Order flow trading

J

JJayFX

I have learned a lot over the years, frequenting forums and meeting some very intelligent people. Now it's time to give something back so here it goes. There are bits & pieces of value that can be picked up here & there on the net but pulling all the pieces together and making sense of them...well...that's not an easy task to do.

That's what I'm going to do here. I'm going to share how I trade, what the components to my trading are, and hope it helps others that - like me some time ago - are looking for the important pieces of the puzzle.

I view my trading as centered around orderflow. There is no clear definition of what orderflow trading is...and there's a lot of hype around the term "order flow". The way I view it is that OFT is a mindset. Instead of just looking at charts, I go one step ahead and think about what other market participants might do. It’s all fear and greed in the markets and we can see this every day in the market. You are aware how price is moving, in which manner it moves (not as good as bank flow info, but price action gives some good insights), and your knowledge about other participants helps you avoid common mistakes and finally, your knowledge about market inefficiencies will help you combine all this and exploit those opportunities in live trading.

Getting into the nitty gritty stuff:

1. I trade FX, YM, Crude, Gold, Silver and apply the same template to all of these assets
2. I use the economic calendar to see what the market's expectations for the events of the day will be
3. I use various news sources (orderflowtrading.com's free news feed, Kathy Lien's analysis, various twitter sources, some bank reports I can get my hands on) to derive my take on the "sentiment" behind the assets that look most promising
4. I use simple charting templates to structure my trade entry and stop loss.

I'll explain more about my orderflow trading style as the thread progresses...and of course if it's of interest to anyone :-P For now, onto a couple of trades taken recently. During the summer, I tend to relax and only take really really really high quality setups when they appear.

Here's one that i got unseated from yesterday:

Long UsdJpy

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and then there was a nice flow-based setup on Crude:

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Today I'll be watching the Aussie at 9320s. I will not be touching YM

:)
 
I place horizontal lines on my charts. They are my "preferred weapon", better than any indicator. From my experience, I seem to understand that large players leave a "footprint" on the charts and these footprints are quite evident. They can be seen as:

1. Levels of prior resistance becomming support or support becomming resistance (flips)
2.Evident swing levels
3.Evident orderflow imbalance levels (like a breakout scenario)

So what I like to do is trade into these levels or away from the levels, using short term trader's stops as a tell-tail that the tide is turning.

Stop orders are orders to buy above the current market price or sell below the current market price. Most of the time, a buy stop order will be executed when it’s price has hit the market's offer and a sell stop order will be triggered when it hits the market's bid. The stops orders will be then converted into market orders and will consume liquidity.

But there is something unique about stop orders that I have learned from 2 sources mainly: Trading & Exchanges by M.Harris and Orderflowtrading For Fun and For Profit by D. Goldsmith. It's true: the book left a certain impression on me and I have since identified my trading style as an orderflow style fwiw :-P

Stops can also provide liquidity. Let’s say I’m a large trader (I'm not...but just bare with me) looking to sell an asset. The market price is currently 00/02 (I can buy at 02 and sell at 00). I don’t want to sell at 00 because liquidity is not good enough for the amount of contracts I intend to sell. I’m aware that there are a lot of buy stops above the price of 05 from participants that are already short.

Other participants are also aware of this and price will probably be attracted to 05. I will therefore set my offers above 05 (let’s say 06 and 07) and gain advantage from the stops. How? the buy stops (like trailing stops) from the traders that are short into 00 will be transformed into liquidity for me. My shorts will be filled and price is likely to move quickly in my favor as most buying came from shorts that were stopped out. Price is not attractive for buyers and will likely drop quickly.

Do we call this a stop hunt? Sure...and it's common in ALL markets, not just the FX market. Large traders need pools of stops orders for liquidity, so that when they unload clips of 10-15Mil (in FX) per trade, they have liquidity for their purposes. Big players can't just execute in the middle of nowhere. They would receive slippage which, when dealing with big money, means unnecessary losses.

I draw horizontal lines on my chart to highlight stop levels that can be used as liquidity. Simple always trumps complex where money in involved and I believe that looking for the most evident levels will keep me (and anyone else) from lurking in treacherous waters.
 
So we've got some data coming up:

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Regarding Gbp, I think we're still range bound and will look to see what happens AFTER the data.

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Is it enough to justify a trade? For some maybe, for others maybe not. The important thing is that we had planned for some sort of a reaction. The reaction may not be tradable but as long as we're identifying levels/zones from which to participate, we will be better off in the long run. This game is a marathon based on consistency and longevity, not a sprint.

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Regarding Gbp data: the market diddn't like the lower hourly earnings but the data was overall positive. The bullish stance we had pre-identified from the economic calendar, coupled with the price action, tells us that the market was probably a bit too long (or a bit not-interested) going into the data and a bigger catalyst (or fresh liquidity?) is needed to propel it higher. I stick with the plan illustrated above.
 
Thank you for taking the time and effort to begin this thread. I think this is quite fascinating, and I haven't seen material of this quality on ET for a while now. I appreciate your efforts and I am very intrigued to go through more content on the subject as you are able to provide it.
 
Thank you Magic, I hope my thoughts get conveyed in a clear manner. That said, onto today's business. First stop: Eco Calendar.

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And regarding the action on the Euro for this morning, nothing is really inspiring me to take action yet. Market is waiting for data and opex will anchor price a little. No clear edge in the market expectations going into CPI. The only thing that's interesting is the opex barriers which - if defended - could generate a pop in the Euro to the upside seeing that we're at the recent range extreme. But some sort of bullish movement is needed before stepping in. So far we've only created a base around here.

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Also, sentiment on the Euro is currently quite negative so we really need to see some sort of surprize to the upside before stepping in.
 
Well we've got an early-bird reaction off yesterday's lows/current week's lows (reactive stop levels) a couple of hours before the CPI data. Depending on your risk tolerance, you might have had an excuse to engage or take it as a tell-tail and wait until after the data. Generally speaking, top-tier data can drive the market both ways and it's a 50-50 bet trying to anticipate the reaction. Personally I don't participate right before the data. If I get a setup (like this morning) at a key area a couple of hours prior, then i'll take it with half my normal risk. But I have learned that it's best to sit out of top-tier data and wait to see if the reaction is exploitable.

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Let's see what happens in 10 mins...
 
Usernamehere said:
Nice JJ, what do you think it will take to attack and clear the oft protected 0.9325 level?
More...

Hey Usernamehere,

thanks for stopping by. AudUsd has put in a higher low today and is rotating nicely from the touted levels from yesterday. The guys from OrderFlowTrading this morning touted some decent selling interest around 9400, which is also this week's high so it makes perfect sense. Price might very well stall up there and turn lower again.

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From a sentiment perspective, the RBA wants a lower Aussie and all it would take to break 9320s is some decent jawboning from them, and maybe a tad of worse CNY data which influences the Aussie quite a bit.

Do you have a view on the Aussie you'd like to share here?

Cheers,

JJ
 
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