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Information on how to trade Order Flow

  #28 (permalink)

Spain / Europe
Trading Experience: Intermediate
Platform: Ninjatrader
Favorite Futures: FESX, FGBL, ES...
Posts: 53 since Mar 2012
Thanks: 327 given, 21 received

dom64 View Post
My 2 cents:

The trouble with CD is that, like many other signs of possible divergence, it works sometimes, and sometimes does not (by "work, I mean, it does indicate a divergence with price action and reversal or/and divergent move about to happen).

We would all agree that one can not rely to take trades that sometimes work and sometimes don't, altough this is what happens effectively in the sense that we always have winning trades and loosing trades, but one can not establish a trading strategy based on something that is known in advance to work half of the time, or one might as well trade with a coin, and get similar results, whith heads or tails.

Part of the reason why it may or may not indicate a real divergence, is because market orders sometimes get absorbed by Limit orders, and sometimes do not. Another part of the reason is that it might "work" from a divergence perspective still, if there is some follow up to the CD, whether markets orders get absorbed or not, which in turn, very much depends on whether or not a wave of market orders is an intentional agression (human or algo based but this is not the issue here), or just simply passive and therefore not aggresive maket orders (stop order which became market orders and got triggered on given levels).

The same applies to volume imbalances, for the same reasons, which in itself, does not mean much, and to some other order flows concepts.

The real and only relationship is Offer vs demand, so a divergence in itself only means something if compared to the right thing, i.e, Market orders Vs Limit orders.

I have been trading the order flow for some years now, and this is the main relationship I care about. There is no systematic green/red light to trigger trades, and very much of a discretionary approach(altough statistically, some divergence or else might generate postive results, I don't know, we'd need to see what an algo would produce trading CD or VI).

A good DOM (I use Jigsaw and can not do without it), a good news platform (Metastock offers Thomson Reuters Eikon for $150/month for non professional investment companies), a good understanding of the market you trade, supply and demand laws, "patterns" on the DOM (algos leave their footprints), know the typical range of the instrument that you trade, its average true range, how it reacts to economic announcements, how it reacts to general news, is it volatile (is there liquidity, when, why), how does it behave through various sessions (Europe, US, Asia), etc, in short understand and know the contract(s) that you trade, a decent charting platform (I used Sierra charts) with basic footprint charts/candle charts with volume profile to do morning and end of the day homework with key levels, areas of interest that are likely to be revisited (again it comes back to understanding the mechanics of the markets and why we might come back to some levels), VWAP and its SDs (simply as 70% of algos are vwap based at some level or another), a decent account (capital) and this is pretty much all that is needed, along with years of practice. I also think, and this obviously goes against all marketing/commercial intents to sell the Retail Traders all kind of services and tools, that one should mentally reverse all promises made by Brokers offerings: How to make $10K with $500, becomes how to make $500 with $10K.

Only once I understood, accepted, and spent some time on the above, did I start to be a profitable and consistent Trader in the long run.

I really liked this paragraph. The Holy Grail Of Trading!

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