Order Flow | Pondering Leading vs Lagging Indications

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Changes In Order Flow Precede Changes in Price

I have this pet theory that is built upon the Eco 101 concept that all changes in price are predicated on changes in supply and demand – regardless of the market.

Thus, if you could monitor changes in supply in demand for crude oil futures or S&P 500 futures, you would be able to more quickly determine the likelihood of a change in price.

As these markets have shifted from being transacted in trading pits to servers in data-centers, in my mind, it makes sense to point some software at the transactional data being published by these servers, and then simply jump into the market when the software notices changes in supply and demand that meet certain threshold levels.

Price Momentum Algorithms Are Always Lagging Price

Currently, a lot of folks, well at least hedge funds and prop trading companies, build trading systems based on changes in Price Momentum.

The challenge here is that since changes in price momentum cannot be calculated until after there has already been a change in price, their momentum output is always lagging changes in price.

Wouldn’t it be better to calculate changes in the momentum of the factors that change price, i.e. -Supply & Demand?

Wouldn’t this then offer you an indicator the leads changes in price instead of lagging it?

Wouldn’t this give you the possibility of a trade entry with a better price as you could know in real-time that at any moment price was likely to change at a rate that was significant enough to provide a profitable trade?

In a nutshell, using order flow momentum information as opposed to price momentum information, implies that you have an opportunity to glimpse into changes in price before price actually changes, as opposed using standard momentum indicators to give you a heads up after price has already changed.
 
Quote from TapeReader:

Changes In Order Flow Precede Changes in Price

I have this pet theory that is built upon the Eco 101 concept that all changes in price are predicated on changes in supply and demand – regardless of the market.
.............................................................................

In a nutshell, using order flow momentum information as opposed to price momentum information, implies that you have an opportunity to glimpse into changes in price before price actually changes, as opposed using standard momentum indicators to give you a heads up after price has already changed.
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Why don't you run up some real time examples on the ES for us to follow.

Please show us us how you handle market orders as opposed to limits.
 
HI JJF,

The charts run in real-time and the signals are generated and published real-time so that everything you need in order to monitor a trade (or historical trades) is always available on the site...no registration is needed.

There are a bunch of videos on the site that go through examples.

Video - Why Monitoring Order Flow Matters

Overview of How To Use Order Flow Signals

As for market orders, we steer clear of them and here's why.

The signals that are plotted on the charts represent conditions where the momentum of order flow has 'peeled away' from what we call the 'micro-momentum' of price.

When order flow momentum peels away from price, one of two things has to happen.

1. Order flow must pick up in order to support the move in price.
2. Price must reverse.

We cannot tell to what extent Order Flow momentum and strength will be coming in the future, only what is currently transpiring.

Thus, by using limit order entries, we are using a simple and easy method to confirm that price did in fact reverse, and thus, there is a higher likelihood of a profitable trade.

We feel that this is a much safer way to trade.

Also, if we were to publish trade signals to the web that required Market orders, there would be too much latency and folks would be scrambling to place their trades.

With limit entry stops we are trying to give traders enough time, and safety, so that these signals are valuable to them.

Does this make sense?

Please feel free to ping me with any specifics.

Hope this helps.
 
Nah, plenty of indicators that will tell of price change intrabar. The coder must find the correct set and the correct settings.

And. isn't order flow a fancy word for VOLUME:D

Plenty of volume work done right here at good ol ET.
 
Quote from TapeReader:

HI JJF,

...............................

As for market orders, we steer clear of them and here's why.

The signals that are plotted on the charts represent conditions where the momentum of order flow has 'peeled away' from what we call the 'micro-momentum' of price.

When order flow momentum peels away from price, one of two things has to happen.

1. Order flow must pick up in order to support the move in price.
2. Price must reverse.

We cannot tell to what extent Order Flow momentum and strength will be coming in the future, only what is currently transpiring.

Thus, by using limit order entries, we are using a simple and easy method to confirm that price did in fact reverse, and thus, there is a higher likelihood of a profitable trade.

We feel that this is a much safer way to trade.


Hope this helps.
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How can you tell a Limit from a Market order
 
Hi RCG,

I concur that there is lot's of great volume work being done.

Yet we try to make a distinction between Order Flow and volume.

Most volumetric studies aggregations of volume, or uptick\downtick, or volume profile, or bid\ask type algorithms.

In my mind, it is not so much about volume, but rather, how will the next series of transactions affect price?

For instance, we continually analyze order flow to and apply custom metrics to different transaction patterns....as different rates of order flow, under different market conditions will have different outcomes.

But with regards to nomenclature, I think that if you categorized this work as 'volume' analysis, you would certainly be correct.
 
Just read this in full.

Order flow is fine and dandy. I agree that liquity must dry up before price moves in either direction. The problem is all the order types offered by exchange. Iceburge will only show a percent of the total quantity. So an order flow may think that there is only so much, in reality, you may have a whole much of iceburgers sitting at a price point. Also, people stuff quotes into L1 with IOC.

Any thoughts around address those concerns?
 
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