timeframes? It seems to be most prevalent on the timeframes looked at by the most traders (15+minutes) since it takes advantage of the pop and drop type maneuver.
So, the game of trading is one of identifying those areas where a significant number of traders are going to feel compelled to take action and then entering before they enter. It doesn't matter whether you use fundamentals or technicals or any other form of analysis. If you can achieve this on a consistent basis, you've got yourself an edge.
Know what other traders are thinking - and you can position yourself to profit from their actions.
It's easy to be distracted by the sideshow. The basic principles explained in this thread regarding order flow, how to interpret it, the different types of orders and participants, and how to profit from this knowledge IMO is the gold herein. It's very easy to get sidetracked by interesting but not completely central topics such as br_oker shading, open interest, CoT, news providers, etc. I see pipmutt beat me to echoing this general sentiment.
Let me quote one of the posts early on (#8) that I think hits on or around the major focus of this thread. Or at least what helped the lightbulb turn on for me. Now that I've read the papers, studied IT and had some time to assimilate IT I'm seeing IT all over the map. SK was correct that timeframe means nothing. Wrong mindset completely and thanks for the explanation. It's all about exploiting a constant dynamic - the cycle of the market participants' profits and losses that are painted on the charts and the tape. It's more about assimilating IT all together into a single picture than in digging deep. More like staring at one of those hidden pictures and figuring it out. I may not have the whole thing down (yet) but I can see the outline clearly. And from an understanding of the underlying dynamic, yes there seem to be many edges to be had. Lots of ways to exploit this knowledge. I'm seeing the market through new eyes. Where to start?
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If you can read the market and identify the points where fear will manifest itself, and therefore the triggering of stops will occur on large scale, then you're well ahead of the curve. I only realised the importance of this when I looked back over hundreds of trades which were stopped out and saw how price reacted after - they showed a high tendency to breakout hard, yet I was only closing out losing positions rather than capitalising upon some of the most profitable market moves.
An excellent thread, I hope it doesn't descend into farce.
In the spirit of capitalist's plain spoken language, I want to add to point #2 (below). The OP's charts show where stops have actively been triggered as a result of this apparent (but later to be proven false) breakout. Where are the stops? The literature suggests the round numbers, and the charts also include that point. Coincidence? This isn't new information. I recall reading about stop placement in Market Wizards way back when it came out, but the Osler papers are excellent in explaining the intricacies of this phenomenon.
One other tidbit is that these initial moves in #2 seem to be going counter to the prevailing trend. Misdirection? You might argue on a couple of the charts that the prevailing trend is sideways. That is informative also. I can't tell from the high chart granularity but I suspect that the key bars in question can be positively correlated with news events. Coincidence? Clearly!
Just one point of clarification - most but not all of the charts show a single bar but one shows multiple bars - so IMO a single bar isn't a necessary condition. By using 4 hour charts you're bound to get most of the productive price movement that results from this dynamic encapsulated in a single bar.
What are we not seeing by just looking at the pretty pictures (charts)? The flow of orders or order flow, which is the topic of this thread. But we can understand that a certain group who had resting stop orders or who are new entries, have been induced to execute those orders by price moving through a level that will cause order execution, both voluntary and involuntary. It doesn't get more involuntary than a resting order in a quick moving market.
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Originally Posted by capitalist88
All three charts show annotations which pertain to a single price bar. Each bar does the following:
1. It opens at or near an area of consolidation which is a previously tested area of S/R.
2. Price then moves away from the open (obviously) either to break the S/R area or to bounce off of it. In the first two charts it's a breakout, and in the third it's a bounce. This classic "textbook behavior" draws in the herd, forming the first wick of the candle.
When mass orders are triggered one of two immediate things can happen - either a price cascade, where the triggering of orders causes other orders to trigger more and more (voluntary and involuntary) leading to continuation until the orders dry up; or an order vacuum forms with its obvious implications. The larger the amount of orders triggered, the larger the following move will be. The literature again backs that up. So I would label point #3 (below) as the vacuum effect.
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3. The bar then proceeds to reverse and move past its open in the other direction. The herd craps in its pants.
One other point, this thread seems to be "mean reverting" from the order flow concepts discussed back to traditional TA, support & resistance etc. There are lots of pieces to this puzzle, and understanding them and assimilating them together into a more comprehensive picture of what is actually happening is akin to Neo's dilemma: the Blue pill or the Red pill?
ForexFlash, good points and yes that's where the focus should be headed - the chart as a guide but the order flow to help interpret what's actually going on.
It's one thing to suppose that stops are getting hit in an area due to TA, history or probabilities, and quite another to actually watch the flow of orders going through when those levels are breached. There is a big difference between seeing lots of 100s+ going through and small lots 1s and 5s for example.
But the book as we know only gives us the limit side of things or those who are providing liquidity. And from our understanding of market participants we have a good idea whose orders we are seeing in the book generally. If only there were a stop order book. Haha! But we can see executed orders when we watch "the tape" or order flow or volume as some call it by different terms. Particularly watching order flow at the levels where stops are likely to congregate to give us a clue as to possible reversal, continuation etc. And as Capitalist aptly pointed out, each transaction is really a market (stop or mkt) order meeting a limit order or a liquidity taker meeting a liquidity provider respectively.
pipmutt: You should really break down and read your self imposed homework assignment. slacker! That would clear up a few things with regards to who is doing the heavy trading in the fut currencies and why you should care. I don't want to spoil the ending for you. lol
There is the limit order book as one component and the other is actual transactions or order flow. And then there is the chart and the levels where stops might be placed - confirmed by order flow.
There have been some interesting things posted in this thread. I think there is enough information in the posts and in the reading to fill in the gaps in anyone's education about how the market operates. Because that's what is really key - not trading based on a mythology or superstition, but based on the realities of supply/demand, buyers sellers and who the participants are, their motivations and their approaches to the markets. All this time I thought the markets were something that they are not. Blue pill or red pill? That's the choice we each have whether to do the research and investigate and learn and understand, or if we're content to shoot the bull in the various threads going around in circles being full of knowledge. As one of the Market Wizards said, "Everyone gets what they want out of the market. Everyone." That's true for this thread as well.
I see some who are expanding their knowledge/understanding, some who are content with what they have and a few who are questioning what they have already learned and replacing it with new understanding based on research, facts and actual market dynamics. But just like a bell curve the mass of mediocrity stays stuck in the middle, doing the same things they have always done and comfortably thinking the same thoughts they have always thought. I appreciate the productive contributions of many and will leave you all to your own research. In my view it's all about assimilating the information in the right way so that your picture of the market conforms with how it actually operates. Then with that correct knowledge base, devising a strategy to exploit how things operate. And then it's all about execution. Some of my favorite quotes from the thread:
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If there is one trait as a human that has helped me it's this......HUMILITY.
A humble person NEVER stops learning.
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For the big players,they NEED to place orders,they have no choice.You and I though,it's more of a want thing.We are not forced to do business unless we want too.This is an edge in itself,another one.Think about what this means.
Hint:we get too watch the big nutcases push capital around.But we need not get involved until we know the hand.
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I told you guys it is what you 'cannot' see.
99% of retail traders stop at price.If you stop at price you just haven't gone far enough.
Price has it's place,don't get me wrong,but she lags I'm afraid.
With every tick made,it is H-I-S-T-O-R-I-C-A-L data.
You need to trade out in front.
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When your trading blind you really think that it was your system/your edge that you had devised that cut it out for you.HA,what a big joke that is.Talk about no idea.
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There is a window.You need to get yourself into that window before most.The quicker you are,the more you make,the less risk you take(if any).
When you get in early,everyone is your best friend.
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Look,don't worry if you don't GET IT.If you remain around long enough there may be a glimmer of hope,just a glimmer.
These guys will agree with me that the market is NOT random,it is inefficient.Most will never find these inefficiencies.That's the way it is though.I cannot help it.
If everyone knew where would we be?
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BTW,if someone 'gets' it,then go and help yourself to the market and count yourself blessed.
That's the plan! Many thanks, and best regards!
I'll leave you with the following look at a proprietary commodities liquidity provider:
I don't know if they do. If SKFX emphasizes the speed factor, I assume he is watching time and sales/DOM in realtime and acting quickly on his observations. Time and sales IS orderflow. Depth of market is possible orderflow- a glimpse on the currently available liquidity/trading options. I think these guys use simple futures data to do their analysis, and laugh and laugh when they see us searching for something that does not exist; a chasing of the wind. I read a very intreaging research paper tonight that has convinced me of this.
Gaston said...
I must have read the same paper because I came to the same conclusion. Through the standard sources there is no spot order flow information. There may be some institutional datafeed that I'm not aware of, but there is public info available in the fx futures, and for those people who have read the papers and done their homework they will recognize the value of this public order flow information. The other piece that Darkstar mentions is a feed that gives:
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To trade order flow you need data from outside the chart. Level 2, a brokers orderbook, a service that gives you info about brokers orderbooks, etc. There is a fuckton of money to be made from orderflow trading if you know what your doing, but you need the datafeed.
And no, I won't tell you where to get a datafeed. Some things are better off not being shared.
"A service that gives info about brokers orderbooks. I'll take issue with Darkstar on his last statement. I believe he actually has revealed what service he uses but in the spirit of maintaining the "mystery" you'll have to do a search on his posts to find it.
We've already brought up IFR Markets, is that what you are referring to? In all honesty, I really hope Darkstar and the others are not dependent on some service. What happens when this little man quits whispering secrets in your ears? Nothing good ever lasts, especially something like this, if it is infact what they rely on. Good traders have control of what they are doing, they are certainly not dependant on some service that could vanish tomorrow.
I think that trading orderflow is a skill that starts with a thorough understanding of the market...
I wasn't aware that it had been already discussed but yes you surmised correctly. I think there was a post here on FF a while back that discussed the economics of why banks have a vested interest in blabbing about certain customer orders, and this is the primary reason why these types of services are likely not going to be going away anytime soon. They make $$ by telling. Option plays are probably the best example. But like anything, the magic isn't in the news service, charting method or DOM. It's about developing a strategy to take the information - (because that's what all three of those have in common) and synthesizing it into something that is exploitable under a given strategy. It's just that there are more valuable bits of information. Knowing where the orders are clustering is valuable information. You can get that information by figuring it out from a chart, seeing the action on the DOM when it gets to that level, or having a whisper tipping you off to look at a certain level. I would say the third option is the easiest way to get that information, but it still needs to be backed up by analysis of the minutia. It's easy to miss it when studying a chart if it isn't an obvious S&R level, or the DOM if you don't know where to look ahead of time or aren't looking at the moment it is happening.
I've been seeing some interesting patterns in the DOM using both the limit order book and the order flow and matching them up with the theory found in the literature, and with what my traditional charts are saying. If you have a DOM display and are tracking order flow and are either using them to make trade decisions or are trying to learn how to use them to make trade decisions and would like to compare notes, please drop me a PM.
to use the same with Ninja, what is the best indicator? I already use at least 4 MT4, Ninja and a few more tools, i really can`t have one more software.
thanks in advance.,
What tools does Ninja have to track order flow? TIA!
The funny thing about this thread is that there is a huge gap between theory and practice. There is really next to nothing in this thread that will help you in filling it. I don't mean to be disrespectful, but even SKs charts are somewhat illogical in the context of trading orderflow.
You can't see anything but price on a price chart. I think thats why they are called price charts.
You're correct my friend. My studies on the subject of order flow have taken me far and wide. I've been at this a long time and I feel like my education has finally started to round out. The book mentioned several times in this thread (Larry Harris "Trading and Exchanges") is just a starting point and a boorsomely basic one at that. Allow me to sum up the most important part of it: "the only traders who make consistent $$$ are the ones with superior information - typically information about value (fundamental or technical/order flow). Don't trade if you aren't an informed investor/trader" So basically hardly anyone on FF has any business trading according to LH. Nice - and likely true :O
The papers on the subject, while educational and phd-ish in nature don't move the ball toward an executable strategy that much either. But I'm glad I read them for the few insights they contain.
As for bridging the gap, I believe a good starting point is the book "Mind Over Markets" by Jim Dalton. It's just a start and yes, it's an old book that is mostly out of print about using a funky 80s charting technique. But at the core the book does the best job I have seen in putting the market structure together into a coherent explanation so that it is accessible to the average trader or would be trader. I believe its core concepts are sound: balance/imbalance, initiating/responsive, control, value, use of price/volume distributions to explain market structure and some other important concepts that I can't seem to think of off the top of my head. The concepts are sound but it's possible that some of the analysis methods / tools in the book may not be as sound. You'll have to sift it like anything else you read. And by the way, it ISN'T a book about strategies but about understanding market structure. But the light bulb turned on when I read the dual auction market description as a way to explain how the market operates.
You're also right that a price chart doesn't contain order flow information. Price and volume are necessary to understand/see order flow. We private traders may never see banks' private order flow records but price distributions and (volume distributions for futures markets) can be had and analyzed as an additional way to move the ball forward. I believe that staring at the DOM is a red herring. It mostly consists of potential order flow, not actual order flow and is far less useful than staring at price/volume distributions IMHO.