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Is Orderflow An Outdated Concept?


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Is Orderflow An Outdated Concept?

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  #31 (permalink)
Los Angeles, CA /USA
 
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Asked my fellow broker, Joe Easton, whom I like his market read what he thinks and he shared the following:

Good job doing your homework and asking the right questions. Part of being a good trader is to think rationally and independently. It is correct to search for information and be skeptical of the answers and test to see if they work in your experience. Every trader will have slightly different opinions and experiences and that is what makes a market.
To me orderflow is an outdated concept. Since it is a fact traders can hide order sizes and cancel bid or asks at anytime already pokes holes in the idea that this information could be helpful. I realize there are some successful traders that use orderflow but in my experience I do not find it helpful. I personally believe in technical analysis because you are using information that is a fact…prices traded. You cannot cancel a position already filled and printed on the chart. Using information that has already happened to me is more useful than using information that may or may not happen.

PM with any questions about Cannon Trading (800) 454-9572 (310) 859-9572. Trading commodity futures, forex and options involves substantial risk of loss. The recommendations contained in this post are of opinion only and do not guarantee any profits. These are risky markets and only risk capital should be used. Past performance is not necessarily indicative of future results.
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  #32 (permalink)
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First of all, orderflow is not a technical concept. It is based on fundamentals. When you look at it that way, your understanding of orderflow careens with a new angle. Yes, orderflow with technical mindset alone is an incomplete tool!


TradeTheTrade View Post
Hello guys, I am an aspiring trader and just recently learned about order flow and all these concepts. I was thinking about getting into NoBsDaytrading and learning about DOM scalping then I came across a reddit comment from someone who claims to be a STIR trader and claims that orderflow is the modern day technical analysis.

I will copy paste the comment here:

"I'd put it this way:

The way orderflow is used by retail is completely different than it is used by professionals.

All those concepts like delta, footprints, absorbtion are part of a snake oil sales armada just like the technical analysis hype fuelled the retail software industry 10-20 years ago.

"Orderflow" was more or less taught in prop shops (especially bond and STIR desks) and it worked because markets were much more isolated back then.

When you were able to spot a refreshing bid you could really identify what was going on since it most likely was one guy or one firm executing. Now it's old prop traders who ran out of edge who teach the concepts to the public.

Today all markets are correlated, so a refreshing bid could mean an algo that trades a weighted portfolio of 12 different assets, which is pricing your bid off of 11 other markets. He's refreshing at 20 now until one of his markets ticks down, then he's refreshing at 19.

There is so much cross flow between markets that it is nearly impossible to identify a trading opportunity aka. a price to lean on. Also, the big volume has moved from the lit market back to OTC since they are sick of getting robbed.

No as far as the professional users of flow goes, they are just screening the markets for stale orders to lean on, they have access to OTC venues to get an indication which direction the paper is trading and they monitor changes in correlations.

They also look into microstructure but opposed to the flimsy stuff Jigsaw, ATAS or Bookmap provides, they are modeling the FIFO queue in order to find out weither an order should stay for the 0+ trade or cancel/replaced.

Do they use delta or bids vs offers hit? Yes, some do, but it is just a miniscule part of the trading. More important, they monitor the trading of hundreds or thousands of instruments to get an idea which asset is out of whack. As others already mentioned, the data and creditlines necessary to trade on that level is so expensive that it is just not worth exploring for retail.

If you do not have a specific edge to exploit with your "orderflow" concepts, just don't bother programming an algo around it. Most of it is BS to be honest.


Good Luck
"



I would like to hear your opinions about what he said. I dont want to waste my time if what NoBsDaytrading used to work and now doesn't anymore.
I know I sound like a newbie because I am. I am trying to learn about the nature of the markets and how they work but after reading this I became skeptical of everything for some reason

Thanks


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  #33 (permalink)
Overland Park, Kansas
 
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For what it's worth...my experience with OrderFlow matches this very closely.


TradeTheTrade View Post
Hello guys, I am an aspiring trader and just recently learned about order flow and all these concepts. I was thinking about getting into NoBsDaytrading and learning about DOM scalping then I came across a reddit comment from someone who claims to be a STIR trader and claims that orderflow is the modern day technical analysis.

I will copy paste the comment here:

"I'd put it this way:

The way orderflow is used by retail is completely different than it is used by professionals.

All those concepts like delta, footprints, absorbtion are part of a snake oil sales armada just like the technical analysis hype fuelled the retail software industry 10-20 years ago.

"Orderflow" was more or less taught in prop shops (especially bond and STIR desks) and it worked because markets were much more isolated back then.

When you were able to spot a refreshing bid you could really identify what was going on since it most likely was one guy or one firm executing. Now it's old prop traders who ran out of edge who teach the concepts to the public.

Today all markets are correlated, so a refreshing bid could mean an algo that trades a weighted portfolio of 12 different assets, which is pricing your bid off of 11 other markets. He's refreshing at 20 now until one of his markets ticks down, then he's refreshing at 19.

There is so much cross flow between markets that it is nearly impossible to identify a trading opportunity aka. a price to lean on. Also, the big volume has moved from the lit market back to OTC since they are sick of getting robbed.

No as far as the professional users of flow goes, they are just screening the markets for stale orders to lean on, they have access to OTC venues to get an indication which direction the paper is trading and they monitor changes in correlations.

They also look into microstructure but opposed to the flimsy stuff Jigsaw, ATAS or Bookmap provides, they are modeling the FIFO queue in order to find out weither an order should stay for the 0+ trade or cancel/replaced.

Do they use delta or bids vs offers hit? Yes, some do, but it is just a miniscule part of the trading. More important, they monitor the trading of hundreds or thousands of instruments to get an idea which asset is out of whack. As others already mentioned, the data and creditlines necessary to trade on that level is so expensive that it is just not worth exploring for retail.

If you do not have a specific edge to exploit with your "orderflow" concepts, just don't bother programming an algo around it. Most of it is BS to be honest.


Good Luck
"



I would like to hear your opinions about what he said. I dont want to waste my time if what NoBsDaytrading used to work and now doesn't anymore.
I know I sound like a newbie because I am. I am trying to learn about the nature of the markets and how they work but after reading this I became skeptical of everything for some reason

Thanks


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  #34 (permalink)
SpeculatorSeth
Salt Lake City, Utah
 
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To say that the concept is "outdated" is certainly not true. It's still real data that has a significant impact on how an asset moves and should be factored into analysis. DOM trading also places an emphasis on the execution of a strategy, and that will always give you some edge.

But it is not nearly as reliable as we once held it to be. Part of it is just that a lot of moves are off correlation, and the order flow will be dead wrong when that happens. Part of it is that you're looking for such a short term trade that all it takes is a little noise to ruin the trade. Sometimes it will work for you every time, and sometimes it will fail every time. You have to know when the action is good which is something I've had a hard time consistently doing. So it becomes like everything else. Maybe you can find an edge in it, and that edge might not last forever.

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  #35 (permalink)
Longmont, CO
 
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I don't know if anyone's mentioned it yet but look up MBox on YouTube. https://www.youtube.com/channel/UCLKraR4UVif9dszy4DZLXtw

This guy's system uses order flow and if there's a way to use order flow, it seems to me this is one way to make it work.

That guys seems to be onto something. It helps me that he posts live trades. Except he doesn't tell you how many he recorded and doesn't end up showing.

Disclaimer: I have no affiliation with this guy. I haven't even bought his system. What he says appeals to me though.

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  #36 (permalink)
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CannonTrading View Post
I personally believe in technical analysis because you are using information that is a fact…prices traded. You cannot cancel a position already filled and printed on the chart. Using information that has already happened to me is more useful than using information that may or may not happen.


The whole notion of "order flow" trading deals with trades. Sure, the order book may be used, but I don't think it's implied that "order flow" trading centers around quotes.

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  #37 (permalink)
Boca Raton, FL
 
 
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Orderflow, is orderflow. Not FA or TA by itself. That is the whole point.

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  #38 (permalink)
New York, USA
 
Experience: Advanced
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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?

Great post and insight.

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  #39 (permalink)
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a lot of useful info to consider

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  #40 (permalink)
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Hulk View Post

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.

I find these 3 paragraphs from the above are the most undervalued and underpriced by the amount of information contained in them. Speaking from the experience.

I have also been (from very beginning) very skeptical about ability of the traders to earn consistent profit using DOM. Don't get me wrong, this has nothing to do with my opinion being high or low about abilities of others to recognize the patterns on the DOM ladder. It is more to the fact that because of electronic trading, the nature of the markets have changed significantly in the past 10 years, causing live traders to loose whatever edge they may have had.

I come from the IT / programming background and it quickly became very apparent to me that my biggest strength is not in watching the screens whole day long trying to catch the volume bump to lean on, but rather in ability to spot and recognize context patterns, determine (in very detail) what the conditions are for those patterns and then writing my own code to hunt for these conditions in the market to simplify my job as a trader. In other words, I want my bot (algo) to monitor the market, place an order for me along with proper risk management when conditions line up and I can take over and manage that trade from this point forward.

I am not that smart or delusional to think that I can beat the algos and millions of dollars invested in the super fast hardware, but I am smart enough to employ computers to simplify my job and do the 70% of work for me so I can focus on discretionary trading.

Cheers,

Mek.

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