I have a question for you regarding the T&S. To make it as clear as possible, i created this schematic diagram of one of the trade setup i like to take. It's a very simple setup with no ambiguity.
Price makes some range expansion. It breaks some resistance/support and the expectation is for a retest of the level and continuation in the direction of the breakout. I prefer to evaluate this price action on a point & figure chart as the balance and out of balance phenomenon are clearer to observe on this type of chart.
The range expansion must be clear and be significant in the current context, the breakout level will usually corresponds to a prior nearby swing Hi/Lo. However, i allow price to make a deeper retest than the prior swing Hi/Lo. To find the deepest level of retracement, i create a custom volume profile as shown in the picture (red rectangle). The high volume node (red horizontal line) will serve as my last entry point. I usually enter 1 or 2 ticks above/below the most obvious level (prior swing Hi/Lo) and am ready to scale in again 1 or 2 ticks above/below the high volume node (VPOC) identified with the custom profile. At best, i was able to enter exactly at the prior swing Hi/Lo. If not i let this order go negative and add to my position at a more favorable level near the VPOC.
That basically describes one of my main trade setup. Now my question, how could the T&S help me within this context? I tried many times to use it but was never able to see the advantage. Using my setup i enter before i see any significant activity in the T&S. There is no stress as i know exactly where i'll place my limit order(s) and will let the trade play out.
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Last edited by trendisyourfriend; December 9th, 2012 at 11:44 AM.
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1 - the 3 types of reversal
2 - the participation in the pullback to your entry point
Reversals - By that, I mean the top/bottom of ANY swing high/low. It will occur as follows (consider a bottom):
1 - Price moves down to a point. Sellers keep selling; the total number of contracts in sell market orders is larger than that of buy market orders. Price however, is no longer moving down. This is absorption on the bid. The bids are absorbing the sell market orders. You may also notice that the size of sell market orders is more indicative of smaller players.
2 - Price moves down to a point and sellers simply stop hitting there. You might go down to a price and just see a few prints at the price, whilst this is normal in the back & forth anyway, when you see it move to a price 3 or 4 times and each time see no prints there or very small prints, it means there are no sellers at these prices. Price discovery didn't discover any sellers!
3 - Price moves down to a point and immediately buyers pile in with lots of orders and size.
All reversals come down to the above. It's not one or the other all times, often you will see a combination of the above. 3 is very hard to catch on the order flow, unless you accept a worse entry price.
In your example, you see a range extension up and then a move down. That move down should be fairly weak in terms of participation. You'll see it on the tape as there won't really be a lot of selling on the way down compared to the range extension. This can be slightly hard to see on T&S alone and swing volumes, CD, footprints will all show this.
Now - the other thing to consider in the order flow is liquidity vacuums. These are the "wake" behind a rapid move in one direction. On the way up, if the move is rapid, then it will leave a lack of bids (relatively speaking) in it's wake and that is enough to cause a pullback.
With this in mind, you need to pay attention to the fact that a rapid move in one direction is not necessarily a sign of strength. So if the market zooms back down to your entry point, be poised to trade against it. This is the very moment that inexperienced traders are jumping in, afraid to miss the move and selling the low tick.
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I'm starting to learn tape and as suggested by DT I'm watching the tape + DOM combination each day for 60-90 min without using charts. I also do a video of this and later try to conduct an analysis of what I've just seen.
I'm gonna be posting those videos along with my commentary in this thread from now on. Anyone willing to join, please feel free to do so - we need to revive this thread.
I've marked the area I was watching on the chart (attached) and made an analysis for it.
This is not the whole 90 min video, only a part which i thought was interesting from it, there is also another place later on where shorts could be considered, I'll try to make analysis of it in my next post.
Selling pressure – tape is mostly red with occasional trades at offer. Price approaches support level @ 1430.00 which is demand area of today’s GLOBEX session (I've marked it in DOM prior to watching it)
Big prints appear during 00:00-00:20 on bid @30.00 – 30.25 – holding with limits
Big print on ask @ 30.25 – 30.00 – active entry off the same levels
2. 00:40 – 1:10
A lot of selling is seen (> 2500) in the DOM in current trade’s field @ 29.50 price level. A lot of limits are being added to the same level as seen in the Snapshot field on BID side. Seems like BSD’s are holding the level
3. 1:10 – 3:40
Active buying is seen both in tape and in current trades @ 29.75 – 30.25 levels.
4. 4:10 – 11:40
More buying occurs @ 30.00 – 30.25 levels as seen in tape and current trades.
Tape has more green waves than red waves.
859 bid print @ 30.00 – who would sell into support and why???
525 bid print @ 30.00 – who would sell into support and why???
5. 12:30 – 13:00
Selling pressure is seen @ 29.50 – 29.00, tape is turning red, sizes are relatively small compared to previous buying which is seen both in tape and Current trades.
6. 13:00 – 14:40
More buying off the lows – seen in tape. 500 print @ 29.50
Limits are being added to the 29.25 level as seen in snapshot, a lot of trading goes there, but no prints on tape – looks like retailers are shorting the breakdown.
14:40 – 15:30 – same thing repeats @ 29.50 level – limits are being added actively. No prints in tape, price stalls, and current trades grow in number – small traders are selling into BSD’s limits it repeats again @ 30.00 levels during 16:00 – 17:00
7. 17:00 – onward – buying resumes.
18:45 – looks like stops of those who shorted below 30.00 are being triggered.
19:10 – breakout traders join in.
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I think it's worth mentioning that when "snusnufreak" asked me for help on how to go about learning reading the order flow, it was LESS THAN A WEEK AGO!
This is very quick. I wish I'd picked it up that quickly. Sure ain't gonna take 10,000 hours....
This is excellent action. You are at the low of the day, plenty of people will be looking for a long, so you just need to see if there is sign to support a long trade.
In the first few minutes, selling pressure is pretty clear down to 1430 and then you see the bidders start to get a little more aggressive. On the way down, you see 192, 137, 1122, 187, 745, 997, 912, 233 hit the bids and push through...
Then you see it ticks down to 1430 where there's 1393 contracts on the inside bid and eventually 1905 trades there.
Then you tick down to 1429.75 where there's about 1200 bid initially and we end up trading a little bit more than that.
Those higher numbers of contracts hitting the bid, might make you think "more sellers" but it's really "it's taking more sell market orders to eat thru the bids". Bidders are firming up. Absorbing more selling.
This is a "Heads up".
At around the 40s mark @ 1429.50 - we have 1300 bid and we end up trading more than 2500 contracts at the bid over a period of about 30 seconds. Plenty of time there to make a decision.
This is about as crystal clear as an iceberg bid order absorbing selling as you will see. It does tick thru 1429.25 but that's the way icebergs are. Let's say you want to keep the inside bid at around 500 contracts, so you set your trading platform to do that, the market will still tick down momentarily if someone throws a 700 lot at it. So - don't expect an iceberg to hold the market to the tick.
You could have got long 1429.75 pretty easily. It did come down again and go thru the low 1 tick and that may well have shaken people out. It also has to be said that at 10:19, we saw over 3000 contracts hit into the offer @ 1430.25. This would definitely have made me nervous. In fact, you could easily have made a case for a continuation down from this point. I don't short lows though - it always ends badly for me!
When we came back to revisit the lows, @ 13:50 - we printed 260 contracts 1 tick below the low of the day bidders stayed firm there, there were no sellers down there and then we finally made the move up. You have an area that got defended first time round, now you came back and it held again. This is the 3rd potential entry point and actually a better long but most people would be long already because you never know if it will come back & retest.
The thing about this - whether you went long at the lows first or second time or you went short @ 1430 - these 'setups' caused a pop in the direction of the trade fairly quickly. You had time then to sit back and consider your position. You didn't have to sit through much heat on the trade.
That's it in a nutshell for me - with the order flow, you get in when you think there will be a reaction in the direction you want to trade. You can never guarantee that this will follow through with a major move but it's a lot better than entering the market and just have it carry on going in the WRONG direction...
Last edited by DionysusToast; December 13th, 2012 at 03:34 AM.
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This was explained to me by a ex-pit trader. What I used to see was a lot of countertrend icebergs where they would absorb 3k market orders before the market would just run right through them and carry on the way it was going before.
I thought these people were mad & the trader in question was at my house having me install my software on a PC because he was technologically stunted. Anyway - I mentioned it to him "why do they keep doing it? Won't they run out of money?"
He went to explain that these icebergs are one half of a stat arb trade & the other half could be on the stocks or the big S&Ps. So, when I see trades that make no sense, I consider the fact that this might just be half of a spread/arb trade and the trader might simply not care where this particular market heads afterwards.
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@DT - What about one and two point scalpers (and other tick scalpers) just covering their earlier shorts and taking profits? I look forward to the day when I can place/cover 500+ contracts at a time, but plenty of such traders out there.
@snusnufreak - Yes, excellent post. I am pleased that DT stepped in to comment first as I have only been running same DOM for a bit longer than you! Well done. My main issue to date is trying to understand the rapid switching between bid and offer icebergs. Just as you place an order, it reverses on you!
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Second Place which interested me, after I’ve made a video – was the one on the screenshot attached (DT, thanks again for suggesting the use of tick charts – definitely less noisy and much more easier to read than minute ones)
Price-Action-wise and footprint-wise this is a perfect spot to go short:
- Current trend was clearly to the downside.
- Pullback to the 31.50 area, hit the DPOC which is the max volume, traded within the consolidation, which formed right at the opening of RTH.
- Footprint shows traps for longs – a lot of buying at the top of the pullback (See attached screen).
But we’re here to learn tape, so let’s see what happened there:
1. 00:00 – 1:00
A lot of active selling is seen at 31.00 level, being absorbed by a lot of passive buying – we see that there are 1500 trades made at that level and 2500 limits were added.
Don’t really know what it means when looking solely at the tape.
But after analyzing charts, I can assume that people are trying to short off the low of the consolidation which formed at RTH open. At the same time the larger Time Frame passive buying comes in – bigger hands building up their position, holding 1430 area for after-the FOMC rally, they’ve planned.
There is 500 print seen @ 31.00 bid during 00:20 – don’t know what it means.
916 ask print @ 31.25 – could this be a stop of a big scalper who shorted 31.00 couple of seconds ago? I’m not sure. However I see, that it takes much more buying to advance now, just like DT noted in previous post – we see 2313 lots bought @ 31.25 and > 2500 lots bought at 31.50 with active stacking of offers (~2000) as seen in snapshot field.
3. Approximately till 04:10 we see both lack of buying and selling at 31.25 – 31.50 levels with occasional prints @ 31.75
After 04:10 we see selling gain strength – seen both in tape and current trades against bids.
I think a good entry should’ve been somewhere here.
Basically, it’s like a wave – we see strength in buying, then buying dries up, then selling gains strength - short here!
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Richard, please explain what do you mean by "rapid switching between bid/offer icebergs". Also how do you spot an iceberg by looking at the DOM/tape? I assume, that we need to see a lot of trading going against the level (big current trades number), but the number of limits stays firm, is this correct? In case of iceberg what does snapshot window show?
BTW, my vid for yesterday's RTH open on ES is coming after I analize it once again and come up with a huge-ass post =)
You never know whether someone is entering a trade or exiting one. I suspect that scalpers are using limit orders more than market orders but who knows.
My point is that when I see large traders behaving in a way that would seem pretty dumb, I remind myself that they probably didn't get to be trading 750 contracts at a clip by being useless. I chalk that sort of thing down to the fact that a lot of non-directional trading goes on.
I think trade location is the key. If you have good location and you see the sign from the order flow, then you take the trade.
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This is shortly after opening. I glanced at the chart before using the tape and put the levels to watch in the DOM.
First trade occured shortly after the US open, This trade was the one i noticed using solely DOM/tape combination. All the later ones I was not able to identify at the very instance, but i will try to do it in the analysis.
Buying is more agressive than selling, which is seen both in current trades and Tape:
- The average green print in tape is greater than the average red print.
- There are more green prints than red prints.
- Clusters of grreen prints are bigger in size than clusters of red prints
- As price approaches 1430 resistance area (marked in the DOM prior to watching) I noticed that buying increases - average prints in current trades field get up to 700-1000 against 200-400 seen at lower levels.
01:44 - 531 ask print @ 29.25 immideatly after that I see active selling into the same level (~1300 on current trades) for next 30 seconds during 01:44-02:15
I think this was initially a good place to enter with a stop behind 1430 area and target @ 1426 - YTD's low.
2:15 - 4:00 buying @ 28.75 - 29.00 resumes with prints of 900 - 1000 price is unable to go much higher.
3:33 big limit flashes on bid @ 28.50 - wonder what this was?
4:00 - 6:00 buying @ 28.75 - 29.00 resumes with prints of 600 - 700 - less than previous time.
6:15 - END - sell prints in tape, no buying now compared to previous time.
This is a second chance to enter short @ 28.50 - 28.25