Comprehensive 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 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 (traded volume) analysis exclusively. There are no shortcuts – no ‘magic’ indicators – no ‘black box’ automation. The software employed here is merely a tool for analyzing traded volume and is not a final solution in itself. 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 Tuesdays and Fridays – 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 1) attend training, 2) listen and 3) make an effort.
Traders seeking a magic indicator or automated software solution to trading or any solution 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 (more specifically traded volume). No DOM, no T&S, no indicators – only Order Flow. Not unlike trading on the Exchange Floor.
- Only trade markets with clear and obvious Market Control (allowing low risk, high probability and larger size)
- Limit entry risk to 0-1 ticks maximum per trade (0 is achieved by promptly scratching trades that do not meet our trade expectations)
- 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
- ALWAYS limit downside risk and NEVER limit upside gain
- In short – trade like a Pit Trader
“Order Flow (Traded Volume) Determines Price Action”
Think Like A Pit Trader
You are standing in the bond pit. The Inside Market is 12 13 (traders are willing to buy at 12 (the Inside Bid) and willing to sell at 13 (the Inside Ask)). You are of the opinion the market will go down so you sell (short) 200 lots at 12. Over the next several trades you notice a total of 1000 lots have hit the Bid 12 and the market has not gone down. You need the market to go to 11 to scalp a tick. During the same time a total of 300 lots have hit the Ask 13. The market has not moved at all – it is trading at 12 Bid and 13 Ask. More size hits the Bid for a total now of 1500 lots. Size on the Ask now totals 500 lots. You continue to notice that although three times more size has hit the Bid than has hit the Ask the market refuses to go down to 11.
The market has not moved and you have a decision to make. Why? Precisely because the market has not moved. No matter how much size hits the Bid one or more big players will not let the market go down. They appear to be prepared to absorb any amount of size at 12. This is a problem. You are short 12 with a clearly diminishing probability that the market will ever get to 11 and is more likely to go to 14. The longer you do nothing the more likely you are going to have a loser on your hands. You have three choices and need to act now: 1) you can do nothing and just watch the market go up to 13 14 – something you can pretty well predict at this point in time since no amount of size on Bid 12 is able to push it down to 11, 2) lock in a 1 tick loser by buying 13 before you get handed a 2 or 3 tick loser when the market inevitably moves higher, or 3) try to scratch the trade by buying 12 along with the players holding 12 long in which case you have lost 0 ticks to the market and are only out fees.
You opt to scratch the trade by buying 12 along side the players holding 12 long. You are able to cover 100 lots at 12 (0 loss) and 100 lots at 13 (1 tick loss). By watching the market’s reaction to traded size you were able to limit your losses to 0 or 1 tick. You predicted the probable future price action before the market moved at all. You continue to note size on the Bid holds long instead of pushing short so you buy 200 lots at 13 before the market moves to 14. The market ultimately moves to 16 and you cover the 1 tick loss and then some – all based on reacting to traded volume BEFORE the market moved a single tick. You traded the PROBABILITY that the market would not go down simply based on the fact that players bigger than you would not let the market go down. Better to trade WITH them than against them.
The following video demonstrates how a Pit Trader trades with the only information available in the Pit – i.e. traded volume and the market’s reaction to that volume. It also therefore demonstrates how TTT users trade larger than normal size with 0-1 tick of entry risk and 80%+ winning probability. We trade the market within a 1 tick tolerance and know to a high degree of probability what the market is going to do BEFORE it does it.
Think Like a Time & Sales Tape Reader
You are trading the bond and see a lot of size hitting the Bid at 12. The T&S is lit up red. Blocks are hitting 12. Clearly there is a ton of pressure now on 12 which will surely force the market down. You go short 12 before you miss the move. Before you can react the market goes up instead of down. Now the T&S is lit up green. You cover for another small loser before your stop loss gets hit for an even bigger loser.
Think Like a DOM Trader
You are trading the bond using the DOM (Depth of Market) screen. The Inside Market is 12 13 with 500 size (limit orders) waiting to buy at 12 and 3000 size (limit orders) waiting to sell at 13. Clearly there is much more size on the Inside Ask that surely will prevent the market from going up and only a relatively small amount of size on the Inside Bid to prevent the market from going down. You sell 12 because with all that size above the market and little below there is no way the market will can go up right?
You note that since you took your position way more than 500 size has traded on the Bid and the market did not go down. In fact 1000 have traded on the Bid which still shows only 500 size waiting to buy 12. There is still 3,000 size waiting to sell 13 but the 500 size on the Bid keeps refreshing. This does not look right. Why is the obvious pressure on the Ask and small size on the bid not making the market go down? Now 1,500 has traded and the Bid 12, the market never did get to 11 and the 3,000 sitting on the Ask 13 is now only 200. Most of the 3,000 orders resting on the Ask have been pulled. What happened? You have been ‘spoofed’. Someone was putting a fake amount of size on the Ask that they never intended to sell – this to make it look like the market surely cannot go up. At the same time someone, probably the same trader(s), only showed 500 size on the Bid when they were clearly willing to buy 1,000s because they bought 1,500. How can that be? Is that legal? (Yes it is, see details below).
The market trades up to 16 before you can cover your short. Another loser. You have been had by the professionals again.
Think Like an Indicator Trader
You are trading the bond. Your latest and greatest magic-get-rick-quick indicator says the market will do down. You sell 12 with a 10 tick Stop Loss. The market is not going down however you have given it lots of room to trade (10 ticks based on prior losses when the market pulled back) so you are not concerned as it is only at 16 and you have 6 more ticks before your stop gets hit. Your new indicator still indicates the market should go down so you are not worried as you were told the indicator works and paid good money for it. Wait. Now the indicator is indicating the market will go up. What should you do? Too late. Your stop is hit. Another loser. After blowing up your account yet again you conclude that your new indicator did not work as promised. Clearly you need to find another get-rich-quick solution and buy a better magic indicator. Or are you trading the wrong market using the wrong method? No, can’t be that. Everyone trades this market this way right? Although they do all lose money. Hmm.
Think!!!
The message here is clear. And thankfully is based entirely upon YOUR common sense and not on more mass-marketed nonsense.
“To consistently trade a market with low entry risk and a high degree of winning probability then your clear and only option is to trade based solely on the market’s reaction to traded volume.“
Traded volume not only precedes price action it determines price action. Therefore if you wait for price action to make a decision you will always be late and often on the wrong side of the market.
The above concept is so basic and yet so critically important to your trading success that if you do not ‘get it’ then there is no point to reading further on this site.
Never traded before? Even better! I have taken more than on user to profitability in less than 4 weeks. Getting experienced traders to drop old habits and misconceptions is much much harder.
Facts
- A multi-billion dollar industry has evolved around how to trade
- Almost all the information on how to trade is mass marketed ‘quick fix magic indicators’ which turn out to be nonsense offered by vendors that have no idea how to trade
- Most futures traders trade the ES and/or CL
- The vast majority of traders (98%) lose money
The Most Important Facts
- When you place an order with a 5 or 10 tick stop you are admitting you have no idea (to any reasonable degree of accuracy) what the market will do next. All you do know is that you are guessing and need to give the market a lot of ‘room’ to trade. Your stop size is based on prior losers and you are willing to continue to endure more of the same because that is what trading is all about right?
- When you trade off price action (indicators) you are so far removed from what is driving the market that you are closer to gambling than trading
- When you trade off the DOM with emphasis on the Order Book ( Level II data – 5 or 10 levels of limit orders above and below the last traded price waiting to be filled) you have no idea how markets work and are easy prey for the professionals allowed to legally place fake order size and fake order (details below)
- When you listen to concepts that trading Order Flow has anything to do with the Order Book or reading Time&Sales you are being misled and will never learn how markets actually work.
Pit Trading vs Technical and Fundamental Analysis
There is ongoing debate on whether to trade order flow (traded volume) or indicator-based systems. 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 quote from this excerpt from the Upstairs vs Downstairs Debate. Tom Baldwin is famous for literally controlling the bond market from the Exchange Floor for 12+ years.
The most important point from the debate is Tom Baldwin confirming that floor traders control the market by moving it as far as they can until they can trade a lot of size.
At TradingTheTape we focus on obvious Market Control in order to consistently trade with 0-1 tick of entry risk and 80%+ winning probability.
If you cannot clearly see Market Control in the market(s) you are trading then you are clearly trading the wrong market(s). The ES and CL for instance are two of the worst choices and yet are the most popular markets being traded today. The lack of Market Control is why most markets require large stops. And the large stops are why they trade small size. And yet traders keep chasing the wrong markets with 1 lot and a 10 tick stop using the latest and greatest indicator/method. Could this be why 98% of traders lose money? Where is Common Sense? Is it not better to consistently risk 0-1 tick on entry to make 10 ticks than to consistently risk 10 ticks on entry to make 10 ticks? Do the math. Over time. If you still think you can trade the ES and/or CL for a living with small size and 10 or even 5 tick stops you should quit trading entirely before you become homeless. Or, buy stock like Warren Buffet and hold it for 40 years. Point being – how many times do you need to blow up your account before your change your method? your market? your mindset? Another indicator is not the answer. A radical shift in how you perceive the market is.
What is Tape Reading?
The ‘tape’ refers to the ticker tape that used to come out of a Ticker Tape Machine. These machines were the first attempt by Exchanges to give traders access to real time market data. These machines were loud so they were covered with a thick glass dome as shown below.
The ticker tape data included 1) the instrument name, 2) the number of shares traded and 3) the price at which the instrument traded.
If you have seen images of Ticker Tape Parades in New York this is the tape that gave the parade its name.
Ticker Tape Machines have been replaced by the Exchanges pushing the same basic ticker tape data plus how much size is resting as Limit Orders at the Inside Bid and Ask (collectively Level I data) plus also how much size in Limit Orders is resting 10 levels above and below the Inside Bid and Ask (Level II data).
The Exchanges should have stopped at the basic ticker tape data only as that was traded volume and the only relevant data required to trade.
The Order Book/DOM Fantasy
If you think you are getting accurate let alone useful information from the DOM then you are sorely mistaken and fair game for the professionals controlling the market.
Professionals cannot place orders showing the total size they are actually prepared to trade without moving, and therefore ruining, the market they are controlling (manipulating). So instead of placing a 5,000 lot order that would move the market resulting in a less desirable entry price they place a 500 lot order at their desired price and legally hide the other 4,500.
Exchanges allow professionals to only show a portion of their intended size thereby hiding the rest.
HIDDEN QUANTITY ORDER (ICEBERG)
Yes Hidden Quantity Orders are legal!!
Spoofing
The point of placing a Hidden Quantity Order is to be able to buy/sell as much quantity as possible before the market moves away. At the same time why not place a very large order in the opposite direction to keep the market from moving away while you fill your Hidden Quantity Order? For example, you want to buy 5,000 at 12 so you place a Hidden Quantity Order showing 500 on the Bid. At the same time you place a 3,000 lot order on the Ask to induce traders to NOT buy and instead sell into your Hidden Order. Once the selling stops and you have all you think you are going to get you pull (cancel) the 3,000 on the Ask and sure enough the market goes up. Why? Because you will not let it go down by absorbing all sells on the Bid and you are no longer faking out the market with the larger sell order. Simple. Legal. And employed constantly.
Conclusion
If you are smart enough to understand the concept of Hidden Quantity Orders (also known as Refreshing Orders, Renewing Orders or Icebergs) and understand the concept of Spoofing. And if you are able to see these techniques employed constantly on the DOM yourself. Then why would you put any value whatsoever on size shown in the Order Book (DOM)?
The Order Book is not only useless information it is intentionally misleading! In which case how useful are trading methods being offered by vendors that are in any way based on the Order Book?
Why are the T&S and DOM unreliable for trade entry?
(Hidden Orders and Spoofing)
Trading For A Living
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