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Module 1 - Strategic Order Flow

The document introduces a course on Strategic Order Flow Trading, emphasizing the importance of analyzing order flow to understand market dynamics and the actions of institutional investors. It discusses the impact of large trades on market prices, the significance of recognizing patterns associated with 'smart money', and strategies to minimize execution costs. The course aims to enhance trading skills by providing insights into market sentiment and potential trading opportunities through order flow analysis.

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Mohamed aziz abidi
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17 views

Module 1 - Strategic Order Flow

The document introduces a course on Strategic Order Flow Trading, emphasizing the importance of analyzing order flow to understand market dynamics and the actions of institutional investors. It discusses the impact of large trades on market prices, the significance of recognizing patterns associated with 'smart money', and strategies to minimize execution costs. The course aims to enhance trading skills by providing insights into market sentiment and potential trading opportunities through order flow analysis.

Uploaded by

Mohamed aziz abidi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Strategic Order Flow Trading

Text

Module 1
Strategic
Order Flow
Disclaimer
I want to first express my sincere appreciation and thank you for joining me in
this Strategic Order Flow course. I'm thrilled you've taken this step to advance
your trading skills and am excited to help you master the proven concepts that
have transformed my own success and consistency as a trader. The methods
you'll learn surrounding order flow analysis are powerful, and I'm grateful for the
opportunity to share this knowledge with you. Throughout our journey here, my
goal is not only to provide valuable education, but also inspire the same passion
for markets and order flow that has made trading such an incredible pursuit for
me. With an open mind and focus on applying these strategies, I'm confident
you will gain new perspective and edge. So let's get started!
One of the key components in understanding the dynamics of the financial
markets is the analysis of order flow, particularly the activities of the so-called
"smart money" – institutional investors with vast resources and information at
their disposal.

Identifying institutional buying and selling activity is crucial in making informed


trading decisions. Institutional investors, such as pension funds, mutual funds,
and hedge funds, often possess a significant amount of capital, which allows
them to move markets when they enter or exit positions. Their actions have a
substantial impact on prices, and detecting their order flow can offer a
competitive advantage to individual retail traders.
When executing large trades, it is important to consider the potential impact
costs that may arise. Placing a large order can disrupt normal trading activity in
a market, causing the price to move against the trader. This price movement
due to the trade's impact is called market impact. The larger the trade size, the
greater the market impact as more counterparties need to be found to take the
other side.

Impact or execution costs refer to the implicit costs incurred from the adverse
price moves that occur from executing a large order. These costs arise from
informational asymmetries in the market. Other traders may see the large order
being filled and alter their trading strategies, such as widening their spreads or
changing their price limits. This can exacerbate price swings. The urgency to
complete the trade also means accepting wider bid-ask spreads, or a market
simply moving as other traders try to front run the big order and thus higher
impact costs.
Big trader working his way through
To minimize impact costs, traders usually break up a large order into smaller
chunks and use algorithms to execute the slices over time. The algorithms aim
to detect periods of lower liquidity risk and trade more aggressively then.
Trading patiently over an extended period allows absorbing the order flow in a
way that reduces artificially moving the price. Executing through execution
algos also avoids signaling a large order to the entire market. Considering
impact costs and mitigating their effects through smart order execution helps
large traders trade efficiently while maintaining market integrity.
Don’t want this…
Big order working its way through the market
Order flow analysis involves closely monitoring the volume and direction of
trades executed in the market. By studying the interactions between buyers and
sellers, we can identify patterns that indicate the presence of smart money.

These patterns may include large block trades, icebergs, aggressive buying or
selling, or significant changes in trading volume. By recognizing these patterns,
traders can align their own positions with the smart money and potentially ride
along with them.
Market found liquidity
The smart money's order flow can reveal crucial information about market
sentiment, liquidity, and potential price reversals. For instance, when a large
trader starts accumulating, it suggests that they have an optimistic outlook on
the underlying asset. Conversely, if they begin offloading their positions,
distributing, it may indicate a bearish sentiment.
Accumulating
Distribution. Signs?
The 'big money' refers to large institutional traders like mutual funds, pension
funds, hedge funds, and banks. These large players trade in very high volumes,
so their activity tends to have an outsized impact on market prices.

When a large trader or institution enters a new long position, they will typically
do so by buying at or near the current market price. Their heavy buying interest
provides support for the price at that level.

Conversely, when big money exits or closes out a long position, they sell out of
the position, often at a specific price. Their selling activity indicates that price
level may act as resistance on any bounce higher.

For example, if a large hedge fund buys 1500 ESU3 contracts at 4560.00, the
heavy volume signals that 4560.00 is an area of demand. Until that buying
interest is satisfied, 4560.00 will likely act as support.
Exiting at a specific price
New short position
Knowing where major volume enters or exits the market helps gauge pivotal
price levels and the strength of trends. Paying attention to the behavior of 'big
money' improves one's ability to trade key market inflection points.
New long positioning. What are the clues?
Volume/Delta/imbalances/POC
Volume or delta spike is something that gets traders caught offsides.

A surge in volume could simply be due to an institutional trader quickly


offloading a large position for reasons unrelated to the market's fundamentals.

For example, a hedge fund may need to sell a position quickly to meet investor
redemptions or portfolio rebalancing needs. The high selling volume is not
necessarily indicative of negative news in the market.

If the volume spike reflects forced selling that overwhelms buying interest, the
price may experience abnormal one-sided volatility. Jumping in on what looks
like momentum could mean buying into artificial weakness or strength.
Volume spike up
Volume spike down
The high-volume exit of a large trader can be a one-off event rather than a
sustainable trend. Basing decisions on volume spikes alone increases the risk
of mistiming entries and getting caught in reversals.

At best, waiting for the dust to settle after the flurry of activity allows a trader to
evaluate whether any emerging trend has legs. At worst, it prevents getting run
over by sharp contrary moves from temporary volume imbalances.
Here are some tips to avoid false perceptions of large orders when analyzing
the footprint chart:

Look at full context - Don't assume one long wick or volume spike alone signals
big order.

Compare relative volume - A wick may seem long but if overall volume is low it
doesn't necessarily mean excessive order.

Volume at ask vs bid - Sweeps lift offers and clean out bids quickly with very
little counter trade. So, watch volume traded on the bid and volume traded on
the offer.

Absorption of orders - Volume transacting shows absorption. If wick prints but


doesn't trade, more suspicion.
Long wick, but volume is nothing special.
Volume at bids and ask in sweeps.
Liquidity circumstances - Low liquidity markets make large orders appear bigger
than reality.

Context around wicks - Are other participants reacting or responding to


supposed large orders?

Conditional orders - Wicks can form from stops rather than fresh orders. Know
key risk levels.
Low liquidity makes big orders (volume) look more important than it really is.
Volatility in the market is characterized by increased price ranges and higher
trading volumes. When analyzing a five-minute candlestick chart, for example,
one can identify periods of volatility by observing spikes in price range and
volume. These spikes indicate a greater number of prices being traded,
highlighting the presence of volatility. However, it is important to note that
volatility does not necessarily imply a trend; it merely signifies increased trading
activity.
Volatility rises

Volatility decreases
To further understand volatility, traders can examine the price locations
associated with its occurrence. By observing price levels, it becomes evident
that volatility can manifest at both lower and higher price points. Furthermore, it
is essential to identify whether volatility is predominantly driven by sellers or
buyers. While there may be some volatility stemming from buyers, it is often
more prevalent on the sell side. This observation can provide valuable insights
into the potential direction of price movement.
Order flow analysis and identifying institutional buying and selling are essential
aspects of market analysis. Recognizing the activities of smart money can
provide valuable insights into market trends and potential trading opportunities.

By carefully studying order flow patterns, volume, price action, we can improve
our decision-making processes and potentially capitalize on the actions of
“informed” traders.
Text
This concludes Module 1.

In Module 2, I will discuss


Enhancing Your Order Flow
Trading Performance.

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