UK Election – Traders Guide

Published on: December 11, 2019

Unless you’ve been living under a rock, you’ll know it’s the UK election tomorrow. An interesting election at that which is going to have some huge ramifications depending on who wins. Now, when I say ‘huge ramifications’ – I mean for the markets. I’m not making any assumptions that any party will follow through on any promises.

As the election day starts on 12th December, there will be a UK-wide news-blackout on reporting results or speculation of results. There was one election where a certain UK morning newspaper reported “xxxx landslide” on the election morning and was severely reprimanded. So expect the actual election day to be quiet. Around 10 pm UK time, we’ll start to see results of exit polls (where people are asked who they voted for on the way out of the polling station) and we’ll start seeing estimates which will become more clear through the night. That’s 5 pm US time which means the US traders are done for the day and Asia is just waking up.

By the London open, the results should be fairly clear. It’s probably unlikely that there will be an outright winner and as traders, we don’t want there to be. For sure, we’ll have a great day or two as traders if there is an outright result. We’ve already seen how Brexit news has been spiking the market for years, even though the likelihood of that news being ‘final’ has been minuscule. This is a Brexit focused election, we can expect an initial reaction, my guess is that if Conservatives win, UK markets will rally and if labor wins, UK markets will drop. I’d expect similar on the US side as Brexit is theoretically good for US trade with the UK.

I think there is a larger chance of no outright majority, which is when all the chest-beating and posturing really starts as a coalition is built. We’ll be looking out for 2 main drivers of the markets

1. The UK and European politicians speaking on the news or giving out press releases on coalition events. European leaders will likely be trying to make certain coalitions look bad for example. So we have a high risk of a news event pretty much any time
2. We’ll see organized press briefings, announced in advance where parties release information on negotiations or anything else they want to go public with – like central bankers giving their opinions on certain coalitions or outcomes, or 2 parties announcing coalition talk progress.

So our plan for trading the election is all going to be that the 12th itself will be a low expectation as there shouldn’t be much news about it. There could, of course, be other news driving the markets that day. For an outright win, we’ll expect markets to adjust for a couple of days and for spikes as policies are announced by the new government. With no outright winner, we need to be hyper-vigilant both to unplanned news/comments (Angela Merkel is good at these) as well as press briefings from UK/EU as the coalition is being hammered out.

Expect every piece of news to be traded by the market as if it’s the final word, despite the fact that this is quite far removed from reality. This is the markets, let’s not expect them to actually make sense. If you aren’t used to trading volatile markets, there’s also nothing wrong with taking a few days off or stepping down to naturally less volatile markets –  like from indices to interest rates.

Good luck over the coming weeks & let’s hope we get decent volatility throughout December and avoid the usual tedious slowdown!

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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.