• Document: Introduction To Order Flow 21 st Feb, 2014 Peter Davies Jigsaw Trading Presumptions & Objectives Some people have never used order flow Some people use one order flow tool but don t kn...
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Introduction To Order Flow 21st Feb, 2014 Peter Davies – Jigsaw Trading Presumptions & Objectives • Some people have never used order flow • Some people use one order flow tool but don’t know how to use another (e.g. Cumulative Delta vs Footprint) • Some people use order flow mechanically following a few rules they got off the web/trainer. (e.g. Cumulative Delta divergences) • Our goal today is to get you to understand the mechanics of price change and what order flow tools show you about the change • All Order flow tools should make sense after this, you should understand conceptually that the tools are interchangeable • These sessions are geared towards daytrading, I personally do not use order flow for anything else. • You will get something you can take away and use today. Order Flow Benefits • Refine/confirm a trade entry. Before OR after the entry. • Set Bias • Define a ‘second entry’ – Markets do ‘stair step’ and ‘hidden backstops’ can get created once a move is under way • Enter the market at a point where there is a high probability of a short term “pop” in your favor. • Scalp ticks/ultra-short term trading – Location, location, location… What Is Order Flow? • Order Flow components – INTENT • Resting/Limit Orders – Market Depth, Depth & Sales – ACTUAL • Executions – Volume, Volume Profile, Time & Sales, Reconstructed Tape, Summary Tape, Footprint, Cumulative Delta, Depth & Sales • Order Flow Perspectives – High level/Long Term – the 100,000 foot view • Cumulative Delta, Volume, Volume Profile – Medium Term – the 20,000 foot view • Cumulative Delta, Volume, Footprints – Short Term – the 1,000 foot view • Volume, Footprints, Market Depth, Depth & Sales, Time & Sales Why does Price Move? • Why does price move? – A very different question to “why are people buying here?” – More buyers than sellers? • Definitely not. Every buy is a sell. The number of buyers & sellers is the same (in terms of numbers of contracts) – Supply & Demand • Not in the traditional sense. Only in stocks is supply finite in any meaningful sense “the float” and of course this can cause scarcity. Even then, supply is rarely an issue in stock markets, yet prices still fluctuate. • In futures, 99% of people don’t take physical delivery and it is just contracts traded. Contracts get created and destroyed as people trade. – More aggressive buyers than sellers? • Possibly. Perhaps ‘less patient’ buyers than sellers is better. • Perhaps a better question is “What stops price from moving?” Liquidity Liquidity – Resting Orders Liquidity – Resting Orders Liquidity – Resting Orders Bids Offers Price Summary • Market Orders eat buy side/sell side Liquidity AKA Limit Orders. • When there are no more Ask Limit Orders to eat, successive Buy Market Orders will eat higher Ask Limit Orders and price will move up. • All Order Flow Analysis is a variation on this theme. • As price moves up, it takes time for buy side liquidity to built up behind the move BUT you are moving into an area with sell side liquidity above. In this situation if the amount of buy/sell market orders equalizes, price will move DOWN. • This relative lack of buy side liquidity behind up moves is known as a liquidity vacuum. It is relative, it does not mean that there is nothing behind. • Different players take different amounts of time to fill in those orders behind a price move. HFTs/Market Makers would be first. • “Lines in the sand” get created behind you as price moves up. These are the second entries created once a move is under way. • Don’t just look ahead – keep an eye on what is behind you. So what? • Spikes vs Churns – Which is the stronger move? – A sudden spike up looks stronger but the pullbacks are wilder because the liquidity hasn’t built up behind the move yet – Churns are slower and appear to provide less opportunity to jump on board. This makes trend days problematic. • Retracements – Can be identified by the lack of volume/delta PARTICIPATION in the move. – You don’t change bias until you see the participation – Ticks down on smallish volume means bidders are stepping aside – and why wouldn’t they? Up moves are supported by rising “lines in the sand” but there is no reason to do this on every tick. • Stair stepping – As above, markets stair step up – This doesn’t mean that no-one shakes the tree from time to time because traders put their stops in obvious places. Reversals • Basic elements of a reversal (long to short) 1. Absorption. Offers stay firm in the face of continued buying. Often this is with an iceberg, often this absorption/a

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