Triple Screen Trading System

A few days ago I finished Alexander Elder's 'The New Trading for a Living'. It was a very enjoyable and educational read on the three pillars of success in trading. The topics covered ranged from psychology, trading strategies and risk management. In this blog post I am going to summarize a strategy I have been using at work- Elder's Triple Screen Trading System. 

As its name suggests, the Triple Screen System applies three filters to a trade to increase the probability of success. 

When I first started day trading last year I kept searching for a single magical technical indicator. Whilst some have proven helpful, over-reliance is a dangerous habit as once the market changes the indicator's effectiveness might weaken. I also found a lot of indicators to be contradictory. It is important to learn the difference between trend following indicators versus oscillators. Both indicator types are integrated into the Triple Screen System. 

Time Frames

I personally prefer analyzing daily charts for key levels. This means the daily time frame is my intermediate time frame in the Triple System. Going by factor of 5 as recommended by Elder, this means the long term time frame is weekly and the short term time frame is hourly. Because of the nature of intra day trading where positions are sometimes held for less than an hour, I also like to analyze 10 minute, hourly and daily charts. 

First Screen

Examine the long term chart (weekly) using a Trend Following Indicator. Trade only in its direction. I currently use MACD and exponential moving average. Simple moving averages have the disadvantage of not being able to be weighted towards the more recent market sentiment and will change as each day drops off the formula. 

An uptick/downtick of the chart is how you identify long term trend change. When the indicator turns up below its centre line, the best market tide buy signals are given. When the indicator turns down from above its centre line, the best sell signals are issued.

Examples: Directional System, or slope of 13 week exponential moving average, weekly MACD histogram, Seasons

Second Screen

Examine the intermediate chart (daily) using Oscillators. Daily deviations from the longer term weekly trend are indicated by oscillators. Even though they issue buy signals when market is falling and sell signals when market is rising, we focus only on the daily signals that point in the direction of the weekly trend.

Examples: Force Index, RSI, Elder-Ray Index, Stochastic, Williams %R

Third Screen

Examine the short term chart (hourly) chart to time entry. When first screen says weekly trend is up, and second screen says daily trend is down, placing a trailing buy stop will catch upside breakouts. When the first screen says weekly trend is down, and second screen says daily trend is up, placing a trailing sell stop catches downside breakouts.

The disadvantage of this technique is running wide stops. If you buy a break out higher than the previous day's high and your stop is below that day's low, this is a wide stop after a wide range day. Or, if the previous day had a narrow trading range, placing a stop below the low would just risk market noise cancelling a good trade.

The alternative is to use "average EMA penetration". The focus is on how deep the pullbacks drop below the fast exponential moving average. E.g. in an uptrend, measure how deeply prices penetrate below their exponential moving average during normal pullbacks. After marking in some points and how much they drop below, calculate the average. Calculate the difference between the exponential moving average level of today and tomorrow and add this difference onto today's exponential moving average to forecast tomorrow's exponential moving average level. Subtract the average penetration from tomorrow's estimated exponential moving average level- you are looking to buy at this pullback level to get in cheap and make the most of the uptrend. 

Summary

In my next blog post I will be explaining different trend following indicators and oscillators in more detail. 

Intro Technical Analysis

What is Technical Analysis?

Technical Analysis is the forecasting of future financial price movements based on past price movements. It helps traders anticipate what is likely to happen to prices over time. It can be applicable to stocks, indices, commodities, futures or any tradable instrument where price is affected by supply and demand. Price refers to a combination of open, high, low, or close for a given security over a specific time frame.

The time frame can be based on intraday (1 minute, 5 minute, 10 minute, 15 minute, 30 mins or hourly), daily, weekly, or monthly price data and last a few hours or many years. Also, some technical analysts include volume or open interest figures with their study of price action.

Dow Theory

At the turn of the century, the Dow Theory laid the foundations for what became modern technical analysis. Dow Theory was not presented as one complete amalgamation, but rather pieced together from the writings of Charles Dow over several years.

1. Price discounts everything

This theorem is similar to the strong and semi strong forms of market efficiency. Technical Analysts believe the current price fully reflects all information. Because all information is already reflected in the price, it represents the fair value, and should form basis for analysis.

The market price reflects the total knowledge of all participants, including traders, investors, portfolio managers, buy side and sell side analysts, market strategist, technical analysts, fundamental analysts and many others. It would be foolish to disagree with the price set by these people.

Technical analysis uses the information captured by the price to interpret what the market is saying with the purpose of forming a view on the future.

2. Price movements are not totally random

Most technicians agree that prices trend. However, most technicians also acknowledge that there are periods when prices do not trend. If prices were always random, it would be extremely difficult to make money using technical analysis.

A technicians believes it is possible to identify a trend, invest or trade based on the trend and make money as the trend unfolds. Because Technical analysis can be applied to many different time frames, it is possible to spot both short and long term trends.

3. What is more important than why

In his book The Psychology of Technical Analysis, Tony Plummer paraphrases Oscar Wilde by stating ‘A technical analyst knows the price of everything, but the value of nothing’.

Technical analysts are only concerned with two things:

• What is the current price?
• What is the history of the price movement?

The price is the end result of the battle between the forces of supply and demand and the objective of the analysis is to forecast the direction of the future price. By focusing on price and only price, technical analysis represents a direct approach.

Fundamental analysts are concerned with why the price is what it is. For technical analysts, the why portion of the equation is too broad and many times the fundamental reasons given are highly suspect.

Technical analysts believe is it best to concentrate on what and never mind why. Why did the price go up? It is simple, more demand than supply. After all, the value of any asset is only what someone is willing to pay for it.

Supply and Demand

There are many recurring patterns that help technical analysts predict future price movements. Most of these patterns revolve around the concept of supply and demand.

Support and Resistance

Support and resistance represent key junctures where the forces of supply and demand meet. In the markets, prices are driven down by excessive supply and up by excessive demand.

As demand increases, prices advance and as supply increases, prices decline. When supply and demand are equal, prices move sideways as bulls and bears slug it out for control.

Support is an area of historical buying. A break below support signals that the bears have won out over the bulls. A decline below support indicates a new willingness to sell and/or a lack of incentive to buy. When support breaks the new lows signal that sellers have reduced their expectations and are willing to sell at even lower prices. In addition, buyers could not be coerced into buying until prices declined below support or below the previous low. Once support is broken, another support level will have to be established at a lower level.

It is sometimes difficult to set exact support levels. In addition, price movements can be volatile and dip below support briefly. Sometimes it does not seem logical to consider a support level broken until the price closes well below the established support level. For this reason, some traders establish “support areas”.

Resistance is an area of historical selling. A break above resistance signals that the bulls have won out over the bears. A break above resistance shows a new willingness to buy and/or lack of incentive to sell. When resistance breaks the new highs indicate the buyers have increased their expectations and are willing to buy at even higher prices. In addition, sellers could not be coerced into selling until prices rose above resistance or above the previous high. Once resistance is broken, another resistance level will have to be established at a higher level.

Is is sometimes difficult to set exact resistance levels. In addition, price movements can be volatile and rise above resistance briefly. Sometimes it does not seem logical to consider a resistance level broken until the price closes well below the established resistance level. For this reason, traders establish “resistance areas”.

Support Can Become Resistance

Another principle stipulates that support can turn into resistance and vice versa. Once the price breaks below a support level, the broken support level can turn into resistance.

The break of support signals that the forces of supply have overcome the forces of demand. Therefore, if the price returns to this level, there is likely to be an increase in supply, and hence resistance.

The other turn of the coin is resistance turning into support. As the price advances above resistance, it signals changes in supply and demand. The breakout above resistance prices the forces of demand have overwhelmed the forces of supply. If the price returns to this level, there is likely to be an increase in demand and support will be found.

Uptrend

An uptrend line has a positive slope and is formed by connecting two or more low points. The second low must be higher than the first for the line to have a positive slope. Uptrend lines act as support and indicate that net demand (demand less supply) is increasing even as price rises.

As long as prices remain above the trend line, the uptrend is considered solid and intact. A break below the uptrend line indicates that net demand has weakened and a change in trend could be imminent.

Downtrend

A downtrend line has a negative slope and is formed by connecting two or more high points. The second high must be lower than the first for the line to have a negative slope. Downtrend lines act as resistance, and indicate that net supply (supply less demand) is increasing even as price declines.

As long as prices remain below the downtrend line, the downtrend is solid and intact. A break above the downtrend indicates the net supply is decreasing and that a change of trend could be imminent.

Validation

It takes two or more points to draw a trend line. The more points used to draw the trend line, the more validity attached to the support or resistance level represented by the trend line.

It can sometimes to hard to find more than 2 points from which to construct a trend line. Sometimes the lows or highs just down matchup, and it is best to not force the issue.

Spacing

The lows used to form an uptrend line and the highs used to form a downtrend line should not be too far apart, or too close together. The most suitable distance apart will depend on the time frame, the degree of price movement, and personal preferences.

If the lows are too close together in an uptrend, the validity of the reaction low may be in question. If the lows are too far apart, the relationship between the two points could be suspect. An ideal trend line is made up of relatively evenly spaced lows.

Angles

As the steepness of a trend line increases, the validity of the support or resistance level decreases. A steep trend line results from a sharp advance or decline over a brief amount of time. The angle of the trend line created from such sharp moves is unlikely to offer a meaningful support of resistance level.

Channels

A price channel is a continuation pattern that slopes up or down and is bound by an upper and lower trend line. The upper trend line marks resistance and the lower trend line marks support.

Price channels with negative slopes (down) are considered bearish and those with positive slopes (up) bullish. The line drawn parallel to the main trend line (up or down) is called the channel line.

Flags and Pennants

Flags and Pennants are short term continuation patterns that mark a small consolidation before the previous move resumes. These patterns are usually preceded by a sharp advance or decline with heavy volume, and mark a mid point of the move.

A flag is a small rectangle pattern that slopes against the previous trend. If the previous move was up, then the flag would slope down. The price action should be contained within two parallel trend lines.

A pennant is a small symmetrical triangle that begins wide and converges as the pattern matures (like a cone). The slope is usually neutral.

The length of the flagpole can be applied to the break of the flag/pennant to estimate the advance or decline.

Symmetrical Triangle

The symmetrical triangle which can also be referred to as a coil, usually forms during a trend as a continuation pattern. The pattern contains at least two lower highs and two higher lows. That is, the next triangle is a smaller version. When these points are connected, the lines converge as they are extended and the symmetrical triangle takes shape.

To find a target the widest distance of the symmetrical triangle can be measured and extended from the breakout points.

Ascending Triangle

Because of its shape, the pattern can also be referred to as a right angle triangle. Two or more equal highs form a horizontal line at the top. Two or more rising troughs form an ascending trend line that converges on the horizontal line as it rises.

Once the breakout has happened, the price projection is found by measuring the widest distance of the pattern and applying it to the resistance breakout.

Wedges

The rising wedge is a bearish pattern that begins wide at the bottom and contracts as prices move higher and the trading range narrows. In contrast to symmetrical triangles, which have no definitive slope and no bullish or bearish bias, rising wedges definitely slope up and have a bearish bias. The opposite is true for a falling wedge.

Head and Shoulders

A head and shoulders reversal pattern forms after an uptrend and its completion marks a trend reversal. The pattern contains three successive peaks with the middle peak (head) being the highest and the two outside peaks (shoulders) being low and roughly equal. The reaction lows of each peak can be connected to form support, or a neckline.

After breaking neckline support, the projected price decline is found by measuring the distance from the neckline to the top of the head. This distance is then subtracted from the neckline to reach a price target. Since the price target is usually quite large other factors should be considered as well. These factors might include previous support levels, Fibonacci retracements, or long term moving averages.

Cup and Handle

As its name implies, there are two parts to the pattern: the cup and the handle. The cup forms after an advance and looks like a bowl or rounding bottom. As the cup is completed, a trading range develops on the right hand side and the handle is formed.

A subsequent breakout from the handle’s trading range signals a continuation of the prior advance. The projected advance after breakout can be estimated by measuring the distance from the right peak of the cup to the bottom of the cup.

Gaps

A gap is an area on the price chart in which there were no trades. Normally this happens between the close of the market on one day and the next day’s open. Gaps can offer evidence that something important has happened to the fundamentals or the psychology of the participants in the market.

Common gap

A common gap usually appears in the  middle of a trading range or congestion area, and reinforces the apparent lack of interest in the market at that time. These gaps are common and usually get filled fairly quickly.

Breakaway gap

These happen when the market is in a trading range. The market gaps through support or resistance leaving those who missed their stop loss panicking to get out and exacerbating the breakout.

Runaway gap

These gaps happen during a strong trend and if unfilled quickly show that the trend will continue. They are often called measuring gaps as some analysts theorise they show the trend is only half complete.

Exhaustion gap

These gaps happen near that end of a substantial trend. They can often be initially mistaken for runaway gaps, but when the gap is filled and reversed they show the trend is over. They should be accompanied by very high volume on the day of the gap.

Day Trading: Scalping Strategies

In this post, I summarise the main points from a video on whether Scalping is "legit". This video was presented by John Grady from No BS Day Trading. 

John discusses the various strategies which are used by pro traders. In fact, their own words are used in this blog post through interview and article excerpts. The aim is to prove that scalping is the way they trade. John's video provides insight into the trade management strategies of individuals who trade thousands of contracts. It covers accumulation/distribution, squeeze plays, reversing positions and moving the market as a result, averaging in an attempt to halt a move and turn losing trades into break even trades.
 
Trading Indicators

The reality is that the depth of market is really the most simplistic of trading indicators. It is also the most pure form of information. The reality is that markets is nothing more than an auction. People wanting to sell, people wanting to buy. Then there is a transaction when prices match. What you see in charts and other information is an extrapolation of the fundamental information in the order flow and trying to reduce it into a pattern, etc. This point was covered in my previous blog post. 

Proof of Speculators

Looking at the 10 year futures, the total volume was 1,313,134. That is the number of contracts traded on that day. The total open interest is 2,370,769. However, the change in open interest was 25,624. Your open interest change is less than 2%- less than 2% of your contracts traded were taken and held over night as open trades. The other 1.2mill+ were in and out closing on the same day. Therefore the majority of trading can be classified as speculation. 

Size Moves the Market

"What I've seen is that traders who don't have a strong trading methodology are often suckered down the path that the issue is their psychology. I, personally, have found it easy to locate good material about trading psychology whereas it has been very difficult to find people who can exercise and teach a winning trading methodology (at least when it comes to day trading)."

There are tonnes of material out there focused on psychology, risk control, etc. but that stuff is the easiest stuff to learn- it is easy to break down mathematically or scientifically. But when you get into the trading, you have discretion involved. You are trying to anticipate the future and this is not easy. Even algorithms are based on discretion. 

When you read interviews and articles by traders who have made it big, a lot of material doesn't make sense because there is no context or frame of reference. They have not seen the business from the inside. They haven't traded size or seen someone trade big size, or worked for a firm or bank that does major trades. 

It seems that what John is promoting is watching the order flow over time will help you put on good trades as a scalper. 

The best interview with Jack Schwager and Tom Baldwin. It sums it up perfectly.
Jack: "How did you figure it out?"
Tom: "It's like any other job. If you stand there for six months, you have to pick it up."
Jack: "How do you make your decisions?"
Tom: "You see the orders and you just trade it."
Jack: "How is size an advantage?"
Tom: "You've obviously never traded on the floor."

When you read through numerous interviews with traders, what they all say in common is that size moves the market. 

Looking at the screen shot, on left hand side, it's the 10 year treasury, middle is the 30 year, then 5 year treasury.

The Flipper- Paul Rotter

John is not saying that scalping is the only way to make money day trading. He is saying that you must understand the mindset of your competition if you want to beat the game and a large number of your competitors are scalpers who trade huge size. 

There is a guy called the "Flipper". Why is that his nickname? What he does it flip. Pretend you have the Bund trading near the support level (the level where most buyers tend to enter the stock). The Flipper might have bids in all three markets, giving the illusion that the market is strong. But, in reality, he has been getting short. When he feels the time is right, he get rid of his bids and then offers several thousand across all three markets. He is flipping his size. This triggers a domino effect. Other day traders sell to be short, people with weak long positions sell to get out because they don't want to lose any more money. While everyone else sells, the Flipper buys back his shorts and profits from the move he himself actually helped trigger. How does he trigger it? He trades size. 

One Eurex trader states that "You should see giant orders on one side of the market that would flip and go the other way". The traders, and a former Eurex official say someone was posting massive buy orders, waiting until the market moved towards that price and then selling instead- a massive head fake. The flipper does so much volume in the bund, boble and schatz that he's able to influence the whole yield curve and catch people out. 

You can see in the first profile, the market is at a high. You have a flipper and they sit here placing big orders (4312, 4794) at the high of the day, and in the 30 year- 1373 and 1334. It's an illusion sometimes. These large sell orders gives the illusion that the market runs into resistance and hold the market down. This keeps the market weak and people will sell right below it. But the flipper is actually buying between 25 and 26. Then he starts bidding his market up towards his own offers. When they get to the offers, they pull the offers. That 4794 size might disappear to say approx 1000. All of a sudden it turns from a market looking like it had resistance and now it is popping through the highs. The flipper who was long down in low prices then turns profit at 285, 290 and makes money. He plays both sides of the market. That is what flipping is and it happens on a daily basis. 

For an individual, the Flipper's scale is stunning. Last year, his personal trading volume alone accounted for about 180,000 contracts a day, or almost $70 billion on peak days, dwarfing all but the very biggest institutional players. He claims his average market share in the German bund was around 10% for many years. This is impressive not from the number alone but the fact the Bund is the world's second most traded futures contract after the Eurodollar. He mainly used boble and schatz for hedging purposes. 

In an interview with the Flipper (Paul Rotter), he states that his tactic is some kind of "market making" where you place buy and sell orders simultaneously, making very short term trading decisions because of certain events in the order book. For instance, he usually has a lot of orders in different markets at the same time, pretty close to the last traded price. The resulting trades are usually a zero sum game, then ultimately make a decision for a larger trade once he gets a feel for what is happening. 

So how long is he usually in a position? Paul is only looking for the next 3 to 5 ticks. Trend plays are rare, and it's a constant filling in different markets on both sides which causes constantly changing positions for hours. Opinions change several times within a minute, which is common when making short term trades. Keep in mind Paul Rotter is your competition. 

Tom Baldwin

Tom Baldwin says that trading not to lose from the floor point of view you are going to do what you have to do to not lose money. That's the goal. In doing that you end up making money because you are getting in positions that are the right way. 

If the initial trade is wrong and I lose money I don't think: I'm short 900 and its 5 ticks against me, I'm going to buy my 900, count up my losses and start over. What I do from a floor point of view is trade the position. That might involve buying 3000 at whatever price to get out, carry the market with me and sell it higher. When you are wrong, you are going to make the market move- people who are wrong generally move markets. So if I'm going to buy 900, I might as well buy all I can, it's probably just going to be around 1500 and in the process it is going to move the market and then I will make money on what I end up being long and then if I get reinforced by the rest of the world and they continue to buy, well I will just continue to buy. 

So what started off as a losing proposition, being short, turned out to be a big winner. His size helps to cause the break through to the highs. Everyone behind him carries it higher. 

Harris Brumfield

Interviewer: Did you trading style change over the ten years you were on the floor?
HB: Well, I changed stuff all the time, but the style itself- being very active, putting on position trades and scalping around them- never has changed. 

So, his basic strategy was trying to pick a direction, but when picking the direction, he is scalping around it all the time. 

Interviewer: What was the typical size for you?
HB: In the 10 year T note pit, I participated in about 20% of the volume, on average. With the Bund, I traded as many as 130,000 sides in four hours. 

This is another example of a trade who trades huge size, and is basically a scalper. He talks about moving from the pit to the screen- "also, the funds could be anonymous on the system, which allowed them to sell 30,000 and buy 20,000 instead of just selling 10,000- they could bluff and get away with it. They can't do that through the phone clerks and the pits- you can pick them off all day long." 

Basically, they work orders on both sides to net out to net 10,000. Looking at the screenshot, people ask how do we get 46163, 46124 size between two prices. The answer is that they are working an order to net out a certain amount. It is intentionally designed to confuse new traders. They don't understand that in the game, it's not just all in or all out. This is a poker game. Say a guy thinks prices are going up. He won't just sweep the market and buy 270, 275. That is too much risk and will move the market against himself. He will linger back and sell some at 255, if he can hold the market down, he can buy some at 240, 245. Then he does it again. Sell, buy, sell, buy. Only every time it goes up, he sells a bit less and buys a bit more. So that, over the course of half an hour, he nets out to be long. He tries to sustain the highs hoping he can create a move to break the highs. And then he gets paid from his positions at 240, 245 and break even at the higher prices.

The New Market Wizards: Conversations with America's Top Traders

Bill Lipschutz was not actually a scalper. But if you read the interview, you start to realise what he is talking about in reference to size and how it moves the market. He was basically short the dollar and got trapped in a bad move against him. 

What he says in this interview is "All I wanted to do was to make it through to the Tokyo opening at 7pm for the liquidity. If you really have to buy $3 billion, you can do it in Tokyo, you can't do it in the afternoon market in New York- you can't even do it on a normal day, let alone on a day when major news is out. My strategy was to try to cap the dollar in New York. Normally, if you sell several hundred million dollars in the afternoon New York market, you can pretty much take the starch out of the market. I sold $300 million, and the market went right through it."

What is he saying? Looking back at the screenshot (even though it's for Treasuries, not dollars), he was short in a big way. The market is heavily moving against him. If he can sell $200-300 million of the dollar, he can stop the market going up and slow down the market through the overnight. As it turns out, the market ignores him and keeps going up. There's nothing illegal about how he is trying to cap the market, you can usually do it with that size. They pick spots where they know that their size can influence the market. They hope they have reinforcement behind them. Sadly for Bill, he did not. 

HFT: Spoofing

It's funny how regulators are saying they are "catching up" with sending false signals on the market when this practise has been happening ever since the inception of markets. It's just easier with electronic markets, because nobody knows who you are when you place the orders. But this tactic was used in the pits- you would have a trader who used 5-6 brokers to help him execute his trades. So, he might be wanting to sell 2000,3000 contracts, then have brokers come in that work for him who bid right beneath him, then he would get his contracts off and the brokers then lower their arms. It's the same thing. Regulatory agencies are trying to squash this type of action, but right now it is still rampant. 

Conclusion

Another misconception is that computers are basically the same as people were, trying to get the best price, they will also get out when momentum stops. That's why you see more range, more choppy  days and it is hard to get follow through with more and more people playing for shorter term moves. It leaves you in the position where if you're going to be a day trader, you need to at least begin trying to understand the mindset of Paul Rotter, the Baldwins, etc. Those are the guys who influence the market. If they make trades that influence the market, you want to ride their coat tails. Be in the same direction as them. 

Order Flow Trading

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.