More on Order Flow and Market Profile

Yesterday, a longtime student wrote:

Hi Tom, long time student here with a question. Do you think the new dynamic profiles that your using offers better support/resistance levels than just taking the legacy profile and breaking it up into it's distributions. Also, are you using the stock settings for the volume profile and volume imbalance in market delta or are you tweaking the settings ? For example the Automatic setting for the volume imbalance is 140% but some people use 200-300%. Looking forward to the new book. Hope all is well.

Regards,

 John

Great questions.

First, lets talk about Market Profile. I use BOTH the dynamic new mMarket Profile that Pete Steidlmayer has developed as a successor to the legacy Market Profile as well as  the legacy Market Profile itself. Why? Because they give me more granular information about support and resistance and where the price is going. I use various timeframes in the dynamic profile to fit the market I am trading. You can see the confirmation of support on the pic below. I then went to my Order Flow chart and saw buying coming in at support and bought the market. Not rocket science.

Dynamic Market Profile takes splitting the Profile a step further. Dynamic Profiles are currently only available in Pete Steidlmayer's software and MarketDelta. I must disclose I am not a fan of Pete's software as it is very klunky and you need to jump around from screen to screen a lot to get information and that's only for a single symbol. MD on the other hand allows me to see everything all at once.

Now lets get to the second part of John's question. How much volume imbalance is volume imbalance. I must say that the default 140% is just not enough for me. I like to see at least 200% imbalance. I describe the techniques I use to decide what to use in the book.

The key in setting all this up is to "see" the order flow and the decision points in a trade.

Reading the Order Flow Gives Clear Direction

Reading the order flow has never been as clear from off floor as it is now. We have the tools to make it all clear or as least as clear as it was on the floor, if not more. Reading order flow is like learning a language - just about anyone can learn a language.

The picture below is made up of three parts:

1. Dynamic new Market Profile
2. Legacy Market profile
3. Order Flow bar chart (Volume Imbalance)

I have automated the highest probability entries but do take other entries manually when they fit with the context and my trading plan.

A key part of a trading plan is to know what to do when a trade goes against you, as it will. There are usually just a few choices, all based on back testing:

• Exit at a loss based on money or specific market activity
• Wait until the trade turns either profitable or break even
• Double down and wait until the market puts you into profit or break even

See How Context Rules

Today's pic is a great example of the importance of context.

Looking at the Market Profile, one can see that the Profile is inside the previous day's VA and has not finished doing it's thing there. On the other hand, indicators show trend is UP. Signals switch between short and long.

When the market opened, I took the first short trade as that was the only information I had. I soon covered the short at a tick profit as I saw that the market was not going to go far due to the context.

 

Once thie context resolves I can take a trade. Trading off individual or groupd of indicators gives a much lower win rate and profitability than can be achieved by looking at the context first and then the order flow within that context. Being clear whether the trade is with or counter the trend is also criticsl.

Trading Order Flow. No Optimization!

I've finished automating my trading. There's automating and there's automating. I do have fully automated flobots. Their goal is to earn 150% on the set aside capital. However, a competent discretionary trader is able to earn up to 80% a month.

How is this huge 80% calculated and proven? And make no mistake, 80% is huge.

Lets say a trader has $25,000 in a trading account that is totally risk capital. He's traded in SIM and has become CP.

Let's look at the math(s).

He trades a 5 lot and averages $1,000 a day nett. $1,000 a day is about $20,000 a month or 80%.

Now lets look at how this $1,000 a day can be achieved.

The chart below is my trading setup. It is a single bar chart and a Market profile chart. There are buttons along the top left that arm the trades I can put on. I can go Long and Short and I can also reverse a position. You can see arrows appear when a trade is detected. The logic for the trade is pure order flow and is coded into the chart. It doesn't look at all the context. Can't be programmed, at least by anyone I have found. The Market Profile or the new dynamic Market Profile is critical. Its like an F1 driver, when he sees he is on the straight he can put the pedal to the metal but needs to brake when he sees the corner ahead. BTW, an exciting finish to this years F1 in Abu Dhabi next week-end. My favourite car brand will be the winning constructor but which driver?

 

Problem is, if I just run the algo 24/7 the most I can make is probably about $37,000 on my $25,000 capital and I will have a drawdown. And I certainly can't live off $37,000.

So I need to approach my executions in a different way. Here it is. Let me be clear. The indicators are context only. No optimization. Just order flow from the volume analysis.

 

The difference between the two chart si the extra button Saying Long5. The buttons on the top left of the chart are just buttons that don't do anything, yet. When I single click on one or more, it "arms" the strategy that then waits for the logic conditions to be fulfilled. I only arm a button when the context is right. When the trade is triggered, the algo shoots an order to the broker faster than the eye or hand can see it. The platform is also colocated near the broker so that the distance of my workstation in France from the broker does not matter. I'm trading alongside some of the HFTs and use them. The issue with any setup is that one large opposite order can make the trade a loser. By trading with the size I'm reducing the chance of this happening which means my win rate is even higher.

All this is in the book. Coming soon. Busy Xmas writing and videoing for me.

Order Flow Automated

The integration of the latest order flow technology into my trading has been completed. EVERY trade is judged on seeing exactly what "they" are doing. As you can see from the arrows on the chart below, I have been able to automate this information.

There are buttons on the top line that arm the algo so that when the conditions are met, the order is triggered. I can arm and disarm the algo with one click when I see a trade setting up. It only goes off if in fact the trade does setup. I can also just leave the algo on and let it do what it does but I make more money manually switching the algo on and off because I can trade much bigger size. I guess I just like the control of being a discretionary trader. Also, context is king and the algo cannot possible see ALL the context.

The algo sits on a VPS collocated within 2ms of the broker engine. There is no way anyone can be as fast as the algo VPS combination in getting an order filled.

I am finding that the HFTs are my friends and help me get to my profit target. My profit targets are close. For example. on the ES, T1 is just one handle or $50 per contract. Multiply this by size - even 10 contracts - and its not hard to see a decent green day.

I've finally got the book into its final outline and will try and finish the videos over Xmas, skiing permitting.