Order Flow, It Gets Even Better!

 A lifetime ago there was an Abba song we almost sang on the floor: Money, Money, Money, While the Abba girls were looking for a "wealthy man", we, on the floor, were making money, money, money and on our way to being wealthy men if we knew how to exploit the fantastic edge we had on the floor.

The point of saying this is that evolution of the technology we have had since the markets went electronic has resulted in an even playing field for all of us electronic locals. No, we can't compete with the big HFTs but we don't need to. We have our own edge. Our edge is that we can use the latest technology to trade with the agility that trading smaller size allows.

Finally, we can throw away all the indicators we used for entries and exits and rely solely on order flow within the context and market structure we can see using the tools that reveal the playing field we are engaged in. The context I need is to know what sort of day we are in: 

• trending strongly or rotational
• where support and resistance is
• where large players may have business to do
• where the Mean is that I continually revert to and break away from

 Much of this information I get from my Market Profile/ Volume Profile chart. Ths information helps me to know the "where". My trading chart focuses on order flow and the Mean. This tells me the "when". When + Where = Trade

The chart above is a range chart. No great magic. I often use this periodicity as it gets rid of a lot of noise. I could just as easily use a 1 minute chart or a tick chart. The periodicity of a chart is the microscope that best reveals the order flow. Looking at each tick on a chart is helpful to me. I want to know what the order flow is doing and that is not a single tick but a "flow" of ticks. The ticks can come in fast and furious and the numbers on a footprint chart can change so fast that the eye can't absorb that information. The computer can. Each bar and a series of bars can tell me all that I need to know. The software analyses each bar and series of bars and outputs the information I want using the widgets on the main chart division and with the cumulative volume delta in the division below. The volume profile of the current day on the left side of the chart is the same information I get from the separate Market Profile/ Volume Profile chart I also use.

 

I am a discretionary trader but use the technology to help me not miss trades as well as to enable me to trigger a trade faster. That's what I call Hybrid trading. When the correct context reveals itself, I arm the algo and when all the order flow conditions I have programmed happen, Flo shoots off the order. She also places stop and target orders that I then move to places related to my money management and to support and resistance places.

Weekly, on the week-end, I run Flo in playback mode to get an idea of not only how I performed against pure algo but also to help me with stops and targets metrics. The last two days' pure algo results are below.

As I have written many times before, the harder I work the luckier I get. This trading business requires continual monitoring nd re-evaluation to keep on the bleeding edge of performance.

 

Trading the New Normal

 As these index markets continue to evolve I have found that I need to evolve my technology with them. With the higher volatility markets we have been experiencing there is a need for technology to better reveal the order flow. There is a difference between rotational times of a 24 hour period and a trending or one time frame type of time. For this reason I am using four charts to trade instead of two.

I will give an example from today's ES market. My prime context chart is, of course, still a market/volume profile chart.

 

 

MP/VP shows me where I am in the context, support & resistance, and where price is likely to go. The Bookmap chart shows me support and resistance as well as exhaustion, icebergs and spikes.

The shart below is a renko chart to get rid of noise onto which I have added multiple order flow information using NinjaTrader, Gomi and MZ Pack. This chart is excellent in both rotational and one time frame markets.

 

Once I have identified a trending market, the chart below using NinjaTrader, Gomi and MZ Pack keeps me in the trade

 

I just love trading in the deep pool with the Algos.

I just love trading in the deep pool with the Algos. They provide the flow and rhythm that helps me make the profitable trades. I do have losers and scratches too but usually its due to a lack of focus or bad read on my part. The information is there for all of us to see.

The pic below is another way of looking at the markets. This a NinjaTrader chart using MZPack's BigTrades add-in. I have found that it really suits me more than Bookmap or Jigsaw. The arrows come from another add-in I have programmed to give me additional order flow metrics. I have tried this chart on more granular settings down to just a few ticks but a 10 tick ES chart is too granular and I lose the context. I find that 30 seconds or 60 seconds provides the best order flow information for me on the ES. For less liquid markets such as NQ, CL and GC, 60 second charts tell me what I need to know. MP is still here for context and bias. Today's high opening and the subsequent selloff to unchanged was a joy.

I just love trading against the algos now. Great liquidity and they do the heavy lifting. Not hard to find where the scalp-able peaks and troughs are. Technology is still evolving and making the markets more even.

Money for Nothing?

 I'm a big fan of Dire Straights and Peter Gabriel so today's title was easy to find. One of my fondest memories is watching Peter Gabriel as guest of Eric Clapton at the Albert Hall in London more than 25 years ago.

The answer to the question in the title is "NO". Making consistent profits trading is definitely not money for nothing. It requires a lot of work and the harder I work the luckier I get 😃

Chart below is a piece of ES just after the RTH open. Huge volatility, even more than lately. Price rocketed upwards and then collapsed. The only way I found to trade these volatile periods is Outside In trades - the old way we all traded as locals and fade the "paper". Its a matter of reading the order flow and fading the paper for a mean reversion. I have my finger on the button and click as I see the reversal beginning. Its easier to know which direction the next trade will be in but catching it when price is still flying out from the mean gives a better trade location and less risk. The medicine for being a bit early is doubling down. But I use context to determine where to trade. I keep my size much smaller in these volatile markets as my stops are very, very far away. Stops are only in case of broadband disconnection. Correct trade management cannot be done from an ATM.

Watch as the aggressive buyers come in after a sell off

 I thought I'd share an example of what the correct tools can show you. This is using MZPack's BigTrades module. The 5 minute NQ chart using NinjaTrader 8 below shows the sellers hitting the bids all the way until the last sellers get trapped short. Aggressive buyers then come in and push prices back up. I'm not suggesting everyone trade from a 5 minute chart - you need to find the periodicity that suits your style and risk tolerance (the bigger the bars the further from price the stops must be) - each periodicity is able to show the order flow.

The Tools Have It!

 I'm really enjoying this extra volatility we have. Lots of opportunity. It's a matter of picking the right market and the right periodicity. There are times when the NQ is too volatile but the ES is good. Traders I know are even switching to the YM to slow the speed. For me, the right bar size seems to be the criteria I look for as the bar size determines my stop loss and risk.

The chart below is the 1 minute ES. I liked it very much this week. I switch between the 1 minute and the 30 second bars. The chart below is a footprint chart with lots of additional information highlighted by colouring and arrows. There are a bunch of different providers of these tools and its a matter of hunting around to find the ones that provide the information you want in the form that you can see it easily in the heat of battle. I use three or four different Ninja add-ins  to get the information I need for my trading plans. I think that finally I have as much or even more order flow visibility than I had in the pit. The main difference is that there are now no order filling brokers that identify the possible origin of the "paper" we are trading against. But perhaps that's a good thing because we can identify both size and probable icebergs as it happens.

There are great tools out there now. Using them is more than well worth the cost if you also learn how to use them. Not hard now. Again, context is very important as is evolving as both markets and tools evolve. Just looking at the chart below shows me the trades jumping out. 😁 I hope you can see them too.

 

Ultimate Context

 As you will know if you have been reading this blog since 2009, I have been using Market Profile now for over 35 years. I was fortunate enough to learn it from Pete Steidlmayer not long after he released it at the CBOT. There has been, in recent years, a tendency to abandon Market Profile in favour of Volume Profile. I believe that this is a mistake. Market Profile provides different information to Volume Profile so perhaps the answer is to use both. The attached pic shows fin-alg's add-n to NinjaTrader and is able to display MP with VP underlayed.

The additional information of MP is a result of the TPOs. For example, today we had a perfect example of what some call a neutral day where there was range extension on BOTH sides of the initial balance in the RTH profile of NQ. Old time users remember the trade where, if the fit of the MP is correct, that when the second range extension on the second side happens and there is still time in the RTH session, you wait for the order flow to show the range extension finishing and then make a trade for price to go back to at least the POC. 

This easy to see on the MP chart as below - much harder on a VP chart without a bar chart set up to show it.  I will never trade without a Market Profile chart.

 

As you can see, the second range extension was down and it found support at the high of the previous days profile. Once the buying started it was simply a matter of going long with it and exiting in stages at the different resistance spots.