Month: January 2014

 

Much of how OrderFlow needs to be traded and the need for this great tool is found in an earlier post on this subject in November.

I want to take this opportunity to re-emphasize the importance.

Trend Indicators :

The OrderFlow is the Buying and selling of the market. It is the auction theory playing out though those two lines.We all know that the market is driven by the action of buyers and sellers and their quest for getting the fairest price or value.As traders we need to be trading value and not price. It is through the OrderFlow that we see changes in the control happening.We can see Buying beginning ( start of blue/ green) and we can see it exhausting and the selling happening ( start of pink/ red).The orderFlow is a visual representation of that process.

Need for 2 indicators :

The market place is dominated by different time frames each of who use the same system to buy or sell.So we can have the scalpers, one hour traders, day traders, short term, intermediate term and long term buyers and sellers.Each of them buy or sell at the same prices with different objectives thus causing the market to move or change. Not all of them though are present in the market at the same time. As Intra-day traders we are keen to spot the entry of a longer term player who can move the market in a big way or the presence of the day time trader only.Accordingly we have the green pink line which will function at it's best when the day time frame player is operating and the blue-red line which will work when the larger time frame player is operating. Much like you cannot use a weekly chart to trade 10 point prices, you have to correctly use the right time frame or right orderflow for the buy sell process.

How do we know which one is correct :

The Order Flow charts are provided with value area lines from yesterday.The first thing we note is the open price.If the open is within the value area of the previous day then the action that day will not be very big till one of the value areas break. So in this case the green pink line has to be used.Generally the size of the value area is 25-40 points on an average in the Nifty and about 70-90 in the BankNifty.So we emphasize that you should book for 10-15 points in the Nifty and about 40 points in the BankNifty.
If value breaks then you can change to the higher OrderFlow and ride the position with a stop/ profit booking at the value area or appropriate pivot level or vwap or any other level given in the trading room.
Always begin with the slower orderflow.

What about whipsaws :

To answer this question we need to see why whipsaws happen. Since our indicator is a buy-sell barometer, it will whipsaw at places where both buyers and sellers agree on value.These places would be the Point of control ( developing and previous) , VWAP and occasionally value area lines also.Most of the time these places are within value and hence the green pink indicator would be operating.The other option would be to wait out the period till a resolution happens. The POC is the place where the market finds it best to trade and even if the signal is good one needs to be patient for price to move around it.If one needs to trade, then the better option is to ensure that you get green blue on the same side or pink-red together from this zone.

What about stop losses :

Since the system is a stop n reverse method the actual stop loss is a change of signal.But one can be looking for clues to ensure whether the trade is going your way.
a) When the signal is generated a price is given on the right of the screen for that indicator which is a mental stop ( not a hard stop). The trade will be in danger above/ below this point. As the trade goes in your favor, this price keeps increasing or decreasing.One needs to keep monitoring this price. It will always have the color of the signal you have chosen to trade.
b) Follow the movement of the price candle above or below your signal line.If it's a green-blue signal for buy, then most of the time price will spend above the indicator line.If it manages to go below and stay below, then a reversal is around the corner.The same logic applies for the pink-red signal where a move above the pink or the red line will indicate a reversal.
c) A third method and the one which we use currently is to utilize the prime levels.

Profit Booking :

We are big believers in the risk free second trade. Our advice is to trade in multiples of two lots and book the first half at 10-14 points in the Nifty future for green pink line and 30-40 points in the BankNifty. Ride the second at cost or change of signal.The blue red can be part booked at 25-35 points in the Nifty and 60-80 points in the BankNifty.Look for VWAP, VAH, VAL etc as booking points also.

Another method would be to book profits at each of the Power levels mentioned as PR3 to PS3. Thus a BUY signal can be booked at the closest PR1, PR2, PR3 with every preceding level becoming a stop loss for the existing order. Depending on how the smaller OF reacts , one can re-initiate the booked order

Other Aspects :

Try as much to trade with the Nifty and the Bank Nifty giving similar signals. Same color OrderFlow, above-below vwap together and same position of value area.
The best signals are when all 4 signals are the same in the Nifty and the bankNifty.

Please read a conservative approach to trading OrderFlow in the "Must Read" section.

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OrderFlow- Practical usage

 

We have certain rules when we trade Order Flow and these rules have been taught to us by Market Profile.

Following these rules keep you on the right side of the auction process, in itself a parameter for successful intra day trading.

Just To Recap :

1) Buyers will always buy every dip above value area high(VAH), as long as it holds.

2) Sellers will sell every rise below Value area Low (VAL), as long as it holds.

3) Buyers are stronger above day's vwap.

4) Sellers are stronger below day's vwap.

5) Reversals can happen at/ near known Market Profile reference points/ Pivot Levels.

We know that above or below value we have to trade the Blue-Red Indicator and in Between value a dependence of the smaller green-pink will give us better results.

But the question which arises is whether the green-pink can still be used to trade the region away from value.

The answer is in the affirmative if you follow the 5 rules above.

You would get better results only if you trade the right side of the auction process as indicated by the blue-red line.

Let's look at the action from the session dated 25th Jan, where the market traded above and below value 95 % of the time.

An open above value would have alerted you to the prospect of trading the larger OF as opposed to the smaller one.

The easiest thing to do on this day was to keep trading the blue-red indicator.

But there were good possibilities on the smaller OF as well.

I've marked rectangles on the chart for all failed smaller Order Flow trades.

The main reason why these trades failed were because they go against our basic rule which says that one should trade the larger OF only above value.

But the other fundamental reason why each of those trades failed was that they were trades taken against the stronger trend ( Blue-red Indicator ), against VWAP ( orange line ) and against value ( brown dashed lines).

Notice that on the way up from the open, it is the pink trade which has failed and on the way down it is the green trade which has failed.

Also above value and above vwap the green is stronger than the pink and below value and vwap, the pink is stronger than the green in terms of the length of trend.

As a conservative trader, if you can trade the Smaller Order Flow on the right side you would still have a lot of winning trades.

When you enter your trade, just ask your self these 3 questions :

1 ) Are you on the right side of the trend ( Blue-Red Indicator)

2 ) Are you on the right side of vwap ( above for buy/ below for sell)

3) Are you on the right side of value ( above for buy/ below for sell)

Most of the time, trading one side of the market ( right side), makes a lot more sense than both sides.

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OrderFlow- A conservative approach

Trading room charts

This post is a brief write-up to new subscribers to understand the charts in the Trading Room.We would urge you to be patient as you go through this material as you represent today, a very small minority of the trading community who uses such charts ( the edge in the markets is by doing things which others do not know about) . So Congratulations and let’s get started. 

Please understand the information provided below by looking at charts in the trading room.

There are a total of 4 charts to be viewed at any time in the trading room. These would be 2 for the Nifty and 2 for the Bank Nifty current month Future charts. We also have bigger displays for these charts through 2 links which are updated in the Trading Room at the open. 

We watch these charts live during market hours

OrderFlow- Basic 5 mins

In Orderflow, the volume of the instrument is more important than the time frame, like a 5 minute or a 30 mins.

We are focussed on Volumes.

Volumes Precede Price.

A quick primer on Orderflow is at – https://vtrender.com/what-is-order-flow/

 

What the Order flow chart does is that within the intra day sphere, eliminates a lot of guess work by showing precisely the movement of volume within the bar and especially the quantity traded at the bid and the ask. Put sequentially this has edge in showing us if Buyers are controlling the market or sellers. 

Thus instead of being restricted to just the Open, High, Low and Close of a small bar ( say 5 minutes or even 30 minutes) we go inside the bar and get an inner view of the kind of volume which traded within the bar.

It can be used to confirm or deny our bias for an entry or even an exit location by looking at whether the broader market participants covered positions or added new at a particular price point

The chart above represents traded volume and hence traded prices. Hence we are looking at only traders who have committed positions in the market already.

World over the definition of Order Flow varies from what is coming into the market in the form of buyers and sellers and typically called the Order Book to the other extreme which is Traded Quantities and Traded Prices and representing transactions which have occurred. 

In India when it comes to getting the Order Flow Book most of us do not get to see beyond the top 5 volumes and prices. Whilst this study of the Order book adds a new dimension to trading, often it is not accurate as many individual traders and even institutions occasionally cancel orders or put them up front only for reactions and not trade. Thus this study has lots of uncertainty even if we had a deeper DOM or depth of Market as it is called.

Vtrender believes in going with Traded prices which shows the commitment of traders during the day and their bias. We work forward after knowing how traders are positioned at any point of time in the market.

On the chart above we have

  1. a) Volume of a 5 min bar represented as Sellers x Buyers. The sellers are on the left and buyers on the right. Since the Order Book is read vertically by the market with sellers above and Buyers below it makes sense to read the traded prices as well, diagonally to see how many sellers are there below for a buy order.  The buy side and the sell side prices are tracked diagonally not horizontally or same side.

In reading the OrderFlow it does not make sense to track every bit of volume in a 5-minute bar but to observe closely what the Market is doing at important reference points like the day vwap or previous day VAH or current DPOC or previous day low or even the hypo levels. The objective being to see that if we are buying into the market, we do not buy into a sea of sellers or the other way around. If more buyers show then we will see quick shades of green.

 

  1. b) We look at the volume traded in the bar to see the impact the Buyers x Sellers are having on price. The Higher the volume, the bigger will be the impact. 
  1. c) The total traded volume in a bar is noted and the difference between the buyers and sellers is painted at the bottom in a pane which will give us a quick idea of buyers and sellers in the past columns of prices. This is a sum picture of the difference in volume between buyers and sellers and is a proprietary indicator we use called the COT. Generally, if the COT is big green it means more buyers have shown intent and vice versa.
  1. d) Chart Ref lines like the  Open, previous day high, previous day low, Current week High/ Low and previous week High/ Low are marked on the chart. Also, the IB ( high and low of the first hour)is marked as a black band in the chart. The developing value areas will be shown as light blue for value high/low and dark blue for dpoc. These will be moving lines on the chart. The firmer brown lines are the previous day value high and low and will be visible on the chart as brown dotted lines.
  1. e) The duration of the chart candle is set at 5 minutes on the left chart and at  30 minutes on the right which is the Profile 
  1. f) The IB range and the Day range are in the left bottom
  1. g) The previous day vwap is also highlighted as a price point in the chart.

Market Profile charts

We also have the market profile charts, where, instead of bars or candlesticks, the alphabets A, B, C etc represent 30 min intervals of the day.

A quick primer on MarketProfile is at – https://vtrender.com/what-is-the-market-profile/

Here we like to see the buyer-seller equation again in terms of market time and see where control is being established or who is driving prices.

You have volume profile values represented in this chart.. 

To Conclude

Go through the previous day’s analysis posted on the blog and use the Market Profile charts to understand the structure of the market.

Use the Order Flow charts to position your self for an entry or an exit. The order flow chart is to time the purchase or the sell and is to be used for an accurate execution of the strategy .

 

Wish you the best…

 

 

Trading room charts explained