What happened to this thread? It was a good thread with great info. It seems that the thread is stopped because of the trollers.
Hi Samba,
Sorry, I was quite busy the last two days, but I’ll post an article the next few days. 
Excellent thread. Don’t discount the information here.
Hello Minotaur, What you meant by Line up UJ,EJ and EU? I can see UJ and EJ correlating, But how read the correlation with EU? Can you elaborate it?
Thanks.
I read it in terms of (for example) if you were looking at a buy on UJ and EJ you could look at EU, If it’s bullish then go with EJ if it’s bearish go with UJ etc etc.
hey Minotaur,
thanks for replying. I was keen for a reply thats sorta explain on news event and what to watch our for in terms for sentiment feel on any security/currecny pair. But having futures is one of a good way i suppose, when USD futures are so greatly correlated with E/U pair.
Dali, keep the posts going. I can see you are developing your own way of trading order flow, despite having trollers around. Keep up the good work, gotta agree with you. Order flow trading is a mindset, i am still learning to see the ‘‘inner’’ market.
That make sense Slipp. I didn’t think like this way. I will take JPY pairs altogther to find the correlation but not with the EU. Let me try it in coming days.
Look at EUR/USD right now. Major news out of Cyprus and Russia will hit the tape any minute.
They got bids lined up at c12880 and first layer of offers at c12920. First major line of defence for bears is c12983 (4th quarter 2012) macro level. After that it’s c13055 (1st quarter 2012) macro level for the bears.
The bulls looking to defend c12880 and c12833 (2nd quarter 2012) macro level after that.
Once the tape get’s hit the bears will lock in profits and then begin to also attract staggered layers of ‘long’ or counter reverse stop orders to try and catch an aggressive & extended reverse move back up.
That’s what often causes spiky, erratic price action for a while until the dominant order flow reasserts itself.
That’s what to watch our for on news event.
Great! Thanks man. If im not wrong, current TA shows EU on positive track, sentiment wise we wait for more news of cyprus banks and russian side?
Would love an article on support and resistance please. Like how to tell if the level will break or if the level will hold.
I believe thats where sentiment comes in. to understand if a level will break/hold, there are various condition to be considered. I.e, market sentiment, how large are block of stops/limit orders floating around, options barrier etc… Its all about what could possibly benefit the large trader if the level broke, stops triggered. Imo thats order flow way or trading (correct me if not).
Sentiment Analysis
Sentiment analysis is an important part of the Order Flow Analysis. One could focus only on the technical stuff, but incorporating sentiment reading into your analysis will help you to focus on the higher probability trades.
One has not to go to deep into fundamental analysis to apply it. I do not in-depth analysis about the global economy or specific countries, but rather focus on the key themes in markets and follow news. There are a lot of free news feeds out there and most brokers offer the one from Dow Jones. I personally use only the IFR Markets feed from Reuters, but again, the one from Dow Jones or websites like ForexLive will also serve you well.
So what should you be looking for?
1. Key Themes in the Market
What are the key themes everyone is talking about in the markets? This should not be too difficult to identify, as news services will report about them frequently. Currently, we have:
a) Cyprus bailout
b) BoJ Inflation Target
c) UK’s stagnating economy
d) The Fed’s response to the improving US economy
There are themes that will have a long-term impact like the Fed’s future policy and those with short-term impacts like a worse than expected economic data release of lower importance or some temporary political fights. The short-term impact events often cause inefficiencies, which the OF trader can fade. The long-term impact themes are the ones that are driving flows and even if you are day trading, going with the flow will give you an edge in the market.
2. Keep track of Sentiment/Price Action relationship
I will always look for obvious sentiment (like currently e.g. AUD-positive) and keep track of the price action. If bias for a currency is positive, because of e.g. improving economic data and good chances of a rate hike, I will look for price action to deviate from this and enter long on a favorable opportunity.
This can be caused by a short-term impact event or it can be a “natural” retracement (profit-taking, short-term market participants). One of my favorite patterns is the counter-sentiment stop hunt, which I explained earlier in this thread. If we take again the example of the currency with positive sentiment, we want to look for a stop hunt down into sell stops and fade it. Especially when there is no specific event/reason driving prices, just a “random” stop hunt, this will offer great opportunities.
3. Price Action can influence Sentiment
It’s a two-way relationship. Like I mentioned in one of my earlier articles and Minotaur wrote about a few posts above, price action also influences market bias. Let’s take an example from today: Shorts were worried keeping their position open over the weekend as any improvements in the Cyprus bailout deal could lead to a larger spike on the Sunday opening. Even as market bias for the Euro is negative, the risks are too high for shorts.
There is a short-term base at 1.2880 and the level was respected. Once buying picked above 1.2940, shorts got even more worried and probably felt there is a squeeze ahead. Stops above 1.2950 were eventually triggered and it attracted further buying until we finally hit stops above 1.30. Guess what? We had reports of large offers sitting at 1.30 during the whole week, so short-term participants took advantage of weak shorts by pushing into their stops and some other participants got themselves good short entries at 1.30.
The situation in Cyprus is still bad, but given the lack of concrete news, the market “cleared” the weak side of the market.
Conclusion
Don’t make it complicated and keep your sentiment analysis simple!
Note key themes in the market, follow the news (focus on one feed and key headlines, don’t become a victim of analysis paralysis) and study the relationship between your sentiment analysis and price action. Think about your opponents in the market and try to identify the weak side of the market. Finally, combine it with technical order flow (key levels, stops) and keep in mind that price action can influence sentiment too! 
1 Like
Here is one trade example, it is a position I still have running.
I shorted CL (Crude Oil Futures contract) at an average price of 95.30 as the stop hunt above 95.50 was completed. Sentiment turned negative pretty quickly in FX markets, but US markets were still trading in a tight range. The choppy price action in the indices and my strong conviction about current negative sentiment in the markets gave me a good reason to stalk a short set-up in CL. Why CL? Stop hunts occur in every market, but in CL it just tends to “stick out”.
I watched stops getting consumed on the way up and waited for price to lose momentum. Stops above 95.50 were done and everything indicated CL hit into decent selling interest at 95.50. While upside momentum was quickly regained on the previous move, this was not the case after it hit 95.50.
So, price action combined with my view of negative sentiment, made me short CL at 95.30 and I’ll leave it open for a stop run below 94. I’ll trail my stop on the way down.
It’s important that I note that it is sentiment that made me anticipate the set-up. I do not advise going against momentum unless you have sentiment in your favor.
Is this thread still active?
Yes dali only posted yesterday check the dates posted
Barrier Options
Barrier options are exotic derivates and an option on the price of the underlying asset. The option writer (typically banks) sell options to the option buyers. FX Options are traded over-the-counter and not on exchanges. If the option expires worthless, the option writer has earned the premium (similar to a comission as you enter a trade) and the option buyer has lost. If the option is in-the-money, the option writer has to pay out the option buyer the specified amount. There are:
Knock-In Options - the option is worthless until the underlying asset hits the specified barrier price in the set time period. Example: EUR/USD spot price is 1.28 and I buy a 1.30 knock-in option. The option is worthless until it breaks above the 1.30 level.
Knock-Out Options - the option becomes worthless if the specified barrier level is hit. Example: GBP/USD spot price is 1.51. I think the pair is heading higher, but do not expect much volatility. If I buy a G/U option with a barrier at 1.53 and it does not reach the price level in the specified time period, I get paid. However, if price breaks above 1.53, the option will become worthless.
Double No-Touch Options -Just like the knock-out option, but it has two specified barrier levels. Example: DNT option for 1.26 / 1.34 in EUR/USD. If price stays within the set range during the stated time period, the option writer has to pay me the specified amount. However, if price breaches any of these two barrier levels, the option will become worthless.
Double One-Touch Option - Knock-in option with two set barrier levels. Example: GBP/USD 1.46 / 1.54. I will get paid on the option if it reaches either of the two set barrier levels during the specified time period. If it does not, it expires worthless.
Why does it matter?
Barrier options can trade in decent size, there are sometimes ones in the value range of 500 million up to 1.5 billion. Let’s use an example for the Knock-Out barrier option, as it the more common used one.
Put yourself in the position of the option writer. You sold a 1.27 / 1.34 DNT barrier option to a customer with a 500 million $ payout. Price is approaching the 1.27 level and that is exactly what you want to see. Once it hits 1.27, you have pocketed the premium and will keep the half billion. This is why option desks will gun for these barriers and try to get them triggered. Similar to the FX spot dealer, you want establish a short position and increase downside momentum. As there are often stops located above/below barriers, this will help to attract the attention of Spot dealers and of predatory traders gunning for the stops.
On the other side, there is the option buyer that has great interest to keep price away from the 1.27 level. Not everyone can buy a option in that size ($500m), so you can be sure he’s got some firepower too. He will try to buy ahead of the level and hope there will be also other bids in decent size. A good example is the 1.28 barrier option in EUR/USD that got triggered today. The option buyer was lucky yesterday, as there was decent demand from Asian Sovereign names and corporates that kept the pair above the barrier level. However, EUR-negative sentiment led to fresh selling this morning and the pair broke below 1.28.
When we talk about barrier options in decent size (at least, larger than $50M), they certainly can have an impact on markets. However, I don’t want this to look like there is a battle whenever a barrier option appears. Just to mention one reason, there are participants that simply don’t care about some barrier option, they are gonna execute their trade idea nevertheless.
Some things to keep in mind:
[ul]
[li]The “battle” will be more intense if the expiry is near. If the 1.27 barrier option in EUR/USD expires in two days and we are approaching the level, there will be very likely some effort from the option writer to get price down there and from the option buyer to keep price above for these two days. On the other side, if the option expires in two months, but it seems very likely we will break below 1.27, defence from the option buyer will be minimal.
[/li][li]Sentiment & Market Profile! If we get bad news from Europe, there will be a lot of selling coming in and nobody’s gonna care about some barrier option. The option buyer will most likely also see that it is not worth defending the barrier - why additionally waste money?
[/li][/ul]
How to use this?
Note reported barrier options (IFR, ForexLive, the Twitter feed I mentioned earlier) and establish a position to push into the barrier level. Preferably, go with sentiment. Example: There were 1.28, 1.2775 and 1.2750 barrier options reported and sell stops reported below them. One could not have a more beautiful OF trade: Establish a short position and gun for the barrier and stops below. Given the average daily range of EUR/USD, 1.2750 would’ve been a realistic target. But a good approach would also be to establish a position and take partial profits as each of the barrier gets triggered to your final target.
In general, it is more preferable to go with the option writer and attack the knock-out barrier, especially when sentiment favors such price action. However, in a market environment with little volatility and tight ranges, barrier protection can be stronger.
Dali,
Often options reported from ifr,forexlive etc are KI or KO options? Most time they are just reported levels.
Most of the time KO or DNT’s.
And yeah, just to clarify, the Options Calendar on IFR is for plain vanilla option expiries and not barriers. IFR will note if they are talking about a barrier option.
Thanks man. One quetion. Whats the difference between plain vanilla expiriers and barriers? I thought they are the same…?
Plain vanilla is a term used for the most basic version of a financial instrument. So they are options giving the owner the right to buy/sell the underlying asset at a specified strike price on or before the set date. Barriers are so-called exotic options as they have advanced specifications.
Plain option expiries won’t have much impact on markets. It might, if markets are really thin and there is a large expiry at a specific price, but in my opinion, it’s nothing we should care about as retail traders.