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For instance, what if Jerome Powell got on TV and said "I think we need to start lowering rates". You would almost certainly see the market start to buy, and continue trending up all session. This is an example of what we call "predictors of order flow". Pieces of information that have a high probability of predicting the future orders.
Which gives a little insight to what order flow actually is. Some mistake order flow for being a strategy. That is not the case. Order flow is merely looking at the market and limit orders in the market. Orders are what move price. That means the only way to really understand how a move played out is by looking at the order flow.
Order flow is NOT another form of technical analysis. Of course, many retail traders mistakenly try to apply technical analysis to order flow. That's always going to happen because our brains are just wired to make predictions based on patterns. The problem is that in markets such patterns simply do not effectively predict what will happen next. That's not to say there aren't patterns. If you have a ton of contracts to sell, you can use current market conditions to predict how the market will react quite accurately. There's a whole world of research out there where stylized behaviors that differ from a random walk are proven. That's how the whole block trading industry works. Current liquidity conditions combined with future orders can accurately predict price.
In other words, order flow is only part of a complete strategy. Order flow is the most complete way to analyze current market conditions. But in the end you still need to be an informed trader armed with predictors of order flow. That could be a breaking news story, options gamma, or information about likely rebalancing by large funds. Anything that has a high probability of predict future orders.
If you aren't such an informed trader then you're basically just noise trader Ned, and noise traders on the whole tend to lose money. Markets are incredibly statistically efficient, and not very informationally efficient. So while you might be able to find a market inefficiency with technical analysis, it's basically not worth trying unless you work at a firm or have a phd. For the rest of us our time is better spent going after informational inefficiencies. Try to find information that can predict the future orders, and understand how those future orders will move price.
I dont use footprint charts but I felt kind of confortable viewing your chart.. would you mind to share a template of yours? You know.. right click, template, save as..
I think those are all NT's standard order flow indicators, right? I mean, no proprietary indicator.. so I could load the template without any errors...
Quite a while back, I was talking to an old friend of mine. He was a floor broker for Lehman Bros in the bond pit. When he first left the floor, he attempted to trade electronically, and within a relatively short period of time he went through all of his money. He had to take a job with the CME working at their help desk. He told me a story about a trader he met during his brief tenure at trading. This trader was another ex-denizen from the floor; however, he had worked as a clerk for a mutual friend of ours. My friend went on to tell me how the ex-clerk had been making $1,000- $1,500 screen trading per-day, averaging $20-25K per month for quite a period of time.
However, after my friend went through all his capital and stopped trading, he lost touch with this ATM of an ex-clerk. Time passed, but my friend ran into the ex-clerk when he hopped into a cab. Ironically, the ex-clerk was not another passenger, but the driver. It had taken a little while longer, but the ex-clerk had lost his ability to monetize his mojo and suffered the same fate as my friend.
If one was simply prone to cynicism, one could say, success is fleeting. Or, if one believed in the arc sine law, one could say it was inevitable. That is, the popular misconception is the more trades a 50/50 trader makes, the greater chance for equalization in outcomes. But, according to the arc sine law, it is more likely that there will be long periods of cumulative success, and equally long periods of cumulative failure. Success is not only fleeting; but its counterpart (failure) can be permanent.
Either the market had changed, or the trader had changed, and that's what probably led to the ex-clerk's demise. Think pro football. Just because a game plan worked against one team, doesn't mean that same game plan will work against another team. Yes, it's the same game and the same rules, but the context of the game has changed; and if you don't adjust your game plan, a loss is likely. The ex-clerk may have failed to reboot his mind. What worked for him in the past, had gradually stopped working. Or perhaps the trader had changed. Bad habits can be ingrained in your psyche, and while they can be temporarily suppressed, they can easily resurface and negatively affect your decision process. It doesn't take much to destabilize a trader. It could have been a depressingly bad losing day, or even a very large winning day that resulted in overconfidence.
Emotionally neutral, logic-based reasoning is the ideal we all seek, but confirmation bias, fomo, over-trading, and bad money/trade management, can wreak havoc on your P&L. Most traders exit their winning trades too early because they trade for average and lack the discipline to watch their profits erode. They fail to add to their positions and let them ride. Markets usually do go further than one thinks and failing to (fully) take advantage of winning trades can be costly in the long run.
So, after another 2–3-year hiatus from trading, I sat down in front of my screens, on Wednesday. It was like I had never left, and it was nice to start with a clean slate. Trading is forever ingrained in my mind, my heart, and my soul, which is why I can’t keep from returning to the screens. Essentially, the game remains the same. News and algos drive the market in the short term and*"momentum and sentiment" drive the market in the long term. That is, it's all behavioral, and it's reasonably efficient. Sure, we like to comment on the fundamentals, but the fundamentals are only important because they influence the behavioral. I was surprised to see that intraday seasonality had remained remarkably unchanged. Gamma, option driven, and CTA equity flows are still some of the most important non-fundamental flows in equity markets, while the retail trade and meme stocks appears to have much less of an impact than it had during the height of the Robin Hood days. Of course, the context has changed! It is no longer a bull market driven by an accommodative Fed and stock buybacks. It is now a bear market driven by inflation and tightening financial conditions.
So, it was relatively easy to pick up on the price action and determine what kind of trading day (range or trend) was taking place. I had brushed up on my McElligott and I had a pretty good idea of the game that was being played, and who and what was driving price. Of course, I had no idea what was already priced into the market, and what was not. Still, I felt I was back in the “church of what’s working now”! I hadn’t had a chance to work on my workspace, so it was bare bones. Normally, I would strive for a workspace that strikes a balance between the complicated and simple. If it’s too simple, it will lack precision. On the other hand, if it’s overly complicated, the input of information may become too large to process. When you’ve been away from trading, it can be hard to factor in a large number of data, and fully understand how a large number of factors will interact. Correlations can be anachronistic and confusing but nonetheless, extremely relevant.
Not so surprisingly, the market isn’t the only thing that hasn’t changed. An email alerted me of this thread, and I decided to check-it-out. Turns out, it’s the same old shit, different day. In response, I’ll try not do the same; and I’ll start with something very basic. You can’t take the same actions as everyone else and expect to outperform. If you hope to do well in terms of performance, you have to depart from the pack. What I mean by this, is you have to look at the market differently. You have to react differently, which means you have to think differently. You have to think of things others haven’t thought of, see things they have missed, and have an insight they are lacking. Following the herd is never a good strategy, especially when the herd may be just as clueless as you are.
Whatever was the case with the ex-clerk, his road to ruin probably had nothing to do with the tools or indicators he used. What indicator(s) or tool(s) and even the entry points they generate, are at best a secondary concern, and should probably be relegated even lower. The skills to control intense emotions and reduce self-destructive behaviors is infinitely more paramount for success. A trader shouldn’t make excuses on bad days; and in turn shouldn’t get arrogant and overconfident on good days. A trader should be confident and humble.
The shorter the timeframe, the more random the price action, the greater the capacity issues, and the greater the model risk. A sound approach to trading must provide quick feedback to alert the trader of failure as soon as possible, and most importantly, traders must strive for both a high win rate and asymmetric payoffs. It is essential in discretionary trading that a high win rate is attained in conjunction with high expectancy, because the risk of ruin is a function of the loss rate. If your method does not have a high enough win rate, then the risk of ruin will be greater due to the inevitability of an idiosyncratic loss or consecutive losers. Even with the success he initially enjoyed, the ex-clerk was probably still undercapitalized, relative to the size he was trading.
In the end you are on your own. Your choice of strategies and tactics have to be correct, and you have to be able to execute better. To succeed you have to think for yourself and be more right than others; and that is what frightens many people. So, they look for comfort and support from others who are equally lost, and who still believe in the tooth fairy, the holy grail, and easy money. They see what they want to see, hear what they want to hear, and end up, doing what they want to do. Self-interest causes them to behave that way, and self-justification enables them to stick with it in the face of evidence that it isn’t working.
Trading is not physics. The rules of physics are immutable because electrons always do what they’re supposed to do. They have no feelings and never behave in a contrary manner. So, even if we can look at what's truly driving price, we can’t predict market participants behavior. This is where insight and judgement come into play. Einstein used to place an emphasis on intuition and imagination over intellect, or a “feeling for the order lying behind the appearance. Einstein said, “Pure logical thinking cannot yield us any knowledge of the empirical world; all knowledge of reality starts from experience and ends in it” Insight and judgement can only be attained through hard work, experimentation, and experience.
Anyone who thinks there’s a single tool for trading that guarantees success, and that it’s available to them, clearly doesn’t understand the complex, dynamic, and competitive nature of trading. There are no simple tools or indicators that provide easy answers. Trading is the polar opposite of easy. Everyone has access to the same information and the same tools, so if you think like everyone else, odds are you will perform like everyone else. And we all know, just how well most traders perform.
I think there is a slight misunderstanding about what I mean by order flow. The advantage of firms like Virtu Financial, Citadel Securities, and Jane Street is that when they run order-execution desks they have access to the STOP, MKT, LMT, and OCO orders that come in from their clients.
Citadel Securities, for example, clears for Robinhood and TD Ameritrade. How difficult is it to pass order information to their hedge fund and then initiate a practice of gunning the stops? If Citadel is not large enough, then use other companies like Melvin Capital to help. This is the real way hedge funds make money. The story of AMC and Gamestop is someone raining on the parade of this strategy by initiating a massive short squeeze that shot a warning to all of these hedge funds.
I once looked at Citadel's 13F collected at Whale Wisdom. Something like 30% of their assets is devoted to the purchase of puts and calls on the SPY 500 ETF. Last time I checked, they looked like they were rolling puts and calls on the SPY since 2007. In fact, their portfolio is full of put/calls trades on ETFs and single stocks that don;t make sense unless you're gunning the stops.
In the world of futures this is not what order flow means. Most people in this thread, and on this site, are thinking in terms of the futures market, not stocks. By and large, this thread is not about the order processing of firms like Citadel, which operate in a different market.
Trading methods using publicly available order data have been widely used in futures for years, and this is what futures traders typically mean. Different markets, different meanings of the term.
Bob.
When one door closes, another opens.
-- Cervantes, Don Quixote
