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Order flow support for price action trading

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Order flow trading — Video below

Al Brooks’ trading room Q&A

Order Flow Depth of Market DOM Trading ScreenOrder flow trading, in the guise of DOM (Depth of Market) trading, and the ubiquitous Time & Sales, has generated a number of questions over time in Al’s trading room.

Al’s response is consistent with what you would expect: we do not need anything but the chart in front of us, along with price action to trade profitably. True of course. But some of us, self included, like to add a little complexity, and fun!, to our lives and order flow trading is one such activity!

For an Ask Al blog post, a trader had asked Al if he used Time & Sales, and if so, is it any benefit. Al gave a definite NO! to using Time & Sales, which is absolutely correct. Time & Sales is useless, but that is only true for the typical data most traders pay for. Unless traders are prepared to pay for unfiltered tick data, giving us every tick (trade) that takes place, we cannot interpret and make use of order flow.

See Al’s entertaining response here: Ask Al: Trading with Time & sales

Time & Sales, the DOM, and order flow trading

To clarify differences between various terms banded about for ‘reading the tape’ as these practices are often called, I thought a presentation and demonstration video might help here. Al noted his Time & Sales answer might make me ‘mad’, given that I occasionally give Al examples of how this stuff helps a price action trader! So here it is.

The Flipper — DOM trading the Eurex

If famous traders like Paul Rotter, ‘The Flipper’ can make money with order flow, it may be worth a look for others. But it needs to be said, that my use of order flow is secondary to price action, and acts as support. Some use enhanced DOMs only, scalping ticks from the market. Not my style, but maybe yours. As Paul Rotter has noted, even he moved away from pure DOM trading (after making $millions!) and now looks at technicals. We are not that different.

Order flow support for price action trading

Video duration: 1 hour 2 mins

Anybody interested in following up the order flow tools introduced in the video can find them on the Jigsaw Trading website. There is also a sophisticated graphical tool, Auction Vista, that comes with the Jigsaw toolset but not shown here. I am quite happy with basic tools. An insane amount of free information, much in video format, on how to use order flow can be found on the same site.

Video outline

  • 00:00 – Introduction preamble
  • 01:00 – Agenda review
  • 01:48 – Order flow trading background, Depth of Market
  • 05:55 – Market auction process
  • 12:15 – Trading with the DOM, prop shops, order flow tools, us vs them
  • 15:25 – How to use order flow
  • 22:00 – Market replay examples intro
  • 24:50 – 21 October, 2016
  • 53:30 – 27 October, 2016
  • 59:00 – Learning order flow trading
  • 60:25 – Unfiltered data need
  • 61:03 – Review and close
  • 62:10 – End

Postscript: Ref question in Al’s trading room on use of order flow. As discussed in video, for me, order flow is ‘support’ for price action. My trading decisions are still 80%+ price action, with 20% or less weighting for order flow. Sometimes a pure order flow setup appears (without price action setup) that I will act on, but not the norm. And as Al noted in room, order flow is very much short-term unless you use a footprint chart or similar to add historical chart data.

  • Hi Richard

    This is a really clear overview of order flow / price action trading. I see from previous comments that you were considering doing some more in this series. I would really hope that you do as its very interesting content. Thanks

    • Hi Ian,

      Thanks for your feedback. Yes, I do intend to get back to more on order flow support very soon. In the final stages of getting subtitles done for the trading course here, and after a brief recharge (really exhausted!) I will get going on live trading videos and similar.

  • Richard,

    Any further videos coming out on this topic? (Perhaps already done and posted elsewhere). Enjoyed this one.

    Thanks,

    Neil

  • Thanks Richard. Very informing! Can you give us an idea how your trade performance has improved since marrying order flow with price action?

    • Hi Jeremy,

      Sorry for delay in reply. Too busy on course videos work.

      I have yet to increase size enough to make full use of my order flow reading, but can say that I have managed to keep above 80% winning trades for the last year. Was 60-65% for the year before that, and worse when I started! 2016 was my first profitable year (in 4 years of trading, 2+ years of order flow), so working Ok in my mind and book.

      Main effect of adding order flow has been to increase my confidence in the reading of setups. I still do not take enough trades, and like Al often says, we can get to see trades on almost every bar, so a lot of upside to take advantage of.

      As noted below, I will get into some live trades videos when course videos done, and hopefully demonstrate how this works when money is on the line. Will be looking at the Asian markets as was as the ES.

  • Richard, thanks for the video. Two questions: one technical, one interpretative. First, I have Jigsaw but I have no idea how you distinguish between the reconstructive tape that is limited to market orders as opposed to the version that includes both. Second, how do you distinguish between large offers traded on the offer that represent profit taking, versus large offers traded on the offer that represent sellers stepping in?
    Thanks

    • Hi Craig,

      (1) If we set a Recon Tape to NOT reconstruct trades, it will show the Time & Sales (T&S) with all trades (when using an unfiltered data source). The T&S is then showing all resting orders being filled on the inner bid (buys) and offer (sells). If we do not filter this data we see individual orders, single or large. I am interested in large orders being filled so I set Size Filter to give me 20 and above. You can experiment with this setting and look for sweet spots.
      With filter, I am seeing all ‘resting limit orders’ being filled of 20 contracts or more. To me that means traders with big pockets have those orders sitting there waiting for a fill. As market orders come in, these orders get taken out. And if a market order is also 20 it may coincidentally take out a 20 resting order, but not too often I would think.
      I therefore interpret the Recon Tape with these settings as showing resting Limit Orders on the DOM. To differentiate them I reverse colors on the Recon Tape, so instead of seeing ‘sell’ orders hitting the bid in red, I am seeing resting ‘buy’ orders being consumed in blue! My audio alerts are also differentiated with a ‘Block Bid’ (vs Block Sell) and Block Offer (vs Block Buy) voice for the resting orders.

      (2) We cannot differentiate between big orders on either side for sure, of course, but this is where market context and our beloved price action comes in. Price action still rules most of the time so if we expect and see lots of buying at support, on a trading range day for example, we can reasonably expect that Al, along with other limit order scalpers are placing trades. We can then expect those same hyperactive scalpers to be taking profits (or maybe half their position off) 4 ticks higher. Then perhaps more at 8 ticks, or at support/resistance for more profit taking. At support/resistance we also expect many of the same scalpers/algos to be reversing positions. That’s how I see it.

      Hope that makes sense.

      • Richard, thanks for the explanation. Can I make sure I am following your thought process? The Recon tape set to reconstruct trades represents market orders. The Recon tape set to NOT reconstruct trades represents limit orders. On the Recon tape set to NOT reconstruct trades you reverse colors to blue and pink because this tape then shows the resting buy orders being consumed in blue and the resting sell orders being consumed in pink. The Recon that is set to reconstruct has ask orders being attacked in green and buy orders being attacked in red. Am I following along correctly? Thanks for your time.

        • Hi Craig, yes, correct. (Have removed your earlier dupe Q)
          To be extra clear I could add two more words and say: …The Recon that is set to reconstruct has Ask SELL orders being attacked in green and BID buy orders being attacked in red.
          ‘Attacked’ is a good word to describe the aggressive action of market orders. But having large hidden iceberg bid/offer limit orders is a form of aggression too. Fascinating action.

          • Richard,
            Since seeing this video, I have been looking at the difference between the tape with the reconstructed/market orders and the non-reconstructed limit orders. Do you have any additional insights that you can provide that explain what you look for between these (similarities/differences). Seems like grouping of the limits is important to show absorption. Watching whether the area then holds or not gives you insight as to the likely direction of the next move.
            Thanks,
            Craig

            • Hi Craig,
              Sorry for the long delay in reply. Didn’t realize there were new comments here. Bogged down with video productions!
              Ref insights on using the Recon Tapes in my way, I do give priority to price action itself, particularly measured moves or support/resistance levels, and watch for an imbalance to appear.
              The other interesting thing is that we will often get a strong support appear, with heavy bids coming in, but the market still drops another 4-5 or more points before reversing. That’s when our confidence in the read is tested. A gut feel for profit taking vs bag holding will often take effect, so we need to keep calm and stick with out trade if entering too early. Just do the same as the pros, and add on further down after all the weak bulls n bears have given up. Easier said than done of course, and I will get into some live videos soon to show this – whether I win or lose! 🙂

  • Richard,

    This video is absolutely brilliant! I’ve watched hours of Jigsaw’s own stuff but never really grasped it. You explained order flow and especially icebergs really well here. Thank you!

    It seems clear to me that you are definitely benefitting from these tools, especially in the instant when that entry bar ticks below the wedge short and fails, and obviously during those two breakouts in the video. Very interesting stuff! Seems to me that one could have got out of the wedge short far earlier than waiting to exit above the poor entry bar or being stopped out above the signal bar…

    /Angus

    • Wow, thanks for the kind words Angus. And I consider Peter Davies at Jigsaw to be brilliant and a much better speaker than me, despite his Brummy accent.
      I had better get moving on creating an order flow trading trading course! Haa.
      Yes, the order flow can be very interesting to watch around our beloved price action setup points. And yes, it can get us out early if wrong, get us in early when right.

      • Just shut up and take my money hahaha! 😉

        No only kidding but absolutely make another one of these videos, where you show PA setups succeeding or failing please. Very helpful. And entertaining!

  • Richard,

    Thanks very much for your video and I look forward to the next one. BTW, a while ago I did find a bar number indicator for NinjaTrader, which you mentioned did not allow for one. Let me know if you’d like me to forward that to you.

    Thanks again,
    John

    • Hi John,
      Yes, would like to add bar numbers to make it easier to refer to. Still using Ninja v7 for now, but moving to v8 next month if official release has no big issues reported.

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