Data drives everything

On Orderflow interpretations and Orderflow charts

I thought long and hard on doing a small write- up on Orderflow interpretations and the charts we get based on the data we feed into them , which in turn drive hard rupees into the markets, with an expectation that they would come back to you a percentage which is more than what you initially put in. I know i step on some toes as I do this, but this needs to be said and put out .

Data drives everything. Often wrong interpretation of data is used to drive canards too ! But this post is not on that. Instead let’s focus on the rights .

The problem seems to be – if there is one system called Orderflow charting, why is it that different people put up absolutely different images of the same instrument, in the same periodicity of the same day.

After all, if you open say a 60 minute candle stick chart of say the Nifty, you would expect to see the same green or red chart with the same highs and lows and the same open and close anywhere you would open it- In Investor RT, Ninja, Sierra or any charting service anywhere.

Then when it comes to Orderflow , why does the chart appear different everywhere? Should it not be the same?

The tools we use have to have a direct benefit to our trading. They should, why would we use them if there was no benefit? There are various pieces which when they come together help us manage and execute our trades better. When all the pieces add up nicely, we have a good story and we are that much more confident when we execute based on that info. But what if some of the pieces in the story are not saying the right things? Worse, what if they are painting to a different picture than what is the reality. Now that is an issue for a trader already fighting hard in the market to make his trade work. If his tools are going to fight against him or to put it mildly assist him wrongly in the execution of his trade, then imagine the problems our dear trader friend has.

Data is what makes a chart beat and the purpose of the chart is to point you in the right direction. Period.

In Orderflow charts, For price to move higher, the available sellers in the tape have to be taken out. No doubt there are always willing buyers below the price, but if they keep running into a wall of sellers at every price point, you will note the price does not move higher.

Let’s put it this way..

Assuming there are 3000 contracts for sale in the Banknifty in the middle of the day. This adds up to a volume of 60000 on our Orderflow charts. Whilst this number may deplete or grow depending on the liquidity provided by other market participants at that point in time, only one of 2 things will actually happen

a) As our main character is a seller. You may see less than 3000 contracts on the Buy side , say 1600 contracts and then moving through to the next price. Wait, what happened to the other 1400. In this case there is a imbalance skew meaning no big demand to counter the supply available. Chances are in this case the sellers overpower all the remaining demand also easily and there is a rush of new limit and market orders in the market as price probes cleanly lower, You see a sharp move lower in this case .

b) Second option, you see a multiple of the 3000 contracts coming on the Buy side and quickly to counter our main character- The Seller. This is a big number and does not happen very often. In-fact, it is very rare that we ever see 3000 contracts for buy or sell in the BankNifty . Say we see 7500 contracts now as a Buyer, but in this case you would never get to see the market print 7500 at any time . What really happens if that after the initial 3000 is absorbed the balance 4500 is thrown to all the sellers waiting in queue behind and price probes quickly higher. ( shorts are coming out) . So even though we never saw a print of more than the 3000 on the opposite side, price is still moving higher.

This is an example of a Volume transition happening . It does not take a genius to understand where those positions start to unload, if you know correctly where they came in. The problem is here and when you do not know who is driving the auction- the new players or the stuck inventory.

Either way, if your system of Order-flow does not account for such changes in reading the print accurately, you are seeing less than 50% of the value of OrderFlow analysis.

Then there are situations where the 3000 contract mentioned above gets shown as 1400/ 1600 or 1200/ 1800 as the data feed parses the contracts. Now this is done differently by different vendors and has no effect on the overall Order flow read as long as the total volume read is 3000 contracts. But even if it is off by 50 contracts or say 1000 of volume in the BankNifty , would it really affect a market which trades 250000 or 12000 contracts every 30 minutes. And I get people saying , not every tick is accounted for and blah blah blah. Does it really matter?

On the subject of ticks, there is Delta and cumulative delta and no topic on Orderflow is complete without a mention of Delta. For some people Orderflow is delta and delta is order flow. Nothing could be more further from the truth. The Orderflow industry has gone crazy over the concept of Delta from 2002. Yes that’s how long Orderflow trading has been around from . If you are new to the concept of orderflow in 2019, don’t feel lost or less behind. There are still people peddling junk from the 1980’s as magic indicators even today. At least you are here and reading on Orderflow, some people will never get to know anything beyond the price based indicators they will put at the bottom of their charts.

Back to Delta- I don’t use it anymore, though it stays on my charts as an indication to me to what other traders are looking at and seeing. If delta meant aggressive buyers or sellers moving an auction through market prices, most people don’t get it, that it moved that way because some one on the other side was also making a concession! Whether forced or voluntary is a different aspect but they were part of the trade and their role should not be minimised. If he had refused to “passively” participate how would the auction move?

Delta has been the favorite “feature” peddled by over eager charting service providers and tons of marketing resources have been dedicated to it. But it has no real time edge to me and you as a Trader.In the Orderflow universe we live in, delta is like that divergence which appears in traditional candle stick charts- promises you a big rosy future and lots of hope but never materializes.

In a slow or average paced market, a delta calculation is very easy if you have a correct feed and you keep adding the size of the trade on the buy side and sell side to previously accumulated volume. But in a fast break or a sharp rise, price moves quickly and often market orders are filled at the bid when the ask is rising rapidly creating a delta figure which is negative as trade gets subtracted from previously accumulated volumes. You will notice that most trend days have negative delta which does not look good on screen. So what did they come up with ? The concept of delta divergence of the kind used by lagging price based instruments and price. you have to understand here that positive delta does not mean new demand, it can also point to short covering. Granted some times there is factual delta divergence , but if it happens everytime you have not addressed the elephant in the room.

So what is this issue?

Non technical readers might want to ignore this para, but since we are addressing the issue, I believe the subject does not complete with out this. The problem as mentioned above in fast markets is that TicktypeatBid and TicktypeatAsk does not enumerate properly in most platforms. The problem went back and forth between data vendors and charting service providers and I know at least one guy on Ninja who bypassed the Ninja platform so that his users could get real trades as put out by the exchanges and as correctly mapped to orders. Many have tried Ticktypeinsidebid and TicktypeInsideAsk and ticktypecurrentbid and ticktypecurrentask. But to the best of my knowledge it returns current best bid and current best ask and not the value where the tick occurred. I had this problem when I went deep with my Orderflow charts and was happy to find that when TSTQ was enabled the data matched up nicely. TSTQ is short for Tick server trades and Quotes.

Most Orderflow softwares today have not just the price at which the last trade happened but also the quote there at the time of the trade. Explains why there are sometimes 0’s on charts and there is nothing fake about them! On the contrary, we in the Vtrender Trading Room get excited every type we see the 0 quotes at the fag end of the bar and are quietly punching orders as we see them. You see 0 quotes is the surest way to understand that an auction just got completed there, a fundamental auction market theory concept!

Hopefully after this post I stop getting DM’s of this kind as above. It’s important for you to know when you are reading a chart, what makes the chart tick!

My purpose here is just an information exchange. I’ll politely accept all you comments and feedback even ego driven insults of the few. I perfectly understand that there will always be elements who like to give everything a “spin” to further agendas of their own. As mentioned, I felt I had an obligation to speak. We live in an ugly industry . No charting service company will consider that there is a better way of doing things. This is because none of these people in the data industry or the charting service company ever do trade. They are packed with developers and sales agents who were not good enough to continue, even if they once did trade. Once you take the trader out of a developer, the product becomes just a marketing tool to coin cash. They start rolling out new indicators and flashy flashy concepts and ideas, none of which they want to trade with their own money. The cycle moves to producing “features” than give “benefits” to traders .

Good traders know that there is a good and the bad. Trading is about making decisions. We make some bad ones but we wisen up quickly and them make the right ones. Good judgement with an ability to course correct and separate the good from the bad is the only thing which will carry you long in this business.

Good luck.