We've shared 2 order flow patterns that we find extremely valuable: order flow reversals and order flow drives. Order flow reversals are characterized by changes in the dominant flow: from selling to buying or buying to selling. Order flow drives are caused by strong, correlated, and unidirectional order flow that can drive the market to new highs or lows.
Dominant buying or selling over a range is usually but not always indicative of the direction the market will go when the range breaks. This selling over a range can be tracked using summary stats on the V.I.T. However, there are certain places where limit order traders like to rest their orders and where dominant selling is more likely to produce a drive higher. These are the areas near previous pivot highs in a up trending market and near prior pivot lows in a down trending market. It is during these areas that often going against the transient order flow will often be the right choice. In general staying with the dominant flow and trading against the transient flow can be a successful strategy.
The lesson: Like all trading, order flow is very context sensitive. Keep in mind when watching the order flow whether we're at a new high, low, or near a previous pivot low.
Wednesday, February 27, 2013 12:33:00 PM