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Is Orderflow An Outdated Concept?


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Is Orderflow An Outdated Concept?

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  #11 (permalink)
Lutherstadt Wittenberg
 
 
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Hulk View Post
I will take a stab at this. A lot of what was said on that post at reddit is correct.

I am a professional trader. One of my strategies is based 100% on "order flow" but its nothing anyone has ever seen or based on what is available for sale via courses or tools these days. It can never be. But I am faced with the same challenges this person is talking about so I can tell, he knows what he is talking about.



Agree. Retail folks look at various structures like cumulative delta, market/order profile, LVN/HVN in various ways and try to find reasons to establish their bias. I dont use any of these. I have not been able to generate a backtest that consistently performs based on any of these theories.



Agree. I learnt many of these theories - NoBS, L2ST, JigSaw... etc. cannot even remember the rest but he is right. These theories came from traders that scalped thick markets were you could see the order book. There was only one type of refreshing order - an iceberg which was a clear indication that someone had a large order and he did not want the world to see that. He kept it hidden in order to get filled. Apparently, this observation would help people establish a short term bias for scalping purposes.



This is the meat of what happens today on the screen. What this means is that now orders are not limited to one particular market. An order could span multiple contracts and instruments. Normal people can never tell which trade is getting filled. For instance, in the commodities markets (I cannot speak for anything else), if someone is bullish WTI outright and wants to establish a long position, he will probably never buy just the front month. Instead, he will employ an "aggregator" type of order that will start filling the front 3-4 months, the front few spreads, cracks, WTI to Brent etc. Basically, he would express his bias in WTI relative to forward months and other markets. If you are monitoring just the front months using some of these retail tools, you are looking at a flea on the tail of a dog - completely missing the dog itself.

There is rarely an outright bias for a commodity being expressed in the markets these days. The bias is expressed mostly relative to either time or correlated markets or both.

OTC markets are where block trades are executed by communicating your order to a broker. Most retail price feeds do not disseminate these trades. And even if you had a feed that did, these are reported to the exchange (I am talking mostly CME/NYMEX Clearport here) with up to a 7 to 8 minute delay so you cannot make sense of it anyway. If you want to know the % volume of these trades, just look at the volumes page for that contract on cmegroup.com.



A stale order is one that has been on the book for a long time. You can see this if you subscribe to a data feed that disseminates MBO. I dont know what he means by professionals screening stale orders to lean on. I dont fully agree with this statement. OTC venues do not dictate the bias. They are just like the screen - no one really knows where the market is headed. But having access to OTC data definitely helps in different ways. I havent found an electronic way to get this data. I dont know if there is one but if I had the OTC order book electronically, I would be very very happy.


Scalpers do this. I mean, this is a different class of traders that have a very short term trade duration. But it has nothing to do with what he has been talking about earlier. 2 very different types of algorithms.



Yep, this I agree with. If you are trading NatGas, you are monitoring electricity and weather for sure. If you are trading Crude oil, you are monitoring Brent, Gasoil, gasoline, diesel both forward in time and across. This ties into what he says earlier and like I explained. If an outright bias isnt being expressed, you wouldnt look for it. Instead, you would focus on monitoring relative bias. Simply put, if WTI is bullish, then its bullish relative to what? Look at the WTI and the RBOB gasoline charts since Feb 21. Look at the front month and then look at the Apr/Dec or May/Dec spreads. Also look at the front RBOB crack and the front RBOB vs HO spread during this time. You will go nuts trying to figure out what you should have traded and when.



This is the statement I agree with the most. I wish everyone that reads this statement above, believes it and acts on it. But I know, no one will.

So... still aspiring?

For someone who wants to learn, where to start then?

I also assume what we are discussing is for scalpers and those looking at the DOM.

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  #12 (permalink)
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TradeTheTrade View Post
For someone who wants to learn, where to start then?

I also assume what we are discussing is for scalpers and those looking at the DOM.

No, This really isnt about scalping or trading by looking at the DOM. That never worked for me and I dont think it is sustainable as a means for regular income. In other words, you cannot consistently do that every day.

Your question is a loaded one but I will first counter that with another, do you really want to day trade? Why?

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  #13 (permalink)
Lutherstadt Wittenberg
 
 
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Hulk View Post
No, This really isnt about scalping or trading by looking at the DOM. That never worked for me and I dont think it is sustainable as a means for regular income. In other words, you cannot consistently do that every day.

Your question is a loaded one but I will first counter that with another, do you really want to day trade? Why?

I want to day trade and swing trade, a mix of the 2 of course depending on the trade I see.

Why, so I turn this into a business and trade for a living.

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  #14 (permalink)
Lutherstadt Wittenberg
 
 
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Hulk View Post
No, This really isnt about scalping or trading by looking at the DOM. That never worked for me and I dont think it is sustainable as a means for regular income. In other words, you cannot consistently do that every day.

Your question is a loaded one but I will first counter that with another, do you really want to day trade? Why?


I still fail to see why these concepts accumulative volume, absorption..etc dont work, these concepts sound very logical. I dont see how the market can move otherwise. It is all based on supply and demand, buyers meeting sellers..etc

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  #15 (permalink)
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TradeTheTrade View Post
I still fail to see why these concepts accumulative volume, absorption..etc dont work, these concepts sound very logical. I dont see how the market can move otherwise. It is all based on supply and demand, buyers meeting sellers..etc

Based on this post, I feel you didn't quite follow what I said earlier. Let me put it this way, the concept is sound but most beginning traders do not have the tools and the mindset to convert the concept into a consistent revenue stream.


TradeTheTrade View Post
For someone who wants to learn, where to start then?

Most people in your situation, lose whatever money they put into trading and are forced to give up. My guess is > 90% of people starting out, never make it. My guess is only 1% graduate to actually making money in the markets consistently.

I am not saying this to discourage you but to help you plan. The most important part of the plan is to have enough time to learn and enough money to survive the first few years.

The best way to get started is to get a job at a trading shop as an analyst and learn first hand. No one can teach you exactly how to trade, what to trade, which instrument, what time frame, scalping or swing. But if you can somehow manage this, its the most preferred route to becoming a full time trader.

The only other way that I know requires a few skills. These skills are programming and pattern recognition. Get historical data (the most detail you can get), write programs or visualize graphically to analyze data and identify patterns. For each pattern you identify develop a theory, backtest the theory and see if it has any credibility. In my estimation, for every 100 theories you come up with, you will find 5 that will be historically profitable. Maybe 2 out of those are actually executable and not all will consistently retain the edge. If you are well funded, start small and gradually raise your size otherwise, reach out to funds, prop shops and show them what you have done to get a job with them. Trade their capital. This is not a trivial thing to do. It took me years.

If you do plan to use your own funds, my advice to you is to not risk a single dollar in the markets unless you at least have a profitable backtest. Not all profitable backtests will execute the same way as backtests show. There is a learning curve to this and its quite painful.

In other words, if you find these concepts you talk about - accumulative volume, absorption etc logical, then prove it first on a few years of data (for CME, 3 years is good enough). Do not rely on third party tools, build your own.

If some of these terms are new to you, there is a lot of information on the forum about backtesting. This topic has been discussed many times.

Always ask yourself, what is it that you have that is better than your competitors - is it your program? your data? or your risk appetite (yeah, I know, you are saying what does this have to do with winning? but it is one the most important attributes of a successful trader). Try to find a yes for either of these questions before you deploy risk.

Good luck.

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  #16 (permalink)
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I use some notion of "order flow" as one pillar in my trading strategy. Yet, I agree 100% with the sentiment expressed here so far, mostly by @Hulk -- markets are exponentially more complex today than they were 20 or even 10 years ago. In fact, I'd say that they're more than just complex -- they are sophisticated. The participants are sophisticated. Yet, "order flow tools" are thrown around and have been the hot retail thing for some time now.


TradeTheTrade View Post
I still fail to see why these concepts accumulative volume, absorption..etc dont work, these concepts sound very logical. I dont see how the market can move otherwise. It is all based on supply and demand, buyers meeting sellers..etc

The problem is not that they "don't work" -- it's that you seem to be looking for a turnkey solution, dare I say, "indicator," that will tell you when the market is going to change directions, so that you can catch the bottom and top. I'm sure you're not consciously thinking this, but your question certainly indicates a line of thought that lines up with a need to find "the answer." "Does this work?" is not even the right question, because it seems to want a "yes/no", binary answer. Does it work? Of course it does. Trendlines "work" -- fib retracements "work" -- higher highs and lower lows "works."

The question is, do you have the skill set to find an opportunity, recognize it as actionable, and then take risk based on it?

If it were as simple as putting up a footprint/order flow chart and seeing volume and fading it, well, everyone would do it, and yes, then it wouldn't work. Markets are too complex and sophisticated for anyone to consistently extract profits without doing something that is different from what most people are doing. I don't think that the method has to be complicated, despite the complexity of the market. I don't think you have to be a math whiz, or anything like that at all. But you must have some advantage to compete with others. The trader must think different and do something different than what everyone else is doing, to achieve results which are different from everyone else's results.

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  #17 (permalink)
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josh View Post
I use some notion of "order flow" as one pillar in my trading strategy. Yet, I agree 100% with the sentiment expressed here so far, mostly by @Hulk -- markets are exponentially more complex today than they were 20 or even 10 years ago. In fact, I'd say that they're more than just complex -- they are sophisticated. The participants are sophisticated. Yet, "order flow tools" are thrown around and have been the hot retail thing for some time now.



The problem is not that they "don't work" -- it's that you seem to be looking for a turnkey solution, dare I say, "indicator," that will tell you when the market is going to change directions, so that you can catch the bottom and top. I'm sure you're not consciously thinking this, but your question certainly indicates a line of thought that lines up with a need to find "the answer." "Does this work?" is not even the right question, because it seems to want a "yes/no", binary answer. Does it work? Of course it does. Trendlines "work" -- fib retracements "work" -- higher highs and lower lows "works."

The question is, do you have the skill set to find an opportunity, recognize it as actionable, and then take risk based on it?

If it were as simple as putting up a footprint/order flow chart and seeing volume and fading it, well, everyone would do it, and yes, then it wouldn't work. Markets are too complex and sophisticated for anyone to consistently extract profits without doing something that is different from what most people are doing. I don't think that the method has to be complicated, despite the complexity of the market. I don't think you have to be a math whiz, or anything like that at all. But the trader must think differently, and do something differently than what everyone else is doing, to achieve results which are different from everyone else's results.

Very well put.

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  #18 (permalink)
Skokie
 
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I am sorry but anyone writing things like this works, that doesn't work because of their possible own experience with the markets, does a disservice to anyone aspiring to make consistent profits.
The truth is everything works and nothing works.
Order flow, Volume profiles, support resistance, patterns all are great tools of any tool box of a seasoned trader.
Trading is a very personal journey and different things work for different people. Just because something works/doesnt work for me, it doesn't mean it will work or not for someone else.

The journey of a trader is a pretty simple one. As an example if you are an intraday trader,,,have the right setup with live data so you can see the flow of orders (yes it works obviously). Pay attention to volume distribution, support resistance on multi-time frames, price rotations, correlation of the market youre trading with other instruments ...
After 10s of 1000's of hours of screen time and skill of preserving your capital while you learn, proper risk management you will just finally get "IT". You can then start to increase your size as you succeed.
No shortcuts, no algo programming miracles, holly grail indicators, gurus, chatrooms, simply time and effort.
There are some great educational sources out there that will shorten the learning curve, most are free.

Cheers and Good luck, Trading is the best most easy and difficult job in the World.

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  #19 (permalink)
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josh View Post
The problem is not that they "don't work" -- it's that you seem to be looking for a turnkey solution

Gold nugget, pretty much hit nail on the head. I wish I had understood this about myself when I started, would have saved me some money.


josh View Post
The question is, do you have the skill set to find an opportunity, recognize it as actionable, and then take risk based on it?

This takes LOT of time, its really not that simple to do it, even after having tools to do it, especially without having your own idea/plan to trade.

In older times martial artiest stressed on the fact that weapon is part of your body, just like your own limbs. In trading that is also true, whatever you are using needs to be "part of you" otherwise you wont be able to always win even with the edge.

I agree with everything Hulk and Josh have explained, you wouldn't get this even after doing ton of courses.

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  #20 (permalink)
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One other point that hasn't been mentioned yet is that visible orderflow may have vastly differing informational value depending upon the product traded.

The author of that reddit post is a short term interest rates trader. This means that he's most likely trading eurodollar futures, where most of the biggest players are spreaders, arbs, hedgers, and basis traders. One guy might be buying the redpack against the blues. Another guy might be selling the greens versus cash two-year notes while the next guy is just hedging convexity risk in his mortgage book.

The point is that the rates market is vast and deep, and the majority of traded volumes occur in OTC products - cash treasuries, swaps, forwards, term repos, and so forth. Whatever orderflow you might be seeing in, say, EDZ1 is going to be completely dwarfed by the volumes going through in the surrounding contracts, cash treasuries, and other related interest rates products. So I agree that trying to develop strategies based on orderflow concepts in interest rate futures is probably a fool's errand.

HOWEVER

The same market structure does not necessarily apply to other products.

The equity indices, for example, may still contain a lot of arb and spreading flows but also have much higher levels of outright retail participation, where certain small directional biases can still reveal themselves in the order flow.

And what about, say, the sugar market? Or cocoa? How actively are people trading the cash / futures basis in these markets? How much orderflow "noise" is being created by cross-asset spreaders, hedgers, or basis traders? I don't know the answer to this question because I don't actively trade these products. I'm only pointing out that just because one idea or concept may not work in rates, it does not necessarily mean that it won't have some value elsewhere.

The point is you need to know your market. Regardless of what you're trading, there's always a lot more going on than what you're seeing on your DOM and footprint charts. How much and how relevant that might be - and whether or not you can gleen any valuable information from it - will depend on the product you're trading and your knowledge of that product's overall market structure.

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