Order Flow Reversals At Extremes

Order flow often becomes very valuable when it runs contrary to price action. One of the best trades to watch for is when traders herd together and get caught the wrong way. These events often occur at new highs and new lows. The market topping process for the S&P 500 is different from market bottoming processes. Market tops are often characterized by a narrow or tight range over a long period, and then a fast drop down to support. These ranges are caused by liquidity providers constantly "recycling" trades by absorbing selling and then running traders stops. Market bottom processes often don't have these ranges, at least in the S&P 500, but instead are characterized by fast moves up, profit taking, and finally basing. 

Some people confuse AlphaReveal as just a "scalping" platform. Yes, it is true that attempting to scalp without using our program would put one at a significant disadvantage. Likewise, it true that many order flow patterns are good for a few points. Even so, our software can prove extremely useful for traders looking to catch larger, more significant moves.

At least for the e-mini ES (S&P 500), when the order flow reverses after a significant amount of selling then often that order flow will remain strong all the way back to the prior open or even a prior high. Of course, the cost to catching the bigger moves will be a lower winning percentage.

The lesson: Watch for changes in the dominant order flow at extremes to catch market reversals. These changes can be seen in our OrderFlow BarsTM  and using the PressureVolumeTM display.


Wednesday, February 27, 2013 12:22:00 PM


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