Today I came across a video presented by John Grady from 'No BS Day Trading'. In this video, John talks about how order flow is the fundamental core principle behind trading. In this blog post, we discuss what really drives price movement using the Treasury market as an example and how scalping is effective in profiting on intraday price movements.
I found his information to be very interesting as I had never previously considered scalping to be a trading strategy. In my next blog post I will cover various scalping strategies and automation through algorithms.
The real reason most traders lose
The majority of traders come in from retail side. They are looking at things that don't have impacts on the market. Things like Moving Averages, MACDs, charts. They are trying to make decisions based on that but they miss the fact that all the indicators are driven by order flow. I.e. The actual transactions that are taking place that drives the market up or down.
In the example, we are looking at Treasury Futures. Bids are in Blue, Asks are in Red. In the middle you see prints. With Jigsaw, it splits the up tick and down tick data. In the first screen, it is the 10 year Treasury Market.
The second screen is the 30 year, third is 5 year and then it is the ultra bond.
For the 10Y Treasury Futures, the most recent prints is 349 into 115 (11 and a half) and 192 up into 120 (12). There are some buyers hitting 120 and some sellers who are hitting 115. That is what shows up in the blue and red. The second column shows days volume profile. That is, this is the total accumulated profile for this session.
Let's shift focus to the 4th profile- If you're the only guy in the offers and I'm the only one bidding, 66 is bid at 20 and 137 is offer at 21. If I account for all 66, and you account for all 137, we are the only two people in the market. In order for something to happen, one of us must hit the other one.
Let's say I'm the buyer and I start buying and I buy your 137 and then I bid 200 at 21. So now I take it up a notch- 21. Now you are the offer at 359 at 22. Imagine then I hit all 359 at 22. Now I lift that and bid another 300 at 22. Now you are the offer at 244 at 23. I buy your 244 at 23, I bid 300 at 23. Now you are starting to get worried because I'm continuing to press the market against you.
So you offer 214 at 24. I buy 214 at 24. I bid 300 at 24. When it hits that point, you start to feel the pain from the P and L stand point. So, instead of just offering 214, you begin hitting me with 200, hit 200, hit 200. But the problem is no matter how many you sell at 24, I just keep buying. Then I buy at 25, then I buy at 26.
The point is that I am driving the market against you by clearing out all your offer orders. I am pressing it up. Ultimately, if it was just me and you, I will run the market up until your forced to liquidate, that is, your forced to start buying. But in this hypothetical world where we are the only traders, I am the person selling to you and I will take all your money.
This is what is happening at the core fundamental level. You can't build a methodology for day trading if you don't understand how the game works at the core fundamental level. What encounter a lot is that people don't grasp the concept of E.g. If i were to buy all 137 contracts, and then I bid at 21 for another 200, the bid price will go up. Taking the bid up to 22, taking the bid up to 23. People struggle to understand this.
One side is trying to dominate the other side. They are trying to make the other side exit. You press the market against the losing side so far they can't stand the pain and exit for a loss. The other side liquidates for a profit. With sellers, they try to make the people start selling for a loss, when they start that the sellers are working buy orders to cover a profit.
The majority of people are speculators. There are times when the heavy buying and selling press it far enough the other side gives up and gets out. The market will re trace itself and then go flat. People get confused about how it can go to 12, 5, 12 and flat line. One side wins, one side loses, market comes back and nobody wants to play anymore.
So what is order flow?
Order flow is the orders coming into and out of the market. You have sellers offering and buyers bidding. Eventually they match up, and one way or another one gives up- in the previous example, if I were buying all 137 at 21, I then have to bid at 21 to get more contracts.
Why is it important to watch order flow when trading?
It's important because it lets you know how much size is trading at certain prices. It can give you an indication of areas that might be just back and forth chop. E.g. first screen there are just approx 80k offer sizes, an approximate 4 tick range. You had a dead market trading a lot of volume. That volume just says its a choppy nothing area and there is no reason to be involved there. On the other hand, if they executed all the way up to 15 and 155, that may trigger some more buying that runs through that. Order flow that takes place getting through that point will tip you off to what is the next movement for a few ticks. This relates to scalping.
Lessons learned while trading for prop trading firms
Where does John come up with my methodology and how am I accurate? Working for a prop firm. Not as much training is in prop firms as people think there is. Difference is there are no charts and indicators, they just show you the ladders and say "stare at this and figure it out". HFTs in particular are almost 100% order flow oriented. They are looking for places to get in without risk, trying to front run and scalp it out with no risk. The best guy was moving the market due to transaction size. This triggers other people to make the same order. This wave is created by heavy hitters. If it not a string of stop orders that move the market.
Misconceptions about pro vs. retail
The misconception is that pro traders try to take retail money. This is only true to an extent. The pro trader is battling it out against other guys who are trading as huge positions. When a major move takes place, you can have smaller ones getting hit and it will help move the market. The main market driver is due to size.
The importance of a good platform
Retail traders are starting to see what they have been missing because they now have access to better platforms at reasonable rates.
Jigsaw is one of them. This is another reason why retail traders struggle and fail. They cannot see the ladder or depth of market. Other platforms are not good at showing prints accumulating. Nobody had access to a decent ladder. Most used to or still have Xtrader. This was super expensive per month just for access.
Getting the edge: Scalping vs. Swing Trading Styles
There is the common conception of scalpers work with 1 ticks. E.g. Buy 115 and work 12s. Not the case - sometimes when market is slow it is a potential methodology, but usually they are looking for the next 3-5 and sometimes beyond that tick. The idea is that you are trying to get involve din areas where it seems like the pressure is in your favour. The idea is more like watching order flow (does it look like buyers are going to lift the offers or sellers are pressing the market down to lows?) I don't need to see anything else to get a feel for that. All other indicators and charts are basing their indicators off the ladder.
What does getting the edge mean?
In the most ideal scenario, if you thought the market was going to go up, you would see 2094 start to print, as it prints, you would buy it, market goes bid at 12, instantly orders start hitting 125 (buyers start buying at 125), big bid behind you at 12. You instantly sit in a break even trade. Someone buys 125, you are one tick in your favour. If you choose, the trade at worse is a break even trade. Ideally, the perfect scenario, you bid, market goes up, you have the edge.
Reading the tape vs. traditional technical analysis
Charts only show you the price. They do not show you how the market traded at the price. Did the market bounce at a certain price because it was light volume after a number release and people were flying by the seat of their pants trying to trade a highly volatile response? Or did it get to that price by steadily trending down and then bounce because a huge amount of money came in to defend that price and attempt to press it back the other way? It makes a big difference if you're looking to trade in that area.
So, if you watch order flow instead, you can see 2000 on offer, and you can watch 1800 trade into the 2000. So you actually know buyers are actually buying at 12. Therefore, rather than randomly placing a buy limit at 115 or 11, or buy stop at 125, you can pin point entries and exits because you can see someone is buying 12. You know there are buyers at 12, so you might as well hit it as you know buyers are coming in behind you.
With traditional tech analysis, people don't pay attention to the prints and from execution, you save ticks by paying attention. Say you might want to be long and your thinking about hitting 12, but you realise no ones actually hitting 12 yet, I can actually get in at 115 as not as many people bidding. You save yourself that tick by not randomly hitting out there and selling 115 or hitting 12.
Also, charts only show the past. Everyone in the world is looking at the same obvious support, resistance, moving averages, pivots, etc. Just because someone is watching a price does not mean he is willing to trade that price. A support level is not a support level unless there are enough buy orders to over whelm sell orders and prevent it from moving lower.
During a particular day, trades on one side may go for a price where they believe there will be stops and the stops are there so they get paid. On a different day, the stops may not be there and they will not get paid. Either way, they react to what happens a the markets hits those prices. If the stops are not there, the traders making the run do not sit and wait hoping they will be there later. They begin exiting in an attempt to not get stuck on the wrong side. They will always adapt based on how orders are moving.
Misconceptions about HFT
If an HFT program or trader plans to buy, the program won't just step up and buy just because there are 192 contracts priced into 2094. The program is going to wait until it sees more size trading. Waiting to see 1000, 2000 print into that 2094 and then the program executes. It is trying to get the edge.
In floor trading, the guys work out who the big traders are. That is, individual traders themselves and who is a broker for big institutions. E.g. Person A watches and sees a broker for Goldman Sachs is about to offer out. So he turns to the first bid near him and hits their bid E.g. hits someone's bid at 10. He is now short. Then he turns around and waits to see if he is correct. Say the broker starts offering. The broker offers at 11, 10, 9, 8 he is moving the market with huge size. Person A then buys at 8. That is what floor traders used to do, it is what scalpers and HFT traders do now.
Why is it important? They are influencing the market on a moment to moment basis. This feeds into charts for technical analysis. The idea you can predict the future one or two hours out is usually not accurate. So much can influence the market in such little time from size. If you think that HFTs have replaced scalpers, you're wrong - HFTs are working orders across multiple exchanges, most is in the realm of stocks. The reason why they can't pull it off in futures is that most futures are locked into a single exchange.
The luck factor
There is always a luck factor no matter what everyone says. Find something that works and stick with it. E.g. if you see its hammering bids, stay away might work (unless you short- but sometimes you might be that guy who goes short too late).
The way you ride it out depends on whether you have proper risk parameters in place.
Q and A with John Grady
- How do you use the Ultra Bond? What is the difference between the Ultra Bond and the 30 year?
The difference other than contract specifications if that UB offers a little bit of a clue, it is light volume and it has been moving a bit more from a readable stand point than the 30 year. the 30 year does not move as much as it does before, as everyone is transferring to shorter term. People who are trading longer term ignore the 30 year now and go towards UB.
- I'm a new Trader: Which is best 5 , 10 or 30 year?
You have to watch them all. Every market has its own nuances. The overall concepts are the same but execution is different. If you trade treasuries, it is important to trade all of them. Once you become familiar to the ladders, it becomes easier.
- NasDaq: I am having trouble reacting fast enough to the numbers. Advice?
I advise against those markets but if you are going to trade them, I find that you must use stop orders. You have to anticipate where the run is going to take place, don't rely on yourself clicking yourself out of an order. It is hard to get the edge in a thin market like that. Prefer thicker markets.
- False or fake orders. E.g. Flash orders.
Spoof orders or flash orders ; you must view them in the context of the situation. If it is an area and there breaking down, those orders are probably real. The sell orders are always there, sometimes you notice there is 4000 on the offer and that will drop to 2000. How you play that depends on numerous factors. it does matter sometimes and with regards to ice bergs you have to pay attention to it. An ice berg order in the middle of a range at noon hour probably won't mean much, but following a news event has importance.
- Why do you not use a Foot print chart as an order flow tool?
This chart shows volume on different time periods. Foot prints are a personal preference. I am biased to strictly staring at bid ask. It is cleaner but some people like foot prints to look back the past 2 minutes or 5 minutes. Some people think they react faster just looking at the ladder.
- Big money moves the orders? Why not just filter so you see big orders only
Often people disguise their orders. oddly enough, if one order of 3000 drops in one market, it is quite frequent that the market just stops. It doesn't go one way or another. It is a conglomeration of size. it is not one guy who is moving the market, it is a guy moving 1000, 5 guys moving 200, 3 guys moving 3000. He will buy and sell in a range until he nets out.
Sometimes it is helpful when market moves one day but you want more information looking at the accumulation of inside prints.
- When do you reset the inside prices?
Sometimes we forget the exact price where it strikes. So if market went back there, you can recall. Therefore we should leave insides up.
- On the ES Chart, there is a big reversal. Is it possible that the big money traders are the same traders that bid it back up?
Absolutely. The initial bump back is probably a short sale covering. All the orders feed off each other. Then you end up with heavy money starting to reverse it too. That is why you don't just sit there, you want the edge.
- Does the market tend to run from low volume area to low volume area?
Actually it is the opposite usually but depends on the context. Eventually it moves into thin area and then develops in a thick area. there are periods of run, cover, run, cover.
- How many trades do you execute on average in bonds?
Maybe 5 to 15, depending on the day. Sometimes I can do 20 trades but slow days I can just do 2 trades. Do not focus on number of trades, focus on whether it is a good trade. Do not worry about how many trades you make.
- Do you use the reconstructed tape on treasuries and do you see the big orders on the ladder?
Do not use the reconstructed tape on treasuries as just watching the amount of size is enough to follow the flow. There is so much more size in treasuries than stock indices.
- Do you look at or use cumulative delta?
Cumulative delta is a way to track from the start of session that executes at bid and how many execute at the ask. Jigsaw has a feature called strength meter and a quick way to figure it out is the ribbon at the bottom. Red: how many hit into bid, Blue: How many hit into the offer.
- Do you watch previous days, or only profile of current session?
I only use the current one, but just be aware of previous action on previous days. For example, between 115 and 13 with 80k volume, the next day I remember there was an 80k heavy volume, so if it gets there again it will probably chop around again.