Friday, 23 April 2010

Detecting and Using Order Flow Part 2

As you become proficient at reading order flow, you can get rid of all the aids and work with just the Volume Breakdown, Cumulative Volume Delta PLUS reading the Range Bars. The only additional indicator I have on my trading chart nowadays is the 33EMA as it tells me where I am. Of Course Market Profile is there to supply the context. The chart below is what I am using and I have noted today's trades on it.

But let's go back one step. Starting with the indicators is, I think necessary, to know what to see and to "see". The 2 CCIs allow you to see the momentum in 2 modes. The direction of the lines, whether they are above or below zero, how they interact with each other, is the market getting ahead of itself when, for example, the 6CCI leads the 45 by too much. All very important things. We look at the indicators together with the bars on the charts until we develop a feel for how the bars relate to each other and to the momentum we are measuring with the CCIs. If the CCIs are so good, why get rid of them? Because they are a derivative of the bars and therefore MUST lag somewhat. Getting to the PRIME information gets you in and out earlier.

The 33EMA divides the market for me and is a major support and resistance tool as well as a trend tool.

We then look at the order flow using the Cumulative Volume Delta and relate that too the range bars patterns and formations. The think I look at include things like: Do the range bars overlap? Are they going anywhere or is it sideways? Where are they in relation to the 33EMA and it's slope? Are they closing up or down? Are there any hammers or hanging men (candlestick terms)?  All of these things create the picture. When I started the blog I emphasized the importance of "the picture". I think that perhaps the reason for this is easier to understand once you delete the indicators because the picture is all you have left.

As far ad the CVD is concerned, it's flow, its peaks and troughs and the relationship between them are all important. I often see divergence between a peak in price and the CVD. It tells me a lot.

I'll be posting my charts without indicators and try to add some notes about selected trades - the type of thing I talk to Kiki about. This is the real discretionary trading. When people use a lot of indicators there is a real tendency to try and mechanise the process. While it may look easier (and if you are auto trading you have to) mechanising discretionary trading gives only an "average" performance rather than achieving the high win rates and profitability many of you have commented about in responses to the blog. Perhaps now there is a better understanding of the difference between just setups (trades to consider) and triggered trades.

Today was a choppy day. I spent all day buying and selling crosses of the 33EMA as CVD was horizontal.


  1. Hi Tom,
    At this point, are you no longer using a Footprint chart to see within the candle? For a while there it seemed that you felt the Footprint info gave you a bit better of an edge.


  2. Are the candlestick patterns also part of your exit strategy? How discretionary is your trading when you get in the market and a hanging man pattern unfolds, like today at 15:43? Is that your exit flag?

    Do you have Flobot looking at candlestick patterns too?


  3. Hi EL,

    When you look at support/resistance on the market profile, how many days back do you look to determine key S/R?



  4. Peter, Yes, I am looking inside the bar.
    Braulio, not so candlestick patterns but range bars that show reversal or failure which in candlesticks are called hammers or hanging men. Its the failure to follow through that tells me something.
    JMD, I only look at Profiles that have not been traded through by a newer one.

  5. Hi Tom,

    regarding Flowbot: What do you think about implementing only 2 or 3 set-ups and triggers with a very high win rate? These 2 or 3 set-ups happen not very often but if one lets Flowbot trade with several instruments one should get enough trades. And exits could be adapted to the vola (eg. with an ATR function).


  6. Hi EL,

    Thanks again for your posts, a question , do you trade always(24h) or only during a particular session? It seems to me more profitable the time period among 830-1200 and 1330-1500. (ET)

  7. Hi, Tom,
    Although I appreciate the idea to trade with less indicators, after reconsideration, I think I was not right at some points in my last comment.
    First, people have their own styles, your system already so perfectly match YOU and you have top trader’s performance, why change it? Some indicators maybe are technically redundant, but to you may not. Your system is stable and robust to you. Those indicators can spontaneously give all the information you need and even trigger your intuition about the market direction. Without those indicators, you have to add more layers on your decision process and low your speed.
    Second, I think that trading without indicators may need different mindset and entry and exit rules. I found it is especially different to define the targets. So traders trading without indicators will prone to take small profit and not swing the trade.
    Finally, I don’t know why you decided to do so. If other people can’t use your system, it is not your problem. You can do so as an experiment or training.
    You already did honest and generous contributions in this blog. I like your blog. That is why I feel I have to say something in case will be helpful.
    I wish you and KiKi well.

  8. EL,

    This most recent post confuses me a bit. I am just beginning my road to CP by trying to find setups...

    When you identify that a specific setup has a high enough win rate to incorporate into your overall trading plan, are you taking that win rate from a purely mechanical approach to that specific setup?

    I ask because it seems to me that if you bring this discretionary perspective into ID'ing a setup, you can easily engineer an unrealistically high win rate...and then we are back to the idea that to be CP you have to have an innate feel for the markets from day one....

  9. Hi EL, can you please elaborate a bit on

    "I only look at Profiles that have not been traded through by a newer one."

    I am sorry I really tried to figure out what you mean. Could I trouble you to please post a couple of example profile charts?