Buying on the bid.
I got the following through on an email today and I figured the reply might benefit a few people:
I have three questions.1-I put a buy order on the Bid. I get filled and the market didn’t move from the Bid.What happened ? How did I get filled ?2-I put a sell order on the Ask. I get filled and the market didn’t move from the Ask.What happened ? How did I get filled ?3-What are the clues that I may buy on the Bid or sell on the Ask and get filled ?Thank you and have a nice day,
Look at the inside bid – 370 contracts bid, 757 contracts traded, 1124 contracts added at that price.
As I was watching this, the actual bid qty was around 200-400 for the whole time that the 757 contracts were trading. Someone was adding contracts to the bid – an iceberg order. So if you’d seen 400 trade there and put an order in, you’d have gotten a fill.
Iceberg orders are quite common, you can join one, especially if the number of contracts shown is small like this. If they are showing 400 and have traded 1,000, then if you join it, you have a good chance of a fill. On the other hand, if they are showing 2,000 and have traded 4,000 they may well be done and anyway – you have 2,000 in front of you. Less chance of a fill and more chance of it going straight through by the time it does fill you.
The problem is that much of the time, you can join the bid and price will just carry on through. If you are trying to figure out how to buy the bid and sell the offer, then this won’t help. My rule of thumb on the ES is to not lean on an iceberg that is counter to the market direction. So don’t expect an iceberg to stop an intraday trend but DO expect an iceberg to stop a pullback.
IMO a better trade when you see this sort of activity to watch the offer side. You know someone is refreshing the bid but in the image above, you can see 1229 offered, 315 contracts PULLED from the offer and 166 contracts traded. If I thought those bids were going to stop the market, I’d wait for that 1229 offers to start reducing 1200… 1100… 1000… 800… 700.. 600.. 500.. 400 and then I’d hit a market buy order into that offer knowing that there is a good chance that price will quickly move through that offer and I’m then sitting on a break-even trade. This is especially true if there’s pulling of offers on the inside level and above.
Cheers
Pete
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Order Flow itself is simply information. Just like charts, it can be used in a number of ways, some good and some bad. But let's first break down order flow into it's components so we all agree what we are talking about:
Order Executions/Tape Reading - This aspect is the real flow of orders. It's the information we see in Time & Sales, Footprint Charts, Cumulative Delta. It is looking at market orders, either as they execute or historically. I guess this is the "true order flow". Every trade is a buy and a sell. We look at market orders because we consider them to be more aggressive. When someone trades with a market orders, they are giving up a price to get an instant fill. Limit orders on the other hand just lazily sit there waiting for a market order to hit them. Often these are market makers with no directional conviction. So we see market orders as being more significant.
But we don't use these in isolation.
Volume Profile/Positions - The tape reading part helps us assess various things like momentum, traders getting stuck, balance of trade BUT the volume profile helps us understand where people are positioned and likely to get stopped out. I sometimes call this "Order Flew". It's important to know when trades will be "washed out" - for example - if we have a volume cluster on the S&P500 Futures and the market moves up 100 points and back down to it, it's unlikely short term traders on either side that were positioned there will still be there. But recent, nearby volume helps us assess areas of positions.
Market Depth - The bids and offers, the lazy passive orders waiting to be hit. This is part of the story but in terms of overall importance, I'd put it at around 20% at most. For example - if you return to the high of the day on any market, the offers will be quite large directly above the high. It means nothing at all. It's just a quirk of the market. It does not help you tell if a price will hold. On the other hand, if you see large depth and as we approach it, we see more added to the depth in front of that price, it means others are front running that depth and that is a useful bit of information.
This is the key - it is all just information. Just like price charts are information. When people look at Order Flow, they consider it to be a technique more than a set of information. They look for things like iceberg orders and decide to make a one rule trading system to fade every iceberg, For these people - yes, order flow trading is overrated because they are trying to ignore everything else going on in the markets and construct a trading system a chimp could execute.
For those looking to improve a decent trading approach, the best thing to focus on in Order Flow is momentum. Once you can read momentum you can:
- Avoid getting into positions when momentum is against you.
- Confirm trades are working after entry when momentum goes your way.
- Exit trades in profit when momentum fades.
That's perhaps the easiest way to use order flow because momentum is easier to read. It's about the market continuing to do what it's already doing. On the other hand, reading a turn in the market with order flow takes a higher level of skill and a little longer to learn.
Order flow can't put lipstick on a pig. It won't help you 'improve' something that doesn't work anyway, which is why whenever someone calls me, the first thing I ask is what they are currently doing and we discuss whether they need a reset or whether it will actually help.
When Jigsaw started back in 2011 - we were one of the first in the space and certainly had the best education. It was always going to attract the underbelly of the trading education/tools world and now we see stuff out there that is so complex but so impressive and futuristic that new traders are drawn to it like moths to a flame.
So here's my advice when looking at Order Flow
- Order Flow can't improve something that doesn't work.
- Order Flow can be used on it's own, without charts to enter and exit the market but you also have to be able to recognize different market states that need different/altered setups. There is nothing magical about this.
- Don't start jumping at shadows and take 50 trades an hour in your first week looking at Order Flow, be selective. It can be exciting to see cause and effect play out in front of you for the first time but don't overtrade.
- Do drills to learn how to read it before you trade it.
- Markets can only go up and down. Don't overcomplicate it. If you have too many Order Flow tools on your screen - you will not be able to make consistent decisions. Less is more.
- Take time to choose a market with a pace you like. Interest rates might send you to sleep, the DAX might give you a heart attack.
It is hard to see how a set of information could be overrated. It is true that some methods of presenting this information are better than others. It is also true that some people simply get on better with different tools (e.g. Footprint vs DOM).
There's a middle ground between complexity and simplicity that will leave you making consistent decisions where you improve over time. For those people, Order Flow will be way underrated because they will be the one's getting the most out of it.
Those that jump in with both feet on day one and those that have 100 different tools up, for those, it's a painful experience.
Keep it simple and manageable. Start with momentum reading and build from there. You will never look back.
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