OrderFlow Knowledge Base



This post intends to describe the the system of trading we employ at Vtrender, the larger theory behind it and ways to understand it to generate maximum profits for us as traders.We also take a look at the Prime Pivot system of trading we employ to book profits.


System of Trading :



The system of trading is simply called the “Order Flow“.  Essentially it is the actual buying and selling of the market. It needs to be understood as a system and not an indicator for us to employ it to develop profits from it.



Order flow analysis is the missing link for many traders. It refers to how the orders are coming into the market, and how they are being filled; whether executing at the offer or on the bid. It is the dual auction at the most micro-level. Assessing order flow in real time can tell the trader how trade is being facilitated in any direction, a key concept in auction market theory.



In a previous post on Vtrender, I have covered this part of Order Flow as a process in which we stay with the buyers when they buy( or cover shorts) and sellers when they sell ( or liquidate longs)





This process of buying and selling is depicted through Green lines in the charts for Buyers and Pink lines for sellers





You would note the market going up or rising as soon as we have a green line on screen and the market coming down as soon as a pink line appears on screen.



The change from Green to Pink is an indication for us to exit the long side as the majority of day participants are now on the shorter side.




The change from Pink to Green  is an indication for us to exit the short side as the majority of day  participants are now on the long side.




As the market is dominated by different time frames, each with their own understanding of the moves of the market, it is important we look at the market through different time frames as well.





We identify the different participants of the market as scalpers, jobbers, day time frame and longer time frame who have a view stretching from one week to several months.




We also categories traders as retail ( or locals ) and institutional. Traditionally the institutional is considered to be a stronger player only because they have the ability to hold a position even if the trade is not going their way.





Accordingly these different players with their different time horizons move the market according to their definition of “value”.. So whilst a day time frame player who was short in an index which has moved his way 50 points ( for example) will use the move to book his shorts and generate the gains he would have sold his position to a longer time frame player who will see the 50 point dip as a buying opportunity as he thinks the market will be 200 points higher in a month ( which may be his time frame).




The point being made here is that at every price there is an equal buyer and a seller and for everyone wanting to sell there is a buyer waiting. At the end of the day buyers and sellers are equal in number.





However if buyers and sellers are equal and the net transaction is zero, how does price move then?



That answer is “orderflow”.




We measure it as the effort made by the Buyer to lift the Offers or by the Seller to strike down the bids.





This he can do only when he is trading at market so that the buyer meets the seller overhead and buys him out.Accordingly price is said to have moved a bit upwards. This process is called “price discovery”.







Theory and working of charts :




The actual working behind these charts can be understood by looking at the background picture as the algorithm computes the buy/ sell pressure of the market.



The program computes the depth of the market (or DOM as it is called) in real time, taking careful note of the volumes as well as whether they hit at the bid price or the ask price.





The numbers in the left are the volume transactions of the market and the actual trading which happens. The pane below in the above chart shows the trades happening at the bid price or at the ask price.




The changes taking place and the computation of the signal are furiously computed as this chart would show.






Careful attention is also paid to where the volume is occurring relative to the previous day’s value areas, PP0’s,  day lows, High volume nodes etc.




Fortunately for us, we do not have to go through these numbers all the time ,  just follow the green/ pink .



Profitability :


As traders it is also important to position size your bets for every new signal which order flow generates.



No two buy signals are alike and there are no guarantees that they will return the same kind of rewards.



Fortunately for us we  we have the Market Profile system which identifies the boundaries for the buyers and sellers.



A previous article on this subject will explain this better : http://www.vtrender.com/content/trading-order-flow-conservative-approach



It would be wise to be positioning your maximum bet size for a buy signal above VWAP/ PP0/ VAH and the day’s DPOC or a sell signal below VAL and all the above.



One also needs to understand that there are places at which buyers and sellers are considered to be equal in weight.



These places will be the day’s vwap/ the day’s developing point of control or simply a previous HVN.



You would note them in the chart as price accompanied by an orange line which is vwap or a blue line which is the day’s DPOC or developing point of control or simply against a grey background which is the Initial balance or IB- the first one hour of the day. A smaller IB always shows that buyers and sellers are equal.



It’s in the situations stated above that the market whipsaws and there are conflicting signals often up to 3-5 in an hour.



Theoretically volume is low in this period and the larger time frame as shown by the blue red line will be a flat line showing equality.It also means that the market is in control of the smaller time frame and the bigger participants would return only when there is a resolution.



Whilst it is draining to get such signals whilst trading, often times we have seen that the third signal or the fifth signal in the sequence is the one which produces the maximum results, as buyers and sellers resolve the impasse and a new trend emerges.



Whilst this can create a short term loss, the patient trader who works through all the signals is the one who takes away the biggest catch !



The few losses in such cases remain low as the market is not moving around a lot.



Booking Profits :



The Order Flow system of Vtrender is essentially a system of trading with automated entries and pre-determined exits.



We ask you to trade in multiple lots of even numbers: 2,4,6 ,8 etc.



We are big believers in the risk free second lot trade putting money management and it’s principles over and above immaculate execution of trades. Whilst our system is great in giving us excellent entry points for our trades, it’s only when you let your winners run that your make big account changing profits .Simply put, even if you have 6 losses and 4 wins in every ten trades, you will still be profitable if you follow the above.




For booking profits we have revisited the age-old pivot point system of trading and worked on it by applying principles of market profile especially volume profile.




Prime pivots explained :


The pivot point system works around the pivot point which is calculated by five different methods, that I know of. The system calculates the closing price, the high price and low price of the day and in some cases even the open price and arrives at the pivot point from where the remaining support and resistance levels are derived.


What we found  through our observations was  :



  1. a) The high price and the low price of the day are usually areas of low volume, hence the system was biased towards low volume trades.



  1. b) The closing price is actually an average price of the last 30 minutes of trade, and the relation of that with the next day’s activity wasn’t very clear.



  1. c) If the open price is taken in the calculation it is also an area of low volume and in some cases odd ticks and even false trades.



We flipped the system around to arrive at a prime point zero or PP0 which is a combination of the highest volumes traded at the Volume point of control and the price point of control,  serving us as some kind of a centre point for the auction.




We believe the market will be positive above this one number PP0 and attract buying efforts as long as it stays above it.








We advise that should you be on a buy signal the first lot needs to be booked at the closest prime level and the balance trailed at cost.




Money management is essential to ensure that the booked profits are not given up.