Saturday, 31 October 2009

Measuring Order Flow and Trading it.

Whether "THEY" are buying or selling is critical to market direction, for the next bar or for the next sequence. Data feeds now contain the information required to harness this information.

I use two main tools for this. The first one looks at each bar by bar and calculates whether trades take place at the bid price or the ask, and how much. Sellers hitting the bid in size has a greater impact on price than a passive seller offering at the ask, even in size. If there is such a passive seller, then the market usually front runs the order by hitting the bids.

The second tool looks at the cumulative effect of the first tool and also smooths it with an average.

These are the last two indicators on my charts. Looking what is happening as the order flow is revealed provides a great edge over the other electronic traders. Of course understanding what you are seeing is critical, if you are to make use of this information.

There is a very simple technique of using the shorter of my moving averages, which I perceive as the center of value at that moment, and trading crosses or bounces from it when confirmed by order flow. You can make a good living off this one setup alone.

The chart below shows some of these trades. Note, the time on this chart is GMT = NY Time + 4 now.

Click to Enlarge


  1. Could you please provide more detailed information regarding setting up these two indicators?

  2. I presume you are referring to the two volume based indicators. The second from the bottom is similar to what has been called Volume Breakdown. It looks at whether the seller or buyer is initiating the trade and how much. The bottom indicator smooths out the Volume Breakdown and tracks the amount of volume bar to bar and who is in control. Each indicator provides different information.

  3. Hi. How can I get the indicators that you are using?