TradingTheTape Software

Automated Order Flow Analysis

Summary

This is a serious website targeting serious traders only.  A serious trader realizes trading for a living is the same as any other full time profession – it requires extensive education initially followed by a lot of hard work. For a profession in trading the education must provide a workable/profitable method and the hard work (focus) must improve the recognition and execution skills required to execute that method.

This website offers traders three months of highly focused training on how to trade using order flow analysis exclusively. There are no shortcuts – no ‘magic’ indicators – no ‘black box’ automation. The software employed here is merely a tool for analyzing the order flow and is not a final solution. Users must learn to interpret that analysis and respond accordingly – hence the importance of the training.

Having said all that, what is required to become a successful trader using this method? First and foremost a commitment to attending training. Training includes one hour Monday through Friday at the open plus an additional hour on Wednesdays and Saturdays – to learn the theory and how to read Market Context. In addition users must spend several hours each week watching training videos and using Market Replay – to develop their recognition and execution skills.

Subscribers using this training model and trading method are, on average, profitable in simulation within three weeks trading one hour per day. All that is required therefore is that you attend training, listen and make an effort. Traders searching for a simple solution to trading that requires little or no effort should look elsewhere as you will not find it here.

Our Goals

The following goals are readily achievable by trading based solely on order flow.  No DOM, no T&S, no indicators – only Order Flow.  Not unlike trading on the Exchange Floor.

  1. Only trade markets with clear and obvious Market Control (allowing low risk and larger size)
  2. Limit entry risk to 0-1 ticks maximum per trade (0 is achieved by promptly scratching trades that do not meet our expectations) (2 tick losers are unacceptable and are typically due to trading poor Market Context – such conditions are to be avoided which is why we train every morning for an hour to learn how to read Market Context using Order Flow)
  3. Analyze Market Strength on a tick by tick basis in order to transition from scalping ticks to scaling in larger size and trailing bigger moves exiting only when Order Flow says to exit
  4. ALWAYS limit downside risk and NEVER limit upside gain (users learn to make $10,000+ profit in a $10,000 account risking no more the $200 for the session and no more than 1 tick on any trade  more…)
  5. Constantly work to improve recognition and executions skills via market replay and additional training Wednesday and Saturday

Clearly the majority of sessions do not allow users to double their account size. However the goals remain constant and limiting risk while not limiting gain does result in long terms gains. When the big moves come along we are ready with larger size and in the meantime have not dug a hole from which we may never recover.

History

The coding journey began in 1967 on an IBM 360 and punch-cards. Then a real-time system on an SDS 920 mainframe. PCs had not even been thought of back then and there were no cell phones let alone smart phones.  The trading journey began in 1981 in commodities with analysis on a Radio Shack TRS-80 looking for a correlation between the London PM Gold Fix and the US Gold Open. Hogs, Live Cattle, Soybeans, etc. were also on the menu and you still had to place orders via a phone call to your broker.  Circa 2000 online daytrading of stocks was the focus without the broker phone call and without automation.  Circa 2005 enter eSignal, back to futures and full automation, which ultimately led to NinjaTrader and TradingTheTape.

TradingTheTape was founded in 2006 to study how volume affects price action and market momentum. This led to automated trading strategies that placed and managed trades based on criteria predetermined by the user and without any further input from the user. These systems would run on a server non-stop full auto for the full three months of the future contract filtering out poor sessions and cashing in on good sessions. Year and many tens of thousands of lines of code later… scrap everything. Fall of 2012 enter Order Flow making every other approach to trading a complete waste of time and money. Prior to Order Flow all TradingTheTape strategies and indicators were based on reaction to market action while it is now obvious today that Order Flow causes the market action making all the industry standard indicators and trading strategies obsolete.

Since January 2013 all TradingTheTape software development has been focused exclusively on automated order flow analysis for both scalping and trend trading, for both discretionary and fully automated program trading, for both thick and thin markets. Today TradingTheTape strategies run on Chicago-based servers that can be controlled via a smart phone. A long journey well worth the wait…the only regret being it took so long. It does not need to take you that long … read on.

My name is Scott Maxie and I live near Toronto, Canada. This is my personal trading system with which I trade every day – no indicators, no DOM, no T&S, just Order Flow analysis- and the system gets better and easier every week. Any new ideas that benefit my personal trading are incorporated into the code and shared with subscribers as a code update. Software and method updates occur as the synergy generated from this website pushes the evolution of the software and trading method forward. In fact it is accurate to say that without the past interaction with subscribers I would not have discovered Order Flow trading and the software and trading method would not be what they are today – literally.


 “Order Flow Determines Price Action ~ To See The Future, Watch The Order Flow” 


Why You Are Not Profitable – The ‘Indicator Myth’

Have you ever noticed that indicators do not work?  That is, they work, you just cannot make any money trading with them? The fact that you are reading this webpage is an indication that most probably

  • you are a non-professional retail trader
  • you trade using indicators for entry and possibly exit
  • you have been chasing markets with 1 lot size and large stops for years
  • you have never been consistently profitable, and therefore
  • you are still searching for that ‘magic indicator’ that will reveal the ‘secret of the markets’
  • you are one of the 98% of ALL traders that do not have a clue how markets work – you are caught up in the ‘indicator myth’

Think about it for a minute. Do you really think indicators came from the Professionals and Market Makers on the Exchange Floor? Of course not. Professionals on the floor ARE the Order Flow. They have always and will always only trade based on market Order Flow. Indicators then obviously were created by outsiders in an effort to gain insight into how markets work. Sad and absurd as all they had to do was watch the Professionals by watching the Order Flow.  Trading based on Order Flow is the closest you will ever come to trading as a Professional on the Exchange Floor.

By far the primary obstacle keeping traders from being successful is themselves and their approach to, and lack of understanding of, the markets.  It is said that 98% of traders lose money – the same percentage of traders using indicators. This would leave 2% that actually know how the markets work – the same percentage of traders not using indicators? Of the 2% most of those are the professionals that are actually controlling the markets with their overwhelming size. So what are the differences between these two groups?

  • professionals vs retail traders – When a 1000 lots hit a price in the ZB do you think it came from 1 or 2 professional traders or 1000 non-professional retail traders all hitting the same price with 1 lot at the same time? Clearly it is coming from the professionals that have extremely large accounts, low margins, even lower commissions and clearing fees, seats on the exchange and ultra-low latency.  If you were placing that kind of size do you think you might be able to ‘influence’ the market? Said another way, do you think you could place that kind of size WITHOUT influencing the market? Professionals ARE the order flow that moves the market and everyone else is just along for the ride. For example, if you are long 1000 lots in the ZB and know you are 2000 of the 2200 size on the Inside Bid and the market is not going up, what do you think would happen if you covered and pulled your bid?  Would your actions drop the market? Of course they would. This is the kind of advantage that market makers and other extremely large players have in the market. Conclusion: if you are still trading like a retail non-professional and not WITH the professionals then your main obstacle is YOU and you must change your mindset.
  • order flow vs indicators – Do you really think professionals are watching the same indicators that you are watching to enter the market?  Or are they watching market reaction to order flow and joining or covering and reversing? Do you think professionals with 1000 lots in the ZB are trailing with a 5 tick stop and willing to accept that kind of drawdown on that kind of size? Or are they watching market reaction to order flow in order to exit within 1 tick? Conclusion: if you are not entering and exiting when the professionals enter and exit then your main obstacle is YOU and you must change your mindset. 
  • mindset - The common theme here is if you are still one of the 98% of traders comprised of non-professional retail traders chasing markets around with large stops and using indicators to make your decisions, you just do not get it and your chances of ever making a living from trading are slim and none. Change your mindset and change your future. Learn to trade a market WITH the professionals where you have 0-1 tick of entry risk thanks to clear and obvious market control by the professionals.

The Good News – The fact that you are now researching Order Flow is a step in the right direction. And when you learn to trade Order Flow in the context of the market you will be well on your way to consistent profitability – trading for a living. Keep pursuing order flow. You are finally on the right track.


TradingTheTape – Automated Order Flow (Tape Reading) Analysis, Trade Execution and Management

Is this system right for you?

This system is not for everyone. It may or may not be right for you:

  • IF you are a prop shop DOM trader and would like to benefit from automated analysis of the DOM and automated order placement and trade management based on that analysis, then YES
  • IF you are a prop shop DOM trader and instead of just trading volume spikes would like to trade the order flow in the context of the market, then YES
  • IF you are a prop shop DOM trader and find it increasingly difficult to trade based on order flow the thinner the market gets, then YES
  • IF you are an experienced trader that has been chasing the ES around with a 10 tick stop for years, have never been profitable and have no idea why the ES keeps coming back in your face, then YES
  • IF you are an experienced trader and think that you should always buy large volume hits on the Inside Ask and sell large volume hits on the Inside Bid (a popular misconception), then definitely YES
  • IF you are trying to learn to trade using the Time & Sales and DOM without success, then definitely YES
  • IF you are a novice trader and looking for a comprehensive training course on market dynamics without being subjected to a lot of hype on the latest magic indicator, then YES
  • IF you are a novice trader and would like to start your trading career on a solid foundation including limiting risk, managing your cash and avoiding the typical bad habits of 98% of all traders, then YES
  • IF you are serious about learning to trade for a living and willing to make the required commitment of time and effort, then YES
  • IF you are looking for a fully automated ‘black box’ system that you just turn on and count the profits, then NO
  • IF you are not willing to make a serious effort to learn how markets actually work, then NO
  • IF you are not willing to make a 3 month commitment to study, practice, attend the Live Training Sessions and/or the Live Trading Chat Room, and otherwise take full advantage of the unlimited support, then DEFINITELY NO

If NO, then please save your money, your time and my time. If YES, then please read on and join us.

Order Flow Trading is an advanced method of trading that takes some effort to learn and at the same time it is the ONLY way to trade. Trading based on indicators will always result in late “after the fact” trades that require large stops, higher than necessary risk and therefore small size. Personally I have not looked at ANY indicator since January 2013 and have not looked at a DOM or Time&Sales window since February 2013.  In my opinion you must learn to trade based on order flow to become successful. With any other method you are just playing into the hands of the professionals. TradingTheTape is more than software. Rather it is a trading method based solely on order flow with the software as a tool.  Personally I found it difficult to analyze order flow and execute orders manually from the DOM so I created the software tool.  With the software automatically analyzing order flow and executing and managing trades, it might as well also manage risk. And if it can do all that automatically on my local computer it might as well be on a server in Chicago to reduce the Exchange data and order routing latency inherent with geographical distance from the Exchange.


FAQ - If your method is so good then why are you sharing?

The first, and most important, reason is because if I had not started sharing back in 2006 I probably never would have found Order Flow.  The synergy that comes from trading with experienced traders is real.  In the fall of 2012 one of my users said more than once that he took a trade using order flow. He did not elaborate…just mentioned the phrase order flow. Then a second user also said the same thing. We were all trading my system based on indicators however I started researching order flow trading. By the Christmas slow down and then into January I was deeply into order flow. I quickly realized that I was on to something and that I had to automate it. The result is I have not even looked at anything since. Thank you synergy.

The second reason is pretty obvious.  Would you mind if a lot of other traders took the same trade at the same price at the same time as you?  The more the merrier in my book.


FAQ – Where is the Money Made?

This a great question as the answer clears up a common misconception regarding automated trading.  There are various levels of automation the most automated being the ‘black box’ systems.  TradingTheTape software is not a ‘black box’ solution.  What needed to be automated is the analysis of the order flow which is typically displayed on the DOM (depth of market) screen. Automated for speed, accuracy and consistency.  Also the execution of the trades based on that analysis needed to be automated . It is a bonus to also automate the trading plan and risk management.

So the money is made by the software then?  No. Absolutely not.  How to interpret the order flow analysis and when and how to take the setups are key and completely discretionary. Discretion is of course based on, and as good as, one’s knowledge, so the money is made:

  • from the training that takes place every day at 8:20 to 9:20 Eastern in the Live Trading Chat Room,
  • from the training that takes place twice each week on Wednesdays and Saturdays at 10:30 AM Eastern, and
  • from the ongoing free training and support that is available anytime upon request via Skype and email

The money is made by TradingTheTape users taking advantage of the training, taking advantage of the software and taking advantage of the 98% of all traders still trading based on indicators.


How to trade using TradingTheTape Order Flow Analysis


What is ‘the tape’? Think of a trader in the 1930’s jumping out of a 40 story window trailing a ribbon of paper tape behind him and you get the idea.  He just read ‘the tape’ and all his holdings are plummeting on heavy volume…i.e. the market momentum is screaming down, it is not coming back and he is wiped out. The tape back then literally referred to a ribbon of tape spewing out of a glass-domed ticker machine or ‘ticker tape’.  The ticker tape had a live market data feed and printed on the tape the last price and volume of various stocks.  In good times there would be ‘ticker tape parades’. In bad times there would be ‘jumpers’.  The ‘tape’ therefore refers to order flow, which is volume at price, i.e. how much size traded at what price. TradingTheTape Today the tape figuratively refers to the typical Time and Sales window shown below. The T&S plots the same concept of volume at price, colored as to whether the last trade was at the Bid or at the Ask.  The problem with the T&S window today is that, even if you could read it, it can and does give misleading information relative to forecasting price action.  For example, a rapid series of green prints (trades at the Inside Ask) does not necessarily mean the market is going up and one should buy.  Instead the prints could all be at the same price and the professionals are absorbing all the hits on the Ask until the market is eventually forced down.  In this case all those green prints mean sell. Size hitting the Bid/Ask MUST be interpreted within the context of the market and only the market reaction to that size is important – not the size itself.TTT_130209_001 In conjunction with the T&S window today’s traders typically look at a Depth Of Market (DOM) window which shows the Inside Bid and Ask plus 5 to 10 levels of orders (Level II data) below the Inside Bid and above the Inside Ask. The DOM can be beneficial to the experienced trader who realizes roughly 80% of the Bid and Ask offers are fake or spoofing. To a novice trader (novice with respect to order flow analysis) the Order Book displayed on the DOM can be very misleading. TTT_130209_002

Why are the T&S and DOM unreliable for trade entry?

(Hidden Orders and Spoofing)


Ok. So what are traders trying to discern from the T&S and DOM anyway?  Essentially they are trying to forecast future price action.  Where will the market go?  Not, where has it been.  A common theme is “Where is the big money?  Are they buying or selling?”  Can future market moves be predicted by watching the ‘big money’?  Yes. Definitely.

The Professionals (a.k.a. the Big Money)


‘Big’ is a relative term and ‘Big Money’ is relative to the market being traded.  For example Big Money in a thick market, such as  the 30 Year U.S. Treasury Bond Future (“ZB”) market, refers to a trader or group of traders that trade thousands of lots at each price level.  A 20 or 50 lot trader in such a market is insignificant having no affect on the market at all.  However, Big Money in a thin market, such as Light Sweet Crude Oil Future (“CL”) market, might refer to your 20 or 50 lot trader. A 20 or 50 lot trader in such a ‘thin’ market and can move the market 10 or more ticks.

Essentially Big Money is trading size that can ‘carry’, stop and/or reverse a market.  Due to their relative size, their position and actions are easily recognized and tracked with a little practice and the right tools.  Big Money is like a bus in the middle of a parking lot full of cars.  The bus clearly stands out. It can crash through the cars with only minor resistance and it will keep moving until it hits another bus or simply decides to stop or turn around. Big money is the bus and retail traders are the cars getting crushed.

Big Money in a thick market includes: institutions, banks, merchant banks, hedge funds, market makers, large proprietary firms (prop shops) and traders, and anyone else with an account balance in the millions of dollars.  Big Money decides where and when the market is going next and when it will stop and/or reverse.

How do Professionals trade?

There is ongoing debate on whether to trade order flow or indicator-based systems. Whether to use order flow to confirm an indicator or an indicator to confirm order flow. One of the most famous debates is the Upstairs/Downstairs Debate between Tom Baldwin (Futures Industry Association Hall of Fame 2009) on the exchange floor and Peter Borish his counterpart upstairs in automated strategy trading. If you have any doubt on whether or not the major players control the markets, read Tom Baldwin’s quotes from these excerpts from the Upstairs vs Downstairs DebateTom Baldwin is famous for literally controlling the bond market from the Exchange Floor for 12+ years.

TTT_130228_011   TTT_130520_009   TTT_130520_010

Logically Professionals  establish trading levels when they enter and exit the market due to the sheer size they are trading.  These levels show up on charts as high volume nodes or points of control.  The high volume nodes are interspersed between relatively low volume price levels.  Why?  This is because large players need to trade with other large players to get in and out of the market. For example, if the market is going up on medium to low volume and a big player decides the price of 100 is high enough and they “sit on the Ask” or start absorbing all the buying at 100, then a high volume node begins to form at 100.  At this point who is going to keep buying if hits on the Ask is not moving the market up?  So the market drops back until it hits supporting volume.  Assuming the big player is looking for 5 ticks of profit he sits on the Bid and absorbs all the selling at 95.  Another high volume node forms at 95.  Now there is high volume at 100 and at 95 and relatively low volume in between.  In this example note that the resisting volume and supporting volume are the same big player(s). They made that move happen.  Hence Big Money has a huge advantage as they can see the short term future since they ARE the short term future…i.e they know they are going to sell up to 10,000 lots into the market to force it down and then buy it back for a profit. This is Market Control and markets with this kind of control can be traded with 0-1 tick of entry risk.. with large size.

But isn’t that market manipulation?  Yes of course it is…but they are making a market and providing liquidity, right? So volume goes to volume? Yes it does. If in the example the big player started covering his short at 99 he would drive the market back up to his 100 entry price price and ruin ‘his’ market. The result would be a 1 tick battle between the big players…a scenario that we want to watch for and avoid.  However if the big players are able to more the market 5 ticks, take profit and move it another 5 ticks, then this is Market Strength as the market did not pullback on profit taking. We are always looking for Market Strength as we want to maximize our session gain by scaling in and trailing rather than scalping out of a strong move too soon.

Then how does the big player trade size without ruining the market?

HIDDEN QUANTITY ORDER (ICEBERG)
An order which displays only a small portion of the order to the marketplace. When the displayed quantity has been filled, another portion of the order will then be displayed to the marketplace.
Yes Hidden Quantity Orders are legal.
This is why the Order Book/DOM is completely unreliable and deceiving.
pic003

Workup Protocol – Beyond Iceberg Orders

Inter-Dealer Secondary Electronic Market for US Treasuries – Aside from choosing between market and limit orders, big players also have choices over the exposure of their trading intention. If it is a limit order, the submitter can 1) display the full order size, 2) submit the full order size but hide part of it from view (i.e., submit an iceberg order), or 3) submit a smaller sized order and wait to expand the order size when the order is executed and the workup process is open. In some markets the workup process accounts for 40% of the traded volume.

Conclusion – If you think you are getting the whole picture watching a DOM and you are giving any value whatsoever to the Order Book (limit orders on the DOM awaiting execution) you are sorely mistaken. In actual fact the DOM is more often than not used by informed traders to mislead and take advantage of uninformed traders. Good luck trading the DOM and any system based on Order Book Analysis.

Hidden/Refreshing/Iceberg orders  In the example, the big player does not offer 10,000 lots at the Inside Ask at 100 or he would crush the market before he can build his short position.  Instead he offers 800 when size at the Inside Bid at 99 is 3200. On the DOM the market looks strong right?  i.e. four times as much buying pressure as selling pressure right?  Wrong.  The small 800 offer is intentional. Hidden behind the 800 is another 9,200 he intends to sell if he can find buyers for it.  Hence all the green prints showing hits on the Ask at 100 on the traditional T&S mean nothing.  Green in this case means sell.

What else does the big player do to trade size?  In the example he is probably most of the 32oo volume at the Inside Bid at 99. He is inducing buying into his Hidden Quantity Order.  Then when he has all he thinks he can get short he will pull his Bid and let the market drop. He was just kidding or ‘spoofing’.  Hence the DOM 800 Ask size was fake and most of the 3200 Bid size was fake and reading the traditional DOM to a novice trader can be very misleading and costly. So if we can see and understand what the market movers are doing we have a higher probability of knowing where the market is going next and we can trade increased size with reduced risk.


Why are you risking 10 ticks when the Professional is risking 1 tick?

1 lot x 10 ticks @ $10.00/tick = $100 Trade Entry Risk  

10 lots x 1 tick @ $10.00/tick = $100 Trade Entry Risk

Trade What, When and How the Professionals Trade

A Chicago-based server is highly recommended to take full advantage of the Automated Risk Management Algorithm


What can a 1-lot novice trader do?

Quit or persevere?  Well, trading for a living is very difficult with an expensive learning curve so quitting would be the cheaper and less stressful option.  However, before giving up you might consider if you are trading the best instrument with the highest probability for success or just the most popular instruments everyone else trades, i.e. boring thick predictable markets or wildly exciting thin markets.  Then you could try so survive while you become an expert at finding and following Professional action using  the T&S and DOM.  Or you could try to get an edge using some alternative tools that reveal more about the market and big players than the standard tools.

TradingTheTape – Alternative Tools for Trading Based Exclusively On Order Flow


The only relevant information required from reading the Time & Sales and Order Book/DOM is the current pressure and market reaction to that pressure.   TTT_Auto_OF automatically analyzes order flow and integrates this information on the chart for discretionary trading and automated risk management.  This information is used to automatically exit trades based on order flow thereby reducing stop loss tolerance to as low as 1 tick in thick markets such as the ZB 30 Year U.S. Treasury Bond Futures. Although not required, a Chicago-based server is highly recommended to take full advantage of the Automated Risk Management Algorithm.

The order flow analysis and risk management are automated, not your trading discretion. The key concept here is if you know within 1 tick that you should exit a trade, then why wait for a 5 or 10 tick arbitrarily loose stop to get hit? Similarly, if you know within 1 tick where the market is most likely to move next and have have identified a good place to risk 0-1 tick on entry then why are you trading only 1 lot? Further, once a trade gets to break even and your market read based the order flow confirms continuation of the move then why would you not increase your size by scaling in, again only risking 1 tick on entry?

At all times you have the discretion to exit the trade manually or with automation. Your discretion is enhanced by the order flow analysis plotted on the chart by the software. Extensive training on when and how to use the order flow analysis and even when to trade/not trade is included with the software. Attending training therefore is the key to low risk high probability trading – no shortcuts.

More important than how to read the order flow is ‘which’ order flow to read…i.e. which instrument to trade.  Trading a thin market using order flow and trading a thick market using order flow are significantly different. All markets move based on order flow – the thin markets just move further and faster on relatively very low volume/order flow. Because Thin Markets move on low volume they are easily influenced/manipulated.  The big moves in a thin market come from the fact that there is very little volume to resist the move.  The volatility in a thin market comes from the move-initiating-players taking profit i.e. there is no volume to resist the market going back to where they started the move. Due to their volatility thin markets require larger stops than thick markets.  A big problem with thin markets then is how to increase size to make a serious amount of money without also incurring unacceptable risk.  Thin markets therefore are inherently high risk markets and are only attractive because of their big moves.

A very thick market like the ZB 30 Year US Treasury Bond future contract typically holds key support/resistance levels with 3-5,000 lots and requires 1,000+ lots of order flow pressure just to move 1 tick.  This means a smaller number of very large players are controlling/influencing the ZB market and trading ‘with’ them has far less relative risk than trading a thin market.  It is entirely feasible to trade 5 lots with 0-1 tick of entry risk at $31.25 per tick or $156.25 risk per trade and with a much more favorable winning percentage. The 0-1 tick of entry risk per trade is possible due the predictability that comes from the overall size being traded.  Why not trade a market with clear and obvious market control with 0-1 tick of entry risk and larger size? 


Trading For A Living

How realistic is it to trade for a living?  Very… if trading is your passion.  Need some inspiration?




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