Order Flow Trading

[jacktrader]

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.

hey Dali, anyway you can be reach through skype or anything? would love to talk in detail about OFT

[Dali]

hey Dali, anyway you can be reach through skype or anything? would love to talk in detail about OFT

Check your emails (the one connected to your BabyPips account).

[samba]

Check your emails (the one connected to your BabyPips account).

Dali, me also like to talk with you. I want to learn from you. Looking forward your response.

[Minotaur]

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.

Plain vanilla options are ordinary puts and calls options. Prices tend to gravitate toward the strike price at the time of expiry (10am NY cut) because each side of the trade has to actively hedge their exposure.

Let’s use the example of a $100 mln EUR put/USD call struck at c12820, today.

One side has an exposure of $100 mln dollars when the market is at or above c12820 and the other side has no exposure.

At c12819, the other side of the trade has a $100 mln exposure and the other side has zero.

All the jockeying back and forth tends to draw prices close to the strike as each side tries to position themselves for the moment (10am NY cut) when the option is exercised or expires out of the money.

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.

Today’s EUR/USD option 10am NY cut influenced price since german unemployment rate print. Action was all about getting price around c12820 for 10am NY cut.

They stuck the bids right above y’days low print and let it ride to the c12800 handle. It was pretty obvious who filled their orders - the short term punters who played the german unemployment rate print.

Look at the 9am NY candle (1h chart) close and you know who got payed, today.

[Dali]

Plain vanilla options are ordinary puts and calls options. Prices tend to gravitate toward the strike price at the time of expiry (10am NY cut) because each side of the trade has to actively hedge their exposure.

Let’s use the example of a $100 mln EUR put/USD call struck at c12820, today.

One side has an exposure of $100 mln dollars when the market is at or above c12820 and the other side has no exposure.

At c12819, the other side of the trade has a $100 mln exposure and the other side has zero.

All the jockeying back and forth tends to draw prices close to the strike as each side tries to position themselves for the moment (10am NY cut) when the option is exercised or expires out of the money.

Today’s EUR/USD option 10am NY cut influenced price since german unemployment rate print. Action was all about getting price around c12820 for 10am NY cut.

They stuck the bids right above y’days low print and let it ride to the c12800 handle. It was pretty obvious who filled their orders - the short term punters who played the german unemployment rate print.

Look at the 9am NY candle (1h chart) close and you know who got payed, today.

Hi Minotaur,

I can’t deny that they can have an impact on markets, but I don’t think it’s something worth to exploit for us as OF traders. In my opinion, focusing on barrier options makes more sense.

Would you like to share a bit about your approach? You seem to have a good knowledge about market microstructure, so I’m curious whether you are applying something similar in the markets.

[whyme250]

This isexcately how I trade except I only trade in the direction of the daily and weekly trends. So if trend is up I wait for flows and supply and demand factors to tell me to trade long or if trend is down I will wait to trade until flows and supply and demand tell me to enter short. I buy at wholesale and sell at retail in the direction of the long term trends and I wait for the trade to come to me I trade on the hourly and 4 hour charts in the direction of the daily and weekly trend direction.

@Dali

eading Order Flow

There are several services that provide real-time flow information like the one’s I mentioned above. Again, they have to be used with caution as orders can get cancelled or can have little or no impact. Also, we don’t want to get too dependent on them. Imagine a service get’s discontinued - you want to be able to do your own order flow analysis and not let yourself be distracted by this. Reading order flow is possible on charts and you don’t need the flow info services necessary.

This is how the standard flow info looks like:

Bids at 1.3000, 1.2980, 1.2950
Offers at 1.3050, 1.3080, 1.3100

Most of the reported levels are one’s that have cluster of orders at or near it. From the above mentioned info we could say that there is buying interest (demand) at 1.30, 1.2980 and 1.2950. The further the level, the more interest we can expect, as traders will feel comfortable buying “very low” or selling “very high”. Remember that price action can influence sentiment too. If we see EUR/USD breaking below a key psychological and technical level, some traders will sell on the break (i.e. momentum funds) and with stops getting triggered on the way, this will drive price further lower.

Orders can either:

[ol]
[li]Get “eaten” along with little or none impact (this is common during a stop cascade/squeeze)
[/li][li]Cause a slow down in momentum; price will consolidate
[/li][li]Cause a reversal (common during times of low liquidity)
[/li][/ol]

When trading of reported orders, I recommend waiting for a reaction and not putting a limit order ahead. See how price reacts to the level and how it behaves it after it hits it. Let’s say price trades down to 1.2950, where we have reported large bids from various participants. We see price stops at the level and retraces back up. Now, how does it behave on the way up? Does it seems that there is real momentum building to the upside or are rallies hitting quickly into fresh selling? Reading the order flow directly is a bit tough in the beginning and it is hard to explain it in words. You have to monitor price action as it happens and take notes. Combine this with sentiment and you have a real advantage.

Sentiment will give you the biggest advantage. Like I mentioned in my last post, you don’t have to make it complicated. Note key factors that are driving price action currently, analyze price action itself and keep track of how they correlate. Let’s take the Aussie Dollar as an example. Sentiment is positive as the RBA indicated it will not cut rates in the near future and on better economic data. Price action confirms this, so we want to look for reported bids and wait for a reaction. Nothing works all the time, but with sentiment on your side, you’ll go with the side of least resistance.

What really turned my trading into a profitable business was focusing on the high probability trades. They don’t require a huge stop and the reward is clearly worth the risk.

Market profile is another factor. During times of low volatility, playing the range is the best strategy. Let’s say we are trading in a 1.2950/1.3020 range in EUR/USD and there is no clear sentiment. You can anticipate a reaction to the reported levels and fade any rally or drop back to the mid range level. When volatility is high, bids/offers can get consumed along the way quickly and that is an environment where you definitely don’t want to pick a top/bottom. When there is real strength behind the move, look to join the momentum and not fade it.

In combination with the reported levels, you can identify key supply/demand levels on the charts. Previous day high/low, previous week’s high/low, previous week’s close level and psychological levels (big figures - i.e. 1.30, 1.31). Start to “read the flow” on the charts and you’ll get better at it with time.

Stops are also easily identified on the charts. Just think what the technical analysis guides taught you. They taught you to place your buy stop above the big figure (i.e. 1.30 -> stop at 1.3010) or your sell stop below the big figure (i.e. 1.30 -> stop at 1.2990). Or, above resistance/below support.

Above is an EUR/USD chart that will serve as an example. Demand at 1.2920 was large and there were first sovereign names reported as buyers and leveraged funds later joined the move. Obviously, sell stops were building above 1.30 and 1.3080, which flow info services later confirmed. As we moved up, they came more and more to the attention of other traders and of dealers, so it was only a matter of time. In my opinion, it is better to enter on momentum and push into the stops, than try pick a perfect entry when you have missed the chance.

Obviously, some of those concepts will be familiar to you from some of the technical analysis concepts. So what is Order Flow Trading about and how is it different? What I learned from Darkstar in his book and in the chat room is how to think differently about the market. It is a mindset that will give you a real advantage in the market as you focus on the core mechanism of the markets and on sentiment. As I mentioned, markets are a great deal about psychology. I will be honest in saying that my capabilities in explaining some of those specific concepts are not that wide and for more detailed education, I can only recommend joining Darkstar’s community. This is no advertising, but giving credit where credit is due.

Order Flow Trading can be applied in many ways and the above mentioned are just the basic examples. I have some more article coming soon, then I will try to make the concept more understandable through trade examples and similar.

[omgwen3rds]

Hi Dali,

Just want to congratulate you on such a fine thread you have started and keep up the good work.

I have a simple question. I am trading FX using FXCM Trading Station Software. Where can I find and analyse orderflow when using FXCM as a broker? Or the only way is to trade Futures FX to see orderflow?

Thank you.

[Dali]

Hi Dali,

Just want to congratulate you on such a fine thread you have started and keep up the good work.

I have a simple question. I am trading FX using FXCM Trading Station Software. Where can I find and analyse orderflow when using FXCM as a broker? Or the only way is to trade Futures FX to see orderflow?

Thank you.

Thanks for the feedback.

Can you specify what you mean? Are you talking about the general Order Flow analysis I presented here or are you talking about the DOM (Depth of Market)?

[omgwen3rds]

Hi Dali,

I am new to this, my basic understanding of order flow was that you analyse the Depth of Market (DOM) the bid and sell orders in order to understand order flow. Is this correct OR do you understand order-flow strictly by looking at the chart with your methodology?

[Dali]

Hi Dali,

I am new to this, my basic understanding of order flow was that you analyse the Depth of Market (DOM) the bid and sell orders in order to understand order flow. Is this correct OR do you understand order-flow strictly by looking at the chart with your methodology?

I do not use the DOM for my analysis, I used it in this thread to better explain how the price change mechanism works. DOM’s are only reliable for exchange-traded products (like, e.g. Futures), but not for FX. FX is an over-the-counter market and any volume data you will get is limited to one or a few brokers. So in my opinion, it is not worthing look at it at all in FX.

I would suggest you read again all my articles successively and try to apply some of what you have learned to the charts (i.e. determine the trend, note the stops, watch price action). Let me know if you were able to get some value from that and if you have further question, just ask.

[omgwen3rds]

Thanks Dali will do Have a great Easter!

[pierredupont]

Hi

I am very happy to find this thread, I want to understand how markets work and this topic contains a lot of useful information for me.
I am glad that the affect of options trading issue popped up because there is something that I found it other forum that seems to be working but I don’t really understand the logic behind it. As I saw there are people in this forum who can explain it to me.
the concept is the following:

you can create support and resistance levels based on the options settlements of previous day

Euro FX Futures EUR/USD Quotes - CME Group

to get the levels using the following formula

to Call: Strike + Settle*10
to Put: Stirke - Settle *10

I attached some picture to demonstrate how levels work

If I could understand why it works this /if it makes any sense/ perhaps I would be able to take advantage of using real time option quotes.

Thanks,
Pierre

[jacktrader]

Feel like im turning into fundamental trader due to extensive news pick and read! Even though I have a good feel of what short or long term sentiment would be now, it feels like in order to trade with order flow, one has to accurately identify “on spot” market sentiment and figure out which level will the movement will liquidate into…

[Minotaur]

In my opinion, focusing on barrier options makes more sense.

Barrier options are used (in massive size at times) when they want to drain the market of volatility and ‘influence’ price. As a consequence price get’s locked into a range defined by their aims and objectives.

Defending specific levels is another strategy used.

For example, if the market is very short with traders looking to push the market below a barrier (or trigger) in search of stop-loss orders or to break a technical support level but fails, the defender of the option has bought large amounts at the bottom of the market.

Often those positions are held on the cheap before selling them back into the market, just as traders are starting to get bullish again after a bottom was put in place just ahead.

Next thing you know, the market is sliding again and looting the trading accounts of bottom pickers.

Preferred time lines - prior interest rate decisions. They are doing it right now with the Yen pairs before tonight’s BoJ rate decision. They have been doing it last week with the Aussie Dollar because of RBA rate decision, y’day.

What I’m saying - focusing on barrier options coming from a retail angle - you need to be damn sure you know who is guarding top and bottom as a defender and how deep their pockets are. The volumes turned over near those barrier options strike prices (both ways) can be huge because the stakes can be so high.

Good luck with that.

Would you like to share a bit about your approach? You seem to have a good knowledge about market microstructure, so I’m curious whether you are applying something similar in the markets.

Whenever I witness price moving aggressively away from a particular level, or attracting good participation out of an area of basing or consolidation (fair value), that tells me the order book is being influenced by a strong momentum shift.

These are the occasions when these area’s or zones begin displaying imbalance, or visibly highlight where the balance is out of sync.

Highest odds/lowest risk opportunities - I do focus on.

[Minotaur]

Even though I have a good feel of what short or long term sentiment would be now, it feels like in order to trade with order flow, one has to accurately identify “on spot” market sentiment and figure out which level will the movement will liquidate into…

Jack- all you need is an awareness of price.

It requires an answer to two questions:

Where is price N.O.W ?

Where does price come from ?

Markets (and their [human] participants) to some degree, are creatures of habit. They prefer familiarity especially where money is concerned.

The EUR/USD c12833 level - where price has been pinging back and forth since mid-March - is a prime example. That level is very familiar to a certain group of market participants. Sentiment-wise it is the fulcrum between German exporters and speculative hedge funds.

Any lower (medium-term close) and you will hear sound-bites coming out of Frankfurt. In fact ECB’s Coeur started, already. What does that tell you, Jack …

[Minotaur]

Preferred time lines - prior interest rate decisions. They are doing it right now with the Yen pairs before tonight’s BoJ rate decision.

And right on the spot - BoJ monetary statement - the Yen pairs flew through Barrier Option defences in line with sentiment and bias, gaining 300-400 pips on average across the board.

Single currency (EUR/USD) still being contained in a range (Barrier Options).

Watch out for Draghi’s OMT’s - ECB press conference - they got their order book ready - took them all week incl. last to feed in the blocks across all major trading hubs.

[jacktrader]

And right on the spot - BoJ monetary statement - the Yen pairs flew through Barrier Option defences in line with sentiment and bias, gaining 300-400 pips on average across the board.

Single currency (EUR/USD) still being contained in a range (Barrier Options).

Watch out for Draghi’s OMT’s - ECB press conference - they got their order book ready - took them all week incl. last to feed in the blocks across all major trading hubs.

Hey Minotaur,

Thought of asking you something now. Right now i have IFR stating a 1bln options expiry at E/U 1.28. And E/U have touched that level several hours ago, to a low of 1.2798.

So does that means the 1bln of 1.28 options is no longer valid?

Btw, how do you tell when E/U is playing in range because of Barrier Options? Just because it is ranging in a channel?

[Minotaur]

Thought of asking you something now. Right now i have IFR stating a 1bln options expiry at E/U 1.28. And E/U have touched that level several hours ago, to a low of 1.2798.

So does that means the 1bln of 1.28 options is no longer valid?

Jack- c12800 option expiry is for today’s 10am NY cut.

Btw, how do you tell when E/U is playing in range because of Barrier Options? Just because it is ranging in a channel?

Take a look at the bars - 1h time frame and below - the footprints are there. Especially when the feeding in the blocks - bars wth no wicks - indecision bars - hh / hl - lh /ll - indecision bars - lh / hl ect… c12880-12750 is the range.

There is overlapping support - where they positioned two way orders - at c12763, c12800 and c12833.

c12920-12880 is first resistance. c12940 and c12983 right in front of the c13000 handle.

[jacktrader]

Jack- c12800 option expiry is for today’s 10am NY cut.

Take a look at the bars - 1h time frame and below - the footprints are there. Especially when the feeding in the blocks - bars wth no wicks - indecision bars - hh / hl - lh /ll - indecision bars - lh / hl ect… c12880-12750 is the range.

There is overlapping support - where they positioned two way orders - at c12763, c12800 and c12833.

c12920-12880 is first resistance. c12940 and c12983 right in front of the c13000 handle.

Thanks man. But im still a bit confuse with the meaning of expiry. I know it’s plain vanilla option. So what does the expiry suppose to mean? Before 10am NY, the price has reached the 1.28 level. I thought if any moment the price breached the level stated before the expiry, the option is no longer valid? Do help me to understand how this option expiry works. Thank you very much

[Minotaur]

Thanks man. But im still a bit confuse with the meaning of expiry. I know it’s plain vanilla option. So what does the expiry suppose to mean? Before 10am NY, the price has reached the 1.28 level. I thought if any moment the price breached the level stated before the expiry, the option is no longer valid? Do help me to understand how this option expiry works. Thank you very much

I have given an example how it works in post #104.

10am NY cut close was c12841 for c12800 (2 yards) option expiry.

Who got paid, Jack ? The bulls or the bears ? And why ?

The 4pm NY fix print was c12933. What does that tell ya going forward ?

The clues are there.

Another important question to ask in order to get a hang into order flow - Who is trading at a particular level and W.H.Y ?

ECB’s Draghi mentioned his OMT’s only once during ECB press conference - look what it did to price.

Take a look at that 1:37pm NY candle - that’s a 60 pips in 60 seconds print - what does that tell ya going forward ?