Learning to Trade - Food for Thought (click to open)
On this page, we’ll focus on the specifics of trading Order Flow, first we’ll just touch on a couple of things to consider as you go.
Learning to trade has 2 sides to it. The first is learning how the market behaves or learning specific behaviors. For instance you might be looking at news events and have a good understanding of how participants react to a hit/miss. You might be looking at the behavior at the extremes of short term ranges in the market. You might be looking at momentum. For any behavior, you need to understand how often it occurs, what is going on in other markets when it does occur, how to tell the behavior is in play, how to tell when the behavior fails. I would use the word “pattern” but that tends to make people fall back to the charts that have failed them so far. It’s more patterns of behavior. It is not that hard to see these patterns. You might focus on breakouts on Crude oil and get an understanding how the ranges initially form, what time of day that occurs, what is going on in other markets. Then as it approaches the extreme of the range, you may see an increase in trade volume as it moves to the top. You may not how far the market moves after a break, how to know a break is failing (headfake) after the bids/offers on the other side hold.
This is behavior. This is NOT trading. Trading the behavior is the second side of trading. Once you understand a behavior, how often it occurs, if it has potential, then you can start to figure out how to trade it. That is your trade plan. That is when you learn to trade the behavior.
You do not jump into trading if you do not have a behavior you can exploit. If you know the behavior, how often it occurs and the failure rates – you will know how much potential is to be exploited by trading it. This is your edge. Then you start to trade that behavior, I can guarantee it will NOT go well at first (unless you are already experienced and profitable, just adding a new trade to your portfolio), you will miss trades, you’ll fail to get out of bad trades, you will exit good trades early. One thing will put you above 99% of retail traders – you can look at your results and the behavior for that day. You will know for every trade whether you traded it poorly OR if the market did not behave as expected. You will know whether your execution skills need to improve or if the behavior of the market is at fault.
For most of the home traders – this is something you never have and probably never imagined. So, with the greatest respect, if you are not making it as a trader now – Do not just start trading based on the information below or when you first get the tools. Observe the market, find a behavior. Contact us and confirm your observations if you want to. Then build a plan around it and your chances of success will be much higher.
How do Professional and Retail (at home) Traders Differ?
The main difference in approach between retail and professional day traders is that retail traders spend their time trying to guess what the market is going to do. Professional day traders trade what is happening right here, right now. That’s a huge difference in the way they learn to trade.
If a market is moving up, a prop trader will buy it (obviously not blindly buying), when a typical retail trader sees a market moving up, they are looking for a chance to sell it. Not only does this mean they miss a lot of opportunities to join moves, it means they are always trading against the market.
The concepts of support & resistance are very popular in the retail world and they can be interesting reaction points. That does not mean you have to trade there. It just means that if a market moves down to a support zone and then moves up, we might see an increase in participation which we can take advantage of.
Trading support means buying a market that is moving down. That’s is a low probability proposition. Retail traders have accepted many concepts like “buy support, sell resistance” without really questioning them much. In the professional world, it’s more going with the flow.
Trading Order Flow - Why?
The short answer to why we’d trade order flow is that this is what prop firms do. I am not aware of any group of traders that get profitable faster than prop firms. You can use order flow to refine your existing trade method or you can use it on it’s own. Order flow cannot fix something that doesn’t work, so if you are trading based on moon phases, it won’t help. You do have to be realistic about what you can achieve with order flow. If you are nominally profitable, it can help. If you are losing most of your trades, then you should consider dropping what you do now and using order flow on it’s own. That might sound scary but lots of traders end up spending 10,15,20 years trying various methods of chart reading and not getting anywhere. Prop traders don’t use order flow because it’s difficult but because they feel it’s the fastest and easiest path to profits for their trainees.
Order flow tools represent the only real way to see what other traders are doing – right here right now. Innovative tools like Jigsaw daytradr. In the following videos, we’ll break down the theory and then look at some practical examples.
Order Flow Theory
An explanation of what order flow information is telling you about the consumption of liquidity and why that is important. Why you need to learn to trade order flow.
20/20 Market Vision
A look at the ‘hype’ surrounding HFTs/Algorithmic trading and a walk through of some Order Flow scenarios on thick & thin markets.
In this video, we look at techniques for trade confirmation. That’s useful if you already have a trading method you want to refine with Order Flow.
Order Flow – Proprietary Trading Styles
In this video, Alex Haywood of proprietary trading firm “Axia” discusses analysis and trading methods they use on the trading floor. This is exactly what their intern traders learn to trade.