Orderflow Strategies
Lets look at a couple examples where we utilize orderflow patterns to make trades. Pause/play/fast-forward and place orders as needed.
Liquidity and Large Orders
Below we have Gold with prices condensed combining 4 ticks into 1 to improve readability. We also have our Time and Sales with our trade size filtered to orders greater than 10 contracts. We want to watch how these large orders interact with the market. The replay lasts 1 minute.
3 seconds in, we have a buy order of 48 - notice how much slippage there is - it spans 16 ticks. Then we have a sell order of 38 - it doesn't move the price at all. This shows us the liquidity on the bid side is far stronger than the ask side. Lets keep watching.
36 seconds in, we have 92 sells hit the bid without any slippage (4078.8) as well as a buy order of 15 that moved the price 8 ticks! Even if the volume of buy and sell trades stays the same, this imbalance in liquidity should be enough to push the price up. Going long at 4078.0 would be a good entry.
After that we see a couple more 'large' buys on the Time and Sales (an order of 12 pushing the price up 5 ticks, and an order of 15 pushing the price up 8 ticks).
Finally we see some resistance at the offer - a buy order of 42 hits 4083.7 without moving the price up. This is a good exit point.
Correlated Equities
A common practice when trading equity indexes, is to watch related instruments to guide decision making. A common group of instruments would be ES (S&P500), NQ (Nasdaq100), RTY (Russel2000), and YM (Dow Jones). For the sake of simplicity, lets watch ES and NQ. Due to NQ being thinner than ES, we combine 4 ticks into 1.
This replay is 1:20 long, let's watch for a minute.
After a minute (7:02), we have seen price move up on average volume and ES is met with some resistance at 6919.25. The price for ES and NQ subsequently retracts. Even though we didn't see the same strength of resistance on NQ, it retracted even stronger than ES. This could be a good entry - the odds of reverting to that resistance is good, and then on top of that, NQ seemed to move a bit dispporptionally. Lets go long at 26017.50 and we will aim to get out at 26026.50.
After 10 seconds, we see ES hit its resistance point already, with NQ lagging a bit behind. We see ES break through the ask resistance and NQ subsequently shoots up as well.
Sideways Trade
Lets look at some slower moving action. This strategy could be labeled as many things - mean reversion, breakout fade, return to volume, etc. Let's break it down.
Here we have crude oil 15 minutes after Nymex market open, (Crude and other commodities typically start trading at 13:00 UTC) We have a 1 minute chart to our left, we can see steady upward momentum on average volume - about 100 contracts per price level. Look at our volume profile on the DOM. The buyers met light resistance at 7:08. We expect to see resistance at 58.52 to 58.54. We see a sizeable increase in volume from 58.46 to 58.52. We are seeing 'happy traders' at these price levels. Execution algos look for liquidity, they want to buy where there are enough sellers to satisfy them.
Press play. This replay is 5 minutes long, so feel free to set to 2x speed.
We have considerably more volume trading in this zone than at any point today
A 5 tick scalp might not be everyone's cup of tea, but we can also use this information to guide longer term trades. While sometimes beneficial to wait for a key level to break, entering a position at a high, this particular orderflow action does not warrant such a strategy. Say we want to go long, it would be unwise to enter after a break with low volume, especially when we are around a high volume zone.