Automated Order Flow Analysis
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 pre-determined 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. 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, just Order Flow – and the system gets better every week. Any new ideas that benefit my personal trading are incorporated into the code and shared with subscribers as a code update. Updates occur often 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.
“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 ZN 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 ZN 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 ZN 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.
- $100,000 per year income over 250 trading days = $400 per day
- $400 / $15.625 per ZN tick = 25.6 ticks per day
- 30 ticks / 10 lots (requires $5,000 account) = 3 ticks per day = three 1 tick moves = one 3 tick move
- how many 1 tick moves off Primary Setups are there each day in the ZN, ZB and ES? 10? 20?
- Primary Setups offer:
- low entry risk of 1 to 2 ticks
- high probability for at least 1 to 3 ticks profit
- how many ticks can you net ONLY trading Primary Setups and ALWAYS using proactive trade management? All you need is 3 ticks per day.
- it is not the size of the move that matters but rather the size you are trading during the move plus your entry risk and win probability
- change your mindset from chasing thin markets with 1 lot and a 10 tick stop to trading low risk, high probability Primary Setups in thick markets with 10 lots for 1 tick profit
- Indicator vs Order Flow Video
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, instead of using a DOM and/or Time&Sales, 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, 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 and when and how to use the automated features of the system, 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 read and execute from the DOM in 4 markets simultaneously 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 can all that automatically on my local computer it might as well it on a server in Chicago to reduce the inherent exchange data and order routing latency.
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 and automated for diversity (trade 4 markets simultaneously and just look for Primary Setups). Also the execution of the trades based on that analysis needed to be automated – for speed and accuracy. 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. When to use the automation, when and how to take the setups, is key and is 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 in the Live Trading Chat Room,
- from the training that take 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. 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 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. 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 the DOM can be very misleading.
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 10 Year U.S. Treasury Note Future (“ZN”) market, refers to a trader or group of traders that trade thousands of lots. A 50 or 100 lot trader in such a market is insignificant. 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. 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: 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 on the exchange floor and Peter Borish his counterpart upstairs in automated strategy trading. Both of these players are big money professionals with massive accounts. One suffers staggering drawdowns, one does not. Unless you are prepared for the drawdowns you should trade with Tom Baldwin’s method. Regardless, 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 Debate.
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? 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.
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. If the big players are able to more the market 5 ticks, take profit without adversely affecting the market and then move it another 5 ticks, we want to increase our size and trade with them since our risk is very low (1-2 ticks) Then how does the big player trade size without ruining the market? Hidden/Refreshing/Iceberg orders. In the example, the big player does not offer 10,000 lots at the Inside Ask at 100. 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 order. Then when he has all he thinks he can get 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 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 Profissionals Trade
A Chicago-based server is highly recommended to take full advantage of the Risk 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. Before giving up you might consider if you are trading the best instruments for success or just the most popular instruments everyone else trades, i.e. boring thick 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 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 and, with discretion, for automated trade entry. 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 ZN 10 Year U.S. Treasury Notes Futures. Although not required, a Chicago-based server is highly recommended to take full advantage of the Risk Algorithm and automated entry/exit features. TradingTheTape TTT_Auto_OF is a tool similar to other volume-based software with the addition of automated risk management and order entry/exit, all based on order flow pressure. The order flow analysis is automated, not your trading discretion. The key concept here is if you know within 1 or 2 ticks that you should exit a trade, then why wait for a 4, 6 or 8 tick stop to get hit. Similarly, if you know within a tick where the market is most likely to move next, then that is a good place to risk 1 tick on entry and you should take the trade. Further, once a trade gets to break even and your market read based the order flow confirms continuation you should add to your position, again while only risking 1 tick. At all times you have the discretion to take trades manually or using automation. You also have the discretion to exit the trade manually or with automation. Your discretion is enhanced by the information plotted on the chart by the tool. Extensive training on when and how to use the tool and even when to trade/not trade is included with the tool.
Introduction To TradingTheTape Automated Order Flow Analysis
Advanced Automated Trading – Order Flow + Price Action
Automation PLUS User Discretion
This not a ‘black box’ solution. User discretion is required at all times.
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 the 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.
A very thick market like the ZN 10 Year US Treasury Note future contract typically holds key support/resistance levels with 10-20,000 lots and requires 2-3,000 lots of order flow pressure just to move 1 tick. This means a smaller number of very large players are controlling/influencing the ZN market and trading ‘with’ them has far less relative risk than trading a thin market. It is entirely feasible to trade 10 lots with 1 tick risk at $15.625 per tick or $156.25 risk per trade and with a much more favorable winning percentage. The 1 tick risk per trade is possible due the predictability that comes from the overall size being traded. For example if you are long during a session and the volume profile nodes are averaging approximately 10,000 lots 4 to 5 ticks apart and 20,000 lots print above your position, why would you stay long and suffer 4 to 8 ticks of pullback? You know the Big Money is causing the pullback by taking profit and that the Big Money players holding 1,000′s of lots each are not going to take more than a tick of pullback so why should you? Per the Tom Baldwin quotes above they will take the market as far as they can and then reverse and take the market as far as they can. So if they cannot hold and advance the market, why are you staying in the trade? Similarly on entry, either the Big Money is supporting the move or not. If you go long and their supporting order flow pressure does not continue, do you really need more than 1 or 2 ticks of proof that the move is not working? If the market movers can not move the market more than 1 or 2 ticks without being forced to exit, why are you sitting in the trade with a 4 to 8 tick stop ‘hoping’ for 5 or 10 ticks profit?
Is there a better market for order flow trading than the ZN? Yes, the ZB. In fact, the close link between the ZN and the ZB and the predictability of the ZB makes trading the ZN off the ZB very low risk, high probability trading.
Key to trading any market is the size of the pullback on profit-taking. If a market is moving up and only pulls back 2 ticks on low volume before proceeding up then it is very strong, very predictable and can traded with increased size and low risk. If the same market pulls back 3+ ticks on higher volume then the market is not strong enough on profit-taking to maintain the move and you should exit also. Thicker markets make those decisions easier.
The Key to Success is trading a market that has enough size at each price to hold price levels. This is market control and makes the market predictable. This allows trading with 1 tick entry risk whether scalping or trend trading. Trading with 1 tick entry risk allows trading larger size. Trading based on Order Flow allows trading the right market with 1 tick of trade entry risk.
THERE IS NO BETTER MARKET FOR TRADING ORDER FLOW THAN THE ZB.
ZB – 1 tick – $31.25 (we trade the ZB every day in the Chat Room with entry risk between 0 and 1 tick)
ES – 5 ticks – $62.50, 10 ticks – $125
CL – 10 ticks – $100
Why trade a market that requires large stops and reduced size?
Trading For A Living
How realistic is it to trade for a living? Very… if trading is your passion. Need some inspiration?