Tuesday, 4 January 2011

What is Order Flow?

The expression ORDER FLOW seems to have spread all over the boards on the web in the last few months. People make assumptions about what the expression means in trading and how it manifests itself, how the trader can discover or see it and, most importantly, how the trader can use it to make money when he identifies it correctly.

Firstly, it is said that Order Flow is VOLUME. Volume is a number and you can't see a number. You can count items and when you add them up you get a number. On the floor we saw the transactions. We saw whether the broker who brought the "paper" had his palms facing towards himself or away from himself. We could look around the pit and see the hand signals that told us how many contracts were trading. We don't have that with electronic trading.

But we do have other tools.

For example, we have MarketDelta's Volume Breakdown which identifies whether a trade took place at the Bid or Ask. We have the MarketDelta Footprint which puts this information into a structure. But that is only part of the story. This is not just The Age of Aquarius, it's the super hi tech age. The big guys have big bux that they throw at their trading. They also hire guys with big brains. They don't want the whole world to know what they are doing so they try and hide it as much as they can until they're ready for us to know, by which time it's usually too late. We have by then, swallowed the frog.

When I was a kid, there was this great movie, in black and white, called "The Invisible Man". You probably have heard about it or about one of the many remakes. Great movie based on a story by H G Wells. Unless the Invisible Man wanted to be seen, which was when he wrapped bandages around his face and put on clothes, we couldn't see him. But when he was invisible and we looked hard, we could see his footsteps on the ground where he went.

That's what we do today in the electronic markets. We "deduce" the order flow not just from what is revealed clearly but from it's footsteps. What can we see? We see the Market profile and the types and lack of rotation. We can measure the momentum. We see price, of course, and it's direction as it changes and the speed with which it changes. And of course, we can see where it is located from what is considered a fair price.

It takes all of this for me to see the Order Flow and the tools I have shown in the blog are what I use to identify it. Of course I'm always looking for better tools too.

BTW, I have started tweeting to StockTwits and Twitter as you can see from the right hand side box on this blog. I don't know how intrusive I'll find it, but I may be able to give a "heads up" on a few things if I can post and trade at the same time.

I was scalping the Euro today as you might have seen me tweet. I reduced the range bar to 3 ticks. It was pretty tiring. I was looking for 5 to 7 ticks profit per trade. I was trading in the European morning, took a break to take Kiki to the airport and scalped in the afternoon.

This type of trading can also be done as HT (see yesterday's post). When the context sets up, I can just switch on the version of Flo that suits and let her do the entries with me just managing the trades with exits. This type of scalping can pull in 100 ticks/contract on a good day, especially using Flo when I don't get so tired from concentrating. I think I'll make a new DVD on scalping manually and using an autobot and add it to the training course. I'll let you know when it's there.


  1. Hello EL and thanks for talking about scalping.
    How did you handle the 4th and last trade?
    Where do you place your maximum stop loss?


  2. I only use drop dead stops and let the market tell me when to exit. After 3rd trade I'm more vigilant. There was no reason to exit as it was just price trying to decide. Last trade I scratched. I had been in the trend too long I thought.