Monday, 7 December 2009

Which way is up?

I received an email asking about how I read order flow. I have talked a lot to Kiki about this and have mentioned it here in the blog, as its central to being a successful trader. I also said that being able to access the volume with the latest technology was the missing link to achieving a high percentage of winning trades which is important to me.

I’ll post some of the questions and observations from the email as they are very relevant. Kiki said she learned something here too.

The order flow that you were using on the floor are orders that haven't been executed yet, you were able to know the existence of these upcoming orders through reading other floor traders' activities (hand signs and such). Thus your main edge on the floor is to be able to see orders that will happen later, then front run them, right?  Not to just front run them but to see that there will be a change in momentum or that the strength of the momentum will change – often important in judging the possible length of vertical price movement.

However, when it comes to trading with pc, how do we get to know the existence of the upcoming orders or whether they are buy or sell order?  I use the two volume studies. They are very clear to me.

I'm not sure that market delta can help to answer the above questions or answer them with high probability, since market delta is a study based on trades (orders that have been executed). Yes, and you can read the strength and direction of the volume. One single trade does not mean much, but looking at a string of trades which have just happened , tells me a lot. MD is able to breakdown the volume into buying and selling and then show you the strength and direction of it. Add the momentum information from the CCIs or other indicator that you like and the chart talks.

For me, the resting  bids and asks on the DOM are useless as there are too many games played. The only thing I am interested in on the DOM is the bid and ask where we are trading, and sometimes those are not real too.

The two MD studies I use are Volume Breakdown and Cumulative Volume Delta (smoothed). There are lots of videos on the MD site showing how to set them up. The biggy is working out how to use them. This blog will point you in the right direction on how I use this information to teach Kiki to trade. I had some emails about the MD settings for the two volume indicators. Both use the Volume Breakdown indicator in MD and their settings are on the left. We plan to switch completely to MD and also use its chart trading facility when we have tested it fully and it is out of beta.

Another comment I have had is about FX trading. I traded currencies back in the early 1980s for about 6 months when it was not so fashionable. I have two things to say about the biggest market in the world:

There are two types of FX "brokers". The first type is an FX dealer who charges no commission and who takes the opposite side of your trade and has a vested interest in its outcome. Many of these dealers move their quotes around and people get stopped out or the spread between the bid and ask widens. The second type is a real broker who executes trades with banks or dealers and charges a commission.

Secondly, the FX markets do not publish any meaningful volume information.
So when I want to trade FX, I trade futures.

Quiet day today, only two trades for us.

Click chart to enlarge


  1. Hi,
    this was a great post!!

    Being an FX trader I'm curious to know your opinion on the FX market.

    I'm a frequent reader of your blog and I would like to know:

    - when you say you trade FX futures, does that mean you don't trade FX at all ?
    - what is your opinion regarding the FX market ? too risky ? too volatile ? doesn't trend ?

    Kindest Regards

    /Ricardo Quintas (Portugal)

  2. Ricardo, I only trade regulated and transparent markets - that means futures only. The FX market would be great if you could see the order flow better. And if the dealers didn't move quotes against you when they the opposite position to you. The limiting issue with FX futures is that they are paired against the US$ so you cannot trade the pairs you want. But you can see the order flow and the quotes are the real market.

  3. Bot 3 at 2891

    1 sold @ 2804.

    Why @ 2804 ? big loss? Percent wise on move ?

  4. Typo Mark. It was 2904 as per the chart. The calculations were fine. Fixed now. I have a drop dead stop on all trades of the value of 2 range bars plus a tick but don't usually wait to get stopped out.

  5. Thanks for sharing your Volume Breakdown configuration. Would you also share your WCCI settings?