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Module 7 - Inefficient Markets

The document discusses the concept of inefficient markets and how traders can capitalize on market inefficiencies through various strategies. It highlights signs of inefficiency, such as wide bid/ask spreads, price dislocation, and low volume, which create trading opportunities. Additionally, it explains the role of stuck traders and the importance of waiting for confirmation before entering trades to minimize risk.

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Mohamed aziz abidi
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0 views

Module 7 - Inefficient Markets

The document discusses the concept of inefficient markets and how traders can capitalize on market inefficiencies through various strategies. It highlights signs of inefficiency, such as wide bid/ask spreads, price dislocation, and low volume, which create trading opportunities. Additionally, it explains the role of stuck traders and the importance of waiting for confirmation before entering trades to minimize risk.

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 7
Inefficient
Markets
Disclaimer
The efficient market hypothesis argues market prices fully reflect all available
information at any given time. New information is rapidly incorporated into
prices.

That it's difficult to consistently outperform the broader market after accounting
for fees and risk, supporting the notion that current prices accurately capture
fundamental values.

With all the high-speed algorithms, retail participation, and abundant data,
markets rapidly process information into price changes before obvious
mispricing's emerge.

But nothing is ever 100% efficient all the time. We just need to identify those
times when the market is not being efficient.
When there is inefficiency, that is an opportunity for traders to capitalize on.

You may not realize it, but some of the most popular forms of trading look for
inefficiency:

When market prices deviate from estimated fair values, it creates potential
mispricing for traders to exploit. Acting on inefficiencies can be profitable.

Panic selling can disconnect prices from fundamentals. This provides an edge
to traders acting on emotion-driven inefficiencies.

Trading strategies like trend following or mean reversion strategies, aim to


systematically extract profits from temporary inefficiencies.
From an order flow stand-point we need to look more closely at what is
happening right now.
Here are some signs of market inefficiency to look for when day trading using
order flow:

Wide bid/ask spreads - This signals low liquidity and potential for volatility if
large orders hit. Watch your DOM.

Price dislocation from value - If price diverges drastically from fair value, it
presents mean reversion potential. Go with trade. Directional.

Thin Prints (Low volume) - Low volume at price levels indicates lack of
commitment. Price may not hold. Go with trade. Directional.

Reactionary flow - If flow simply reacts to price changes rather than leading
them, the order flow is inefficient.
Repeated rejections - Price spikes that get rejected back to the same area
over and over.

High volatility - Markets swing rapidly between extremes as participants react.


Lower stability.

Poor liquidity across price range - Sparse prints and volume through wide
price zones.

Lack of follow-through - Breakouts and spikes fail to hold as no absorption


follows.

News/event driven chaos - Fundamental news events sparking volatile spikes


as traders re-position.
Price dislocation from value
Thin Prints (Low volume)
Reactionary flow - When flow simply reacts to price changes rather than leading
them, the order flow is inefficient.

Leading…
Look at the POCs.
Reactionary flow - When flow simply reacts to price changes rather than leading
them, the order flow is inefficient.

Reactionary…
Look at the POCs.
High volatility - Markets swing rapidly between extremes as
participants react. Lower stability.
Poor liquidity across price ranges - Sparse prints and volume through wide
price zones.
Lack of follow-through - Breakouts and spikes fail to hold as no
absorption follows.
News/event driven chaos - Fundamental news events sparking volatile spikes
as traders re-position.
When there are inefficiencies in the market, that is where trading opportunities
arise. But not all inefficiencies are tradable. I would trade something like thin
prints, but not a news event.

Inefficient markets exhibit what many traders consider noise but a lack of real
conviction. Be patient trading these conditions using order flow, wait for clarity
to emerge.
Effort refers to the volume and delta (difference between buying and selling
volume) exerted by buyers and sellers. When a significant amount of effort is
exerted without a substantial price response, it indicates potential control from
the opposite side. Conversely, when price responds favorably to effort, it
suggests control by the exerting party.
Big effort – no reward
Big effort – no reward
Big effort – no reward
Stuck traders are individuals who find themselves in unfavorable positions as a
result of stop runs. At market highs, stuck traders are typically those who
continuously buy into the top, often driven by inexperienced traders or those
expecting the trend to persist. Conversely, at market lows, stuck traders are
usually short sellers who accumulate large short positions without being able to
push the price any lower. They are looking for or trying to cause stop runs, but
instead run out of ammunition.
Stuck traders in a downward market rally continuously re-offer larger sell orders
on the DOM, pushing prices lower, but a large sell order resulting in an uptick or
flat line indicates a potential turnaround, while continuous re-offering to a
certain point indicates heavy resistance and a potential reversal.

Intelligent traders take advantage of sellers who cannot press the price any
lower, leading to a buy stop run and the entry of big buyers.
Stuck traders
To identify potential reversals of stuck traders, traders need to watch for
reactive buys or re-bids. Stuck shorts face problems when there is a strong re-
bid from buyers to propel the price upward. Conversely, stuck longs get
screwed when the re-offer from sellers to drive the price downward. By waiting
for these reactive moves, traders can enter trades on the same side as the
dominant market participants.
Rebid
Reoffer
To take advantage of this strategy, traders should aim to enter trades in and
around the area where stuck traders have accumulated.

Wait for confirmation of a re-bid or re-offer before entering the trade.

Traders can place their stop orders below the accumulation area, ensuring
limited risk.

This strategy offers a low-risk entry point with the potential for significant price
movement.
Stuck traders can become unstuck if the market moves against their position,
so it is crucial to wait for confirmation before entering a trade.

Depending on the size of the bid or offer, traders can adjust their position size
accordingly.

Smaller bid sizes may indicate a less substantial reversal, so smaller position
sizes may be appropriate.
Text
This concludes Module 7.

In Module 8, I will discuss


Coming Full Circle

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