Great question. No doubt many have the same one and many others have posted their answers. Once in a webinar I offered this definition on a slide:
"Monitoring prices, volume and order fluctuations for specific conditions in order to predict the market’s immediate response."
I generally don't read from the slides (as I assume you can read just fine), so I bet I had some pretty smart words for making sense out of that statement but let's face it - that's some vague and general nonsense. So let's break your question into 2 parts...
Question 1: What is order flow for you?
The word "order" assumes you're talking about quotes, not trades. This implies that somewhere in your process you're interested in the order book or market depth rather than just the time & sales data - which would be trade flow? Not sure if that's a term but if all you're doing is plotting trades at/above the ask and at/below the bid then you better have some way of associating them to the best bid and best offer (or full market depth) or else I'm not sure you can honestly say "order" anything.
So for me that's step 1. A recognition that TRADE (ask or bid) must be somehow relative to the quotes (bids or offers). There are lots of complex tools to analyze this but honestly I think it's pretty simple to just look at the depth and compare the print. The DOM is too damn complex given the participants and their various motives to stake your fortune on the numbers that change faster than your platform can even display them. Just a basic comparison of more, less or about average trade v. bid/offer is sufficient for me. It tells me if depth is being added, removed or slammed. Unless that relates to someplace on the chart I'm looking for a trade - I could care less. Keep it simple and keep your scope narrow.
Step 2 for me is the ?trade flow? part. Again, not a common term but that's what they are - trades that have been struck at the bid or ask - not orders anymore. This breaks down into 3 categories with 3 requirements...
Requirements:
1. Bid and Ask volume is compared relative to actual market dynamics - this is where I seem to stand alone. Conventional wisdom (read: applications built by programmers rather than traders) says that the ask volume minus the bid volume at a price dictates an imbalance in trade. I say blah and when given the opportunity to do a futures.io (formerly BMT)F webinar in the near future I'll explain this point in detail and willingly accept the hate mail and knock-offs to follow. I'd rather offer the knowledge than sell a secret.
2. Comparisons of trade are done only in directional movement. If you look at trade over a series of prices that's had the opportunity to move back and forth, up and down - over and over... What value could that possibly provide other than maybe a profiling distribution? I'm not interested in analyzing churn. I need to see a move and process what is happening in real time.
3. No engagement of volume at a single price will provide actionable feedback. We have to see a sequence of trade across several prices to even consider an event.
Categories:
1. Momentum - when is the flow of orders & trade indicating directional action is taking place and what's a realistic expectation for the move? And more importantly does my market perspective support this "move" as being important?
2. Exhaustion - when is the flow of orders & trade indicating the potential for directional action to end - at least temporarily? Again what's realistic for expectations and how does it relate to my market perspective?
3. 2-Sided Trade - the death of all noobs. When do we see bid and ask trade indicating both sides think they have a good reason to engage the market in such a way that almost all longs and shorts both take a beating? Learning to stay out of the market is probably more important then learning when/how/why/where to get in.
Yikes, that was not so simple... So what is order flow? Its a process of associating actionable events in the market data with actionable decision points dictated by your trading tactics/strategy/etc. Is it for everyone, no. But is it complex? Not at all. It's just fluid which many traders hate. Of course many traders aren't really traders...
Question 2: Why would a trader uses what appears to be complex tools when most of us as we evolve want to simplify things?
Agreed. Order Flow is not for every trader. It has a learning curve and it also has practical limitations. But geez, tell me anything in trading that actually works for "any market in any time frame". I get the same crap in my inbox and mailbox you do. Applying something to your trading is work and it takes a realistic data set to determine if any value at all is brought by its inclusion. My experience is that 99% of the trader-consumers (you use something until a few stop-outs and then buy something new) rely on 2 components to engage the market - if they ever really engage the market... (1) Historical fact and (2) Future projections. Isn't it really funny that every single thing you encounter as a trader is IN ALL CAPS required to tell you that "past performance in not indicative of future results"? It's on every email, contract, click bank, website, platform, webinar and account form. Yet what do they do? Back-test a strategy and project future performance. Wow. Sounds brilliant, huh? What's missing from the equation?
Successful complex business systems (and we'd all agree the markets are complex systems) require more than history and projections to be effective. They need current data as well. History is objective - it has happened. The future is subjective regardless of your model. Current data as an equal operator in the equation applies balance to the objective-subjective scale. It makes the analysis adaptive. Order flow represents the current data analysis that many are missing in their historical-future dream world. Not all. And I stress that.
The tools may look complex but they're really not... And Order Flow at it's core is ridiculously simple. I usually teach new clients the 1-2-3 categories above in less than an hour. I was recently doing a training on location for a firm and everyone was surprised when we were done with the Order Flow portion before it was time to get another cup of coffee. That doesn't mean that they left the conference room and were instant experts but they knew exactly what to work on for practical application of the concepts.
My tools and training are based on 4 things and I will rank them on complexity:
I promise to stop with the War & Peace style posts but given that these first questions/answers might spark something of value for others to contribute, I went all out and long winded.
DB
If you have any questions about the products or services provided by Order Flow Analytics, please send me a Private Message or use the BMT "Ask Me Anything" thread.
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I would like to note for everyone that DB will be on futures.io (formerly BMT) for an Order Flow webinar, April 4th @ 4:30 PM ET. There will be a separate event thread for that as we get closer, and it is a full presentation + Q&A like normal webinar events.
But as I mentioned in post #1 and as part of this "Ask Me Anything" series on futures.io (formerly BMT), we'll be doing some more casual and shorter time frame webinars as well, limited to say 30 minutes, with no prepared presentation -- instead just Q&A and see where it takes us over the 30 minute time limit. Those sessions will be posted and uploaded to this thread only.
I'll work with DB to see if we can get one scheduled this month.
First, let me disclose that I am the owner of Jigsaw trading - not sure if we compete or compliment but I have seen an overview of your products and they look pretty neat.
Based on your experience - what is it that is bringing so many people to Order Flow now? 18 months ago it was "Price Action" everyone was raving about and now Order Flow is very much in vogue. It is certainly being discussed much more on the various forums.
It's almost as if there can't be a 'next' fad because you can't drill down much lower.
Is this an awakening on the behalf of retailers or is it something you think will become less popular as something new comes along?
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1) which vendor provides those 10 depth market levels?
Zenfire, in balancing their demands over loads, provides five levels, as I observed, and frequently turns off access to the historical servers even in the aftermarkets (relative to EST)
2) on thinly traded instruments relative to the massively high volume (bonds, sp5's and currencies), how well does the approach to OFA really work?, as with thin, so much becomes either stretched out or muted in interpretation or followthrough?
thanks
great website, btw.
(pm me, that way I will certainly know I got answered)
Maybe cognitive bias has something to do with it. Given you are a vendor and promote similar ideas you may focus more on the words "order flow" than the average Joe. The footprint and time and sales come to mind of many when these words are mentionned but the concepts associated with the order flow are often presented within this tunnel vision.
On the flip side it is possible that your own cognitive bias leads you to that conclusion and that there actually is more discussion of this side of trading nowadays.
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one question that I always wanted to ask of teachers of these methods were along these lines...
A) do you teach your students to avoid the pitfalls, traps and tell-tales that you teach them to look for?, namely keep your:
A1) stops server side so as not to be spotted, and then only allow or preprogram the software to release the stops, when market is touched? or similar?
A2) using that premise, when the server side orders for stop and targets are managed in that manner namely hidden from the general order book, then how do you account for the change in or increase of bids/asks at the offer?
simply put, actually, there's no way to simply put this concept and question.
if you keep your stops/targets hidden and submit when market is touched, then they show up as recently added, and then contribute to the concept of increased participation (valid conclusion); increased demand (invalid conclusion as these are defensive orders that should have been placed upon order being filled)
A3) since most of the conclusions derived from watching the at bid cross price and the orders and the initial verses most recent quantities at that fast moving level, then what can be derived from that analysis, other than sheer interest in market activity?
what can you do with that instant analysis?, place another order to further participate?, pull other existing orders?, confirm that markets are fat?, confirm that markets are thin?
Watching only Orders coming in and vanishing (pulling) wont help in interpreting current state , so
the Flow of Orders (quotes) actually by itself doesent help alot , if we talk about limit orders
but a Market order is also an order , and a market order (prints) as u can see on the TS , is called Tape Reading ... so no need to call this orderflow
and Prints are more valuable then Quotes
Yes watching How the Resting Orders act in conjunction with Prints is essential , but a DOM can be just fine seeing
that , like if we see rather small*(below average for the time beeing) contract size on the BID lets say 50
and on the OFFER we see 250 and we see that the 50 BID gets Hit several times , but we see that order Refreshing
then we may have evidence of an Iceberg for example... this actually shuld make you vary that someone wants to
hide the buying ... ie. the Market refuses to go OFFER even when it appears to be weak , should raise a redflag .
. and u should think twice before shorting
*depends on current market action (volume traded/ orders coming in and out)
so watching Prints in Conjunction with How the Market reacts to it is essential
actually its more important to see the markets reaction on a certain action as on wich side its happening,
If we see Prints going Off heavily and on high frequence on the OFFER but the market refuses to go up
we cant speak of a strong market as implied by the first impression of demand or buying pressure is strong (prints
on OFFER) but the actual result of that frantic buing is zero to none .. .. also where that happens is essential
here...(resistance , swing high , etc..)
Yes and no , depends on what type of trader u are , but u can see absorbtion, stuffing and whats happening
in a range aswell ..
does the byuing pressure increase? does supply gets absorbed? do we tick higher ?
do we make higher lows in that progress ?
True to that , putting as many odds in your favour as possible , its especially interresting to see how the market
acts if we visit a level of , for example previous buing again.. and watch how it acts now... more buying? no more
buying? etc. .. its a law that comes into play here and thats the law of cause and effect (event)
SO we can say then , that OrderFlow is watching Market Depth and Prints .. and how the two work in Conjunction
to each other ? so actually nothing new here init? .. just a fancy Buzzword Afterall ?
i guess the Software u Developed , is just another tool , wich may be good for people who cant see the above
actions on the DOM .. if it helps people who overwehelmed by watching the DOM , then good..
but actual all this action can be seen by Simple HLC Bars and Volume(activity) Plotted below ..
yes we dont see on wich side the Prints go off .. but its not neccesearly.. what is really important
is what price is doing .. or dont...
PriceAction =
The Result in Price Change after Trades/Transactions are executed
OrderFlow =
What Happens Before PriceAction
Correct ? Right ?
please comment and add or critcic my POV.. TY
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Isn't every software just a tool, a utility that bestows its benefits in varying degrees based on the user?
Sure, bid/ask analysis with an eye on immediate market depth can be accomplished by seasoned DOM traders. Do you mean to claim that you can watch the DOM for a few hours and know exactly when volume clusters ramp up in magnitude, sometimes a precursor to an immediate reversal or continuation, and you do that for multiple instruments simultaneously?? Even if you are blessed with photographic memory, why put oneself through that level of strain undertaking an activity that is stressful enough to begin with. Software, among other things, is supposed to make somethings we already do, easier.
It appears you went to great lengths to agree with most points on DB's explanation only to arrive at your main point that you don't need any software because you are really really great! Orderflow edge is not as it used to be since block orders are a thing of the past. But for scalpers, there is still plenty to exploit. By the way, any volume analysis tool that doesn't live and die by cumulative delta is already a cut above the rest.
P.S. I am not affiliated with DB nor am I a customer.
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