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Information on how to trade Order Flow

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wmueller View Post
Thanks for all the comments. Much appreciated.

I have been thinking some more on the subject and remember some questions from mark Douglas that I think might be worth answering from the perspective of my model...

----- Framing the Now Moment Questions from Mark Douglas (The Disciplined Trader, p.216) using the Order Flow Model with Volume Bars -----
(PA = price action, CD = cumulative delta)

1. What is the market signaling at this moment?
*Is PA convergent or divergent with Cumulative Delta (CD)? Is PA consolidating, expanding, ranging? Is defense or offense controlling?

2. Who is paying up to get in or out?
*Market Buys/sells, or bids/asks.

3. How much strength is there?
*Small range bar = lots of defense bids/asks. Quick action = lots of offense (market orders)

4. Is momentum building?
*Look at slope. Are the volume bars getting larger?

5. Can it be measured relative to something?
*Compare the size (range) of the volume bars.

6. What would have to happen to indicate the momentum is changing?
*PA – CD divergence, PA slope change

7. Is the trend weakening or is this a normal retracement?
*PA – CD divergence, PA slope change. Compare the size (range) of the volume bars.

8. What would show that? If the market has displayed a fairly symmetrical type of pattern and that pattern has been disturbed, then it is a good indication the balance of forces has shifted.
*Look slope changes, bar length changes and cumulative delta divergences.

9. Are there any places where one side will definitely gain dominance over the other? If that point is reached, it still may take sometime for the other side to be convinced they are losers. How long am I willing to give them to rush out of their positions?
*Look for support/resistance, swing highs/lows that show a top/bottom, supply/demand.
What happens with PA there? Sideways action – could go either way, must wait. Reversal, wait for the pullback. Ploughs through – wait for a pull back. Always look for a spot where you can define a low risk point where your expectation is wrong and you would exit the trade (a low cost fail point).

10. If they don’t rush out, what will that indicate?
* If PA doesn’t move and CD doesn’t show a divergence, then there is agreement and lack of activity.

11. What did traders have to believe to form the current pattern relative to the past? Remember that people’s beliefs don’t change unless they are extremely disappointed (by unfulfilled expectations).
*Thee is always disagreement in the market; otherwise prices don’t move. It takes a stronger belief on the part of the bulls (bears) for prices to go up (down). The move can brought about either by offense or defense.

12. What will disappoint those with the predominant force?
*Lack of strong enough PA in the desired direction or a move in the wrong direction.
13. What is the likelihood of that happening?
*Must have statistics on the PA and CD patterns you are seeing to know what the likelihood is.
14. What is the risk in finding out in trading?
* The risk is difference between entry and fail point.
15. Is there enough potential for movement to make the trade worth the risk?
* must look for a likely target based on previous edge levels and volume-at-price structures to come up with an educated guess. Bu remember it is only a guess. Anything can happen.

Any thoughts would be most welcome and appreciated.

That's a lot of thought.
If you're profiling you can also ask yourself if we are either in balance or imbalance. You can further it down to early, mid, late(imo). This will give you the context.

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