Basic introduction to order flow

Introducing Order Flow

My name is Mike and I have worked for JP Morgan since 1994, Commerzbank Cargill Commodities Trading and a period of freelance work. My experience in investment banking has taught me how to obtain information from outside the market and turn this information into profitable positions by finding the best return-to-risk ratio point from the clues of the market. Working at Cargill Trading Commodities Trading Company taught me to probe the minds of users and laid the foundation for me to take profitable positions in the futures markets. When I work for myself, I learn to judge the relative size of benefits and risks. I don't try to catch every random price fluctuation to make myself profitable. I just look for the so-called "minimum pressure point", that is, to gain the largest upside with the smallest possible loss. I have enough pressure in my life. I don't want the deal to pour another bucket of cold water on me.

Different from the traditional technical analysis that only looks at the price trend of the K line, the order flow is presented in the form of a chart to judge the price trend by counting the volume of active buying orders and active selling orders at each precise price. Its value is that order flow can always be detected immediately whenever market tops and bottoms are confirmed by market action. It can be used to observe changes in supply and demand forces in the market, and to spy on market sentiment and investor psychology.

The traditional candlestick only shows the opening price, closing price, highest price and lowest price at a specific time. It will not show how many buy and sell orders are there at each price level down to one tick, and it will not reflect the balance of demand and supply forces, which can be answered from the order flow chart

Investors who are new to the capital market are always trying to find the legendary Holy Grail, which is similar to a money printing machine, constantly withdrawing money from the market. They keep trying various indicators and moving averages, firmly believing that there is always a magical indicator waiting for them in front of them. However, the behavior of the market is not determined by indicators. Nothing in the market is absolute. To become a successful investor, you have to study harder, do a good job in position management, and constantly summarize and learn lessons. The most important thing is to have iron-like trading discipline.

Just like the alchemy in the past, eager to turn ordinary metals into priceless gold, there are many talents who are proficient in mathematics and IT, trying to summarize an indicator to predict the trend of the market. I am afraid that when I say that the market does not follow any formula Fans of Theory and Elliott Waves are going to throw stones at me.

Over the past hundred years, there seems to be little change in the field of transactions, except for the invention of computers that allow information to spread at a faster speed. Investors are still staring at the opening, closing, high, low and volume numbers, as usual. Of course, investors in the 20th century also read the tape, in today's words, it is the market data, or the order flow. Computers help us to better collect these order flow data, organize and analyze them.

There is an old saying in Japan, ask the market about everything in the market. This means that we should be able to discern from price action what the market is really trying to tell us, rather than being blinded by the vast amount of information on the Internet, whether it is technical or fundamental. When the market is engaged in a strong shock trend. An analyst may be able to judge the future long-term trend by summarizing these fundamental information, but they cannot avoid the volatility risks brought about by short-term market trends. Long-term traders also need to know how to identify short-term market behavior. It's not just that retail investors don't pay attention to price action. A large hedge fund also doesn't care about the hidden information of the market's price action. In the case of Clive Capital, everything is going well fundamentally, and the technical aspect also shows such a rare bullish trend. The price is running above the Bollinger Band of the 5-fold channel. It seems that the price rise has become unstoppable.

Clive Capital, the world's largest commodities hedge fund, lost nearly $400 million in oil last week. Clive Capital is located in London and manages nearly $5 billion in funds. Before this sudden plunge, they were almost the largest hedge fund. In an email sent to the Financial Times, the head of Clive Capital said that their assets had lost nearly 8.9% in the past week due to the sudden drop in the oil market. This was not expected to happen.

Will order flow help Clive Capital? I don't know. The only thing I really believe in is when I see a puff of smoke, I will look for a fire, and if there is a fire, I will run. I will not sit and wait until I die.

I know what you want to say, you want to say that Buffett said "I am greedy when others are fearful, and I am fearful when others are greedy", and always ensure not to be influenced by the thinking of the crowd. This is indeed a truth. When the signals that indicate market sentiment are in front of your eyes, we always need to be vigilant. It's like if you're an American and you're traveling in Iraq and you hear the locals chanting the "Damn American" ditty, you'd better get out of here immediately. While this is an extreme example, I hope you understand that if the market tells you it's time to get out then you should.

Order flow does not per se belong to any school of technical analysis. Technical analysis always analyzes and predicts through various charts after the price comes out. Its theoretical basis is that the current price reflects all market information. The crux of the matter is that market prices contain not only inherent supply and demand information, but also people's expectations about the future. Order flow is a dynamic and real-time analysis method for observing market evolution. It is unique in that. Through the market itself, we can clearly see who is controlling the market

The key elements of order flow are price, and the volume of each active buy order and active sell order. When this information is organized and presented in front of your eyes, you can clearly see the strength and weakness of the market. Every price rise and fall depends on the combined action of supply and demand. Traditional technical analysis does not provide a precise way to understand and analyze the forces of supply and demand, but order flow can teach you to analyze the balance of supply and demand, tell you who is controlling the market, and which side is ready

Price is a function of supply and demand, and supply and demand are influenced by investor sentiment. Market trends come from people's expectations of future prices, and traditional charts cannot accurately measure and reflect market sentiment.

Order Flow allows investors to read supply and demand as quickly as possible. By comparing the volume of active buying orders and active selling orders at different prices, we can know whether the trend continues and reverses, and how many wild impulses are hidden in the trading volume.

It used to be difficult to use order data for analysis, but today, the development of information technology and the exchange system provide everyone who is willing to learn the opportunity to understand and use order flow.

Before a big trend starts, institutions are always the first to act, because only they have enough funds and strength to ignite the first fire for the market's rise. In the past, when the floor exchange still existed, when the large order of the institution was executed, people would always follow it frantically. If a large order entered the market, people would speculate whether it would bring about a wave of trends. Now there is no market You can't see people screaming and buying and selling, and everything is electronic. Electronic transactions are anonymous and silent, and we cannot see the main force's trading behavior with our own eyes, so we need to rely on the ability to interpret the main force's footprints on the trend chart.

Why do traders who lose in trading reach 95%, and most of the failed traders trade based on indicators, such as RSI, MACD, MA, etc., and all of this comes from the price. Then why not go deep into the price to see the reaction of market participants? At the same time, we must be clear that the losses of failed traders are your source of profit. The market is originally a law of the jungle and survival of the fittest, which is most in line with the law of nature place. To get there, you need to be that remaining 5% of traders.

Most traders believe they can profitably rely on a formula that has performed exceptionally well over the past two decades. However, they forget that markets are not driven by these formulas

You don't need a master's degree in applied mathematics to learn how to make order flow work, and even experts in finance don't necessarily know the answer. Order flow is just a tool to help investors make the right decisions, detect the strength of highs and lows, and judge the aggressiveness of sell orders and buy orders

There are also investors who believe that they can hand over their money to some so-called black box-programmed trading system, and then sit back and wait for the money to flow into the account by itself. They believe that buying some strategies with clearly marked prices in the market can achieve stable profits. In fact, they don't want to master the skills that a truly qualified investor should master through their own efforts.

Investors must understand what trading and buying and selling are. What I mean by that is that the former is a profession that requires relevant professional skills and requires you to master how to interpret the market, interpret market expectations, price action. If you talk to a senior trader and he tells you the latest indicators, moving averages, etc., remember this is not trading.

What is a successful trade like? Observing market behavior and adopting appropriate methods will allow you to master more information and be smarter than most traders. This is actually not as difficult as you think. Go to the poker table when the situation is most favorable to you, and the order flow provides you with the opportunity to identify these advantages. Its advantage is that you don't have to conduct Tick-level analysis, but just look at the overall state after a K-line is formed.

It is especially important to objectively understand one's own thinking and trading methods. At any moment, there are thousands of people staring at the market, looking for the best profit point. You don't need a magic crystal ball to tell you when they will trade, you just need to know in advance when they enter the market. enough.

Maybe time will slap me hard, but I do wonder why the big hedge funds always like to hire these top students with master's degrees in mathematics. We don't need a PhD to start thinking about how markets work. I always think that trading, like many professions, requires the accumulation of knowledge, and the market does not always work as expected.

Futures trading is just like a business. People are always envious of the hundreds of millions of dollars in profits. Most transactions have only one purpose—to make money. Successful traders often have a business plan (trading plan-when to enter and exit) budget (principal), operation plan (fund management), and the most important trading discipline, and execute their own trading plan with iron-like discipline, and make a profit. They can recognize which day is their trading day and which day needs to be watched from the sidelines. They know when to wait quietly for opportunities to present themselves and when to bark their fangs. Tomorrow is another day, the market works forever during the working day, and successful traders have their own market opening hours in mind. When the time is right, they enter the field to harvest, but before the time comes, they wait quietly. Successful traders behave in the same way as all successful professionals in the world.

As traders, we all want to make big money. When we watch NBA games, we all hope to get $20 million a year like Jordan or James. In fact, these guys are the top talents in their fields, what if it is a lower level? Like Ray Allen, a famous NBA three-point shooter, he also gets a $3 million annual salary, he always hits the three-pointer with precision . See, he's only good at one thing, but he's done it so well that he's an expert in it. The same is true for trading. Mastering the basic concepts and achieving the ultimate in one aspect is enough for us to make profits.

Every mother wants her child to grow up to be a doctor. Why? Because they know that doctors can make a lot of money, but I'm sure the doctors who make the most money must be experts who have reached the top in a certain field, such as cardiology or neurology. In fact, most fields can make a lot of money through continuous research

However, most novice traders are unwilling to take the time to become experts in the trading field. They always look for the next better indicator after losing money. They subjectively think that they seem to know everything about the price, in fact they don't understand the market, and they haven't taken the time to understand the market and find out what drives the market up.

Retail investors are always committed to finding the best combination of indicators and constructing a perfect trading system Professional traders never rely on indicators and complicated charts to help them make decisions

International politics, monetary policy, economic reports, and external economic pressure are all factors that drive price movements. These events cannot be described by an oscillator or moving average. Because moving averages and indicators always have a lag, knowing order flow gives you a first mover advantage when these events occur

If I have achieved my purpose of writing this book, I will take you into a whole new field, one that most traders have never set foot in. But the road has to be walked step by step. Before accepting new ideas, please make sure you think clearly about what you have done and are willing to accept new ideas.

That concludes this introduction to order flow, let's get to the heart of the matter and learn how to use it to be a profitable trader