Looking beyond price – Finding ‘reaction points’ with Order Flow

In this article, we take a look at the activity on Crude futures on the 7th February. The market was in a trading range but the order flow was painting a very different picture, leading us to identify both the reversals at the extremes of the range and then later on, that an imbalance indicated that reaction was imminent. All tradeable events!

When a market is moving sideways, it’s often better to just quit trading for the day. Markets will typically have high activity at their ‘open’ time where institutional traders are most active. After that, it’s a game of speculation, most markets will put in swings with decent momentum (for that market) one way and the other as speculators jump on moves, then take profits and then jump on the counter move. Days where we put in a one way move are the exception, not the rule.

There’s times though where the market just settles into a range. Trading a range is mostly common sense. In the absence of any other information, the best approach is to fade the highs and lows of the range. Fake breakouts are quite normal where the range will break and then we’ll fall back into the range after both reversal and breakout traders have been stopped out. Trading ranges are easier to manipulate because there is no momentum and low volume. Predatory traders have lower risk in pushing the market around.

Trading a range using just price information is problematic. For example, the high of a range will often be a prior high volume area for that day, which might not be visible on the chart. A headfake will usually be apparent when an iceberg order appears (for example) absorbing buying activity after the break of the range high. These things are not visible on a chart but are easy to read when you look at order flow.

Often, the best ‘tell’ that a range extreme is holding is absorption of buying/selling at the extreme of a range followed by the market starting to move back into the range. You have traders trapped at the range extreme and as price moves against them, we’ll be moving to the point where they will exit their trades (stop loss) and that will help the move back into the range. Being patient and waiting for this to happen will get you into trades a little later but it’s worth ‘paying up’ a few ticks for that additional order flow confirmation.

In addition to this, longer term order flow tools like the Cumulative Delta can help us identify if traders are taking a directional position within the range. By that, I mean that there are signs that traders are getting positioned for the range to break.  The Delta shows us the number of buy market orders minus the number of sell market orders. In a trading range it’ll typically be flat. If there is a big imbalance, it means things could well get ‘very interesting’ when we test the range extreme. This is much easier to see than to describe, so here’s a short video showing:

  • Volume nodes becoming resistance when a range later forms
  • Absorption at the high and low of the range (giving you decent trade entry points)
  • An imbalance in the delta leading to the buyers getting stopped out

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Jigsaw Trading
After suffering a 30% drawdown at the hands of “independent financial advisors”, Peter started trading in the early 2000’s, figuring there was no point in paying people to lose money for him. By 2005, Peter was day trading NASDAQ stocks and later discovered the value order flow. He struggled with the way order flow data was presented so designed tools that organized Order Flow information more rationally and Jigsaw Trading was born. Those tools are now the #1 ranked software on Investimonials.com.
Today Peter spends his time trading and helping other traders through the Jigsaw community, articles and free one on one sessions.
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Jigsaw Trading

Jigsaw Trading

After suffering a 30% drawdown at the hands of “independent financial advisors”, Peter started trading in the early 2000’s, figuring there was no point in paying people to lose money for him. By 2005, Peter was day trading NASDAQ stocks and later discovered the value order flow. He struggled with the way order flow data was presented so designed tools that organized Order Flow information more rationally and Jigsaw Trading was born. Those tools are now the #1 ranked software on Investimonials.com. Today Peter spends his time trading and helping other traders through the Jigsaw community, articles and free one on one sessions.

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