Reading the tape

[OrderFlowDashPro]

In this thread, I'll share how I read the tape.

First, I'm the developer/vendor of a specialized tape reading software which really helps me to focus on the flow of the market, AlphaReveal. You can see how it looks below. Our advanced time/sales views aren't shown -- which I don't use. Also, not shown is the q-tracker which I do keep up and sometimes use, it helps to show changes in the book. There is only so much that one can keep track of and so I just use what works for me. There are charting programs that do some of the things our software does but our software is unique in that it is specialized for real-time trading. The key to tape reading is focusing on the immediate market.

Just from reading the tape and my process-based approach to trading, I'd typically see a few good opportunities per day. But, recently, I've combined my tape read with proprietary developed graybox systems that can produce upwards of 30 signals per day. I find watching the graybox signals side-by-side the order flow and combined with my process-based approach to be a far more powerful approach. These trigger clear buy/sell signals again up to 30 times per day and winning percentage of around 80%. It is difficult for me to match their execution prices but I find they help me to maintain situational awareness. I find it especially use to watch the order flow in response to my bots buy and sell signals.

For example today, a huge sell program hit the market exactly when my bot sold. The way the tape responded and having the meta-information from my own bots posture provided critical insight that I wouldn't have had from just watching the system or just watching the tape. But, also, today I was able to detect a shift in the tape which another bot would not have detected that proved critical. So, I'm finding the combination works well. Watching the bots with my tape read is also providing insight that will help me to refine my tape read and order execution.

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Success
We've seen from our customers experiences that traders who attempt to trade soley from the tape tend to be less successful then those who combine it with a more holistic approach to the market.

Our philosophy about the order flow is that it is just data. Many vendors have tried to create these really intricate narratives about how the flow works and what it means but really studying the flow will reveal the nature of how it works which is complex and often at odds with the way that people assume how it works. Our theory is the market is the best teacher.

I use again what I've termed a process based approach which involves me "pinging" various data sources to get a "read" on the market. I don't believe in setups. I mean that, I don't look for specific criteria but rather aim to get a feel for where the market is going. I'm a bit skeptical of setups -- instead relying on my market read and graybox systems. These systems do have very clear entry and exit rules which have proven themselves to be very profitable in historial simulation. And, that's my basic rule -- no rules unless they are proven rules.

In general, while I'll continue to work on my market read, I believe that most of our future research will be toward graybox systems and situational awareness systems that compliment my existing strengths. I can share various patterns that I've detected reading the tape -- some are rather interesting. However, the patterns themselves aren't particulary valuable. The value comes from seeing many patterns, repeated over and over and combining that with a bigger picture context.

 

[OrderFlowDashPro]

Slowing Down The Trend

Here's an example from a few days ago, the market was strong and trending up. Next, we see a big offer flashed in the order book. Why would someone flash a big offer like that? My feeling is that these large orders are actually flashed by large institutions which are doing the buying to slow down the market. What tends to happen is that HFT traders will short in front of the large offer. There are other interpretations. The order may have been flashed in the hope of being taken out, finding no takers, the firm goes to market. It may also be the HFT trader trying to send a signal that to encourage shorting off the level. But, again there are many narratives to explain any given phenomena -- I pick what makes sense for me.

My feeling is that the institution buying starts to see the market go up too fast -- so they want to slow it down. These sorts of things seem to be aimed not at retail traders but rather HFT traders. My personal feeling is that retail trade is not really a very meaningful force in the markets that I trade. I am open to other narratives should the data prove provide a stronger alternative narrative.

However, mid frequency algorithmic trade which may include retail orders, CTA's, professionals, and semi-professionals can have a huge impact. As my guess is that all these systematic traders find similar anomalies in the market and are optimized to trigger orders at similar times.

As a short term trader, it pays to be aware of what these mid frequency algorithmic traders may be likely to do. As these systems can be very profitable in themselves, the only way to be aware of such systems would be too generally develop them (or purchase them).

 

[OrderFlowDashPro]

Dominant Buying and Selling?

Another misconception about the tape is that its all about tracking the market buy and sell orders. Our software does this and we track that but there is a lot more information then just whether there are more buy or sell orders being executed in the market. Pacing is very critical. Our order flow monitor allows one to get an intuitive feel for how fast the orders are coming into the market. Opportunity is very often detected by changes in the rates that the flows are hitting the market. It is possible to read what the programs are doing by getting a feel for the rates of flow.

 

[wallstreetwarrior87]

Dominant Buying and Selling?

Pacing is very critical. Our order flow monitor allows one to get an intuitive feel for how fast the orders are coming into the market. Opportunity is very often detected by changes in the rates that the flows are hitting the market. It is possible to read what the programs are doing by getting a feel for the rates of flow.

Now we are getting there - retail traders have to have a concept of what order flow is to them and their style of trading.

They trade long or short (in the majority) they are not tick scalpers, so trying to deduce what is happening and ultimately where the market is going (which is the aim for a directional trader) is very hard when using the information such as spoofing, pulling, sweeping, sitting etc, as this tells nothing about where the market will go unless there is an understanding of past orderflow. This is why HFT etc has its place but should NOT be a concern for a retail trader as HFT has no comprehension of the past as its based on here and now, and looks to take advantage of momentary imbalance.

Retail traders need to look for a minimum of 3 ticks (to account for comms, slippage, timing, and spread) so they are NOT scalpers. There for they need something more than the ability to "see the order book" to be able to create value for themselves.

Thats not to say that there is no value in having this information, as indeed there is, but it has to be used in combination with other components.

The newbie retailers will always (at 1st) think they can compete, but will soon realise when they dont get filled on limits (miss the moves), or even worse, they get run through (swept), that this is not a viable way to trade, and it must be left to those with the correct infrastructure to battle against each other.

Looks like good software though, for the right people. Compliments!

 

[OrderFlowDashPro]

Tracking changes in the limit orders

We find that changes in the limit orders often precede changes in the order flow. We look for 2 types of patterns: areas where imbalances occur and pulls. The video below shows tracking the net change field as I move a single order. This first field tracks the min depth or pulls and the second field tracks the net change. I find this sort of information adds a good feel to my trading and seems to be useful. If traders are stacking on a level then I view it as a sentiment indicator. But, I would not rely on this without a bigger picture strategic game plan/reason to be in a trade.

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[OrderFlowDashPro]

What They Didn't Tell You About Order Flow
Here's an important aspect of the order flow and something that most vendors don't even discuss. Most of the time the order flow is mean reverting, just like price. This means it pays to stand and take the other side of the flow. However, about 10%-30% of the time, the order flow shows persistence (trends) just like price. This is when it pays to go with the flow.

The difficulty and the skill of the tape reader is determining which type of flow is hitting the market.

 

[OrderFlowDashPro]

The Greatest Edge
The greatest edge for the discretionary trader is the ability too recognize when they have an exceptional versus an average opportunity and to increase their trading size on those high confidence trades. This ability to weight the risk per trade is the big thing that great traders understand. This ability to ramp up and down the leverage intelligently is in my mind the most critical skill for the trader to master. Of course, many small traders are already over leveraged. For those traders, a more conservative trading style which relies on only taking those high probability opportunities may be better suited.

 

[Trader333]

The difficulty and the skill of the tape reader is determining which type of flow is hitting the market

Doesn't this apply to every type of trading as what you are saying is that the skill is in knowing which direction the market is likely to move.

 

[OrderFlowDashPro]

Trader333: The point I was trying to make is that trading the flow successfully is not just about selling or buying with the flow because that flow mean reverts most of the time. There are a lot of vendors out there who like to use the term "order flow" to describe their trading style because I guess its a buzz word when it has nothing to do with that. So, that's one part. The other part is a lot of vendors/traders who do have order flow products don't really understand or aren't willing to share how the flow actually works.

Well, as I stated what one really needs to determine is whether or not the order flow is persistent or mean reverting. This is not an easy task and the reason that most order flow vendors don't discuss it -- again because they don't understand it or don't want to admit it. As far as directional trading methods, yes the profits will come down to the ability to predict the direction more often then not or the magnitude of a big move at a rate that produces a profit greater then the typical loss. The skill/ability to do this often comes down to recognizing different types of randomness and we find the order flow helps with that. But, most traders yes will struggle trading from the flow for the same reasons that they struggle trading from price.

Doesn't this apply to every type of trading as what you are saying is that the skill is in knowing which direction the market is likely to move.

 

[Trader333]

What are "different types of randomness" and can you give examples ?

 

[OrderFlowDashPro]

Trader333: Most people think of randomness as being synonymous with unpredictable. But, really, mathematically one can define randomness based on the characteristics of the data, such as mean, median, drift, kurtosis, etc. In fact, some types of random variables can be traded perfectly. But, I'm not the mathematics type, and I think intuitively traders understand this through technical analysis. A range bound market would represent one type of randomness while trending would represent another. If the market were always trending or range bound then it would be trivial to trade but we know that's not the case.

 

[PieterSteidelmayer]

Trader333: Most people think of randomness as being synonymous with unpredictable. But, really, mathematically one can define randomness based on the characteristics of the data, such as mean, median, drift, kurtosis, etc. In fact, some types of random variables can be traded perfectly. But, I'm not the mathematics type, and I think intuitively traders understand this through technical analysis. A range bound market would represent one type of randomness while trending would represent another. If the market were always trending or range bound then it would be trivial to trade but we know that's not the case.

LOL. BSBot. Love it.

 

[OrderFlowDashPro]

Buy And Sell Programs

One of the things that I key into are the buy and sell programs that hit the market. Much of the advantage that comes from tape reading comes from being able to see these programs. Most institutional programs are programmed to buy on down ticks and sell on up ticks. The market seems to be set on ensuring maximum entropy. In addition, HFT trading in the e-mini ES seems too have increased significantly. These programs tend to fill the order book after a move up or down which makes it more difficult for the directional trader to hit their targets which requires crossing the spread more often. There is also less real depth when we need it. So, we see a lot more low volume spikes designed to take out stops. The LQ providers do this to recycle the flow and that's nothing new but the book fills on targets are more aggressive now.

What I find really instructive is watching AlphaReveal side-by-side my bots. A buy program almost always triggers when my bot buys, while I can't buy quick enough to get the same fills -- the instructive part comes from seeing how the market reacts to the buy and sell programs.

 

[OrderFlowDashPro]

The Many Changes Of HFT

We've found that while HFT in the ES has been talking about for the last several years that recently we believe their activity has became far more pronounced. The effect has generally caused institutions to trade new in ways and has made it more difficult to achieve low risk entries.

One of the things that a good tape reader learns to do is recognize where "true buyers" and "sellers" are likely to operate. This allows the tape reader to place intelligent stops and pick good entries. HFT programs tend to create oscillating patterns as they aggressively buy highs and lows to trigger stops. We suspect they are able to do this due to their speed advantage.

This has generally made the ES a more "twitchy" market with fast spikes and low volume rallies that don't lead to follow through. Some of these changes may be due to a structural more bearish change in the market lately. We also see the HFT's operating at certain times and creating excessively thick markets. So, obviously there are a range of patterns. We'll discuss some in the next posts.

Yes, the HFT can be very aggressive.

 

[OrderFlowDashPro]

The Buy Program On New Low

This pattern isn't new but is more pronounced now due to the lower liquidity in the market. The algorithmic trader has buy programs set to go off when the market makes a new low or high. We figure this is an institution actually. So, instead of keeping limit bid out at a level they want too buy instead they will wait for the market to make a new low or high. As soon as the market makes a new low or high then their algorithm will flood the market with opposite side orders.

So, as soon as the market makes a new low this algo will buy as much as possible. We know that retailers tend to sell at lows and buy at highs.

While trading isn't easy, our program allows the trader see a lot more and gain more insights into the market and how it works.

This is a tough program to deal with and it impacts both dip buying programs which are more likely to experience slippage and the trader who tries to trade with the flow. In general we feel that the HFT tends to make the ES micro-fluctate more which means that whether or not the trader experiences "true slippage" that their orders are less likely to get filled at the prices they see on the screen.

 

[OrderFlowDashPro]

Finding The Range

For the tape reader, it's important to be able to find the range. This is where the true buyer and seller will step in away from the market. It's important to find this range sooner then later because knowing the market's range tends to be less valuable as more traders identify it. AlphaReveal makes it easy to track the micro-fluctations in the market and see where the range is. You can then instant mark the prices using the price color marker.

 

[OrderFlowDashPro]

How Professionally Do You Treat Trading?

While not directly on the topic of tape reading, here's my 20 point checklist for how professional you are in your trading.. add +1 for each yes, higher scores equal higher professionalism

1. Has an empowering belief system (nothing starts from nothing).
2. Earliest experiences with trading are positive, consistent winning experience. Didn't start a loser.
3. Has experienced some challenge, significant DD, trading loss, etc.
4. Creates own narratives that explain technical phenomena (as opposed to using common narratives).
5. Builds own indicators or deconstructs existing indicators.
6. Has achieved success using a process based trading style (non rule based, discretionary)
7. Has achieved success using self-developed trading systems (rule based)
8. Has more then one profitable trading system operational.
9. Does not go it alone. Has at least one trading partner (individiual must be genuinely passionate about trading) who is trust worthy and can share systems and strategies with.
10. Has capital resources beyond oneself, i.e through partnerships, investors, or other firms.
11. Innovates beyond the standard paradigms that system and discretionary traders promote, i.e creating graybox or mixed mode systems.
12. Able to deconstruct and see the implicit assumptions that underlie quantitative trading methods.
13. Has a dedicated virtual machine for trading activities.
14. Has identified primary strengths and possible weaknesses of methods and keeps them up-to-date.
15. Has systems/trades running across a variety of holding periods and markets.
16. Has successfully automated at least 1 strategy.
17. Has trained and mentored at least one other trader
18. Is willing and able to trade smaller then account size allows when performance dictates.
19. Does not use common rules regarding risk such as "2% rule" but rather evaluates both the probability of loss and size of loss in accordance to trading game plan.
20. Keeps a record of high value research and development. Does work on the highest value tasks every day.

 

[OrderFlowDashPro]

Test Lows To Drive Higher
There is an old saying that the big money will first sell the market before buying it to make sure that there is support underneath the market. The logic is that the big money won't take any risk. That old adage appears to be true today.
Buy programs triggered off two specific lows today that our algorithms identified which led to 2 strong drives higher.

Perhaps the HFT selling into the lows and the buy programs going off are run by the same traders. The logic is that the HFT sells the market to identify the true buyer (support), once identified the algorithm buys up the market knowing that there is support. Or perhaps, the buy program is a different trader and knowing that the HFT algo might be trying too identify it, instead of bidding the market, as soon as the HFT sells the market to a new low it buys up the entire market as fast as possible.

At any rate, whatever narrative you want to go with the behavior was clearly present from reading the tape and our grayboxes. The next post will explain why we develop grayboxes instead of auto trading.

 

[OrderFlowDashPro]

Why Grayboxes?

We have 2 types of trading systems that we run, systematic strategies that we're confident in trading in a mechanical way but can adjust/guide with our discretion and grayboxes which give us critical clues to guide our trading but we wouldn't trade mechanically.

Now, you might wonder why we bother with grayboxes and don't just trade mechanical systems? The main reason is that it takes a lot more work to build a truly robust system then it does too too build decision support tools that we can use with our tape read. When we see a strong historical performance and understand the logic, we can deploy these tools to help guide our tape read. Some of these algorithms are also being run on paper accounts for possible future automation. Eventually we plan to make our grayboxes more advanced which allow them to auto-trade the market with specific conditions set by the trader. This will help us cover more markets and trading hours.

We don't currently offer any of our systematic strategies or grayboxes but we are considering it because we've seen that trader's without a methodology struggle even with advanced tape reading tools.

 

[fadetoblack]

Why Grayboxes?

We have 2 types of trading systems that we run, systematic strategies that we're confident in trading in a mechanical way but can adjust/guide with our discretion and grayboxes which give us critical clues to guide our trading but we wouldn't trade mechanically.

Now, you might wonder why we bother with grayboxes and don't just trade mechanical systems? The main reason is that it takes a lot more work to build a truly robust system then it does too too build decision support tools that we can use with our tape read. When we see a strong historical performance and understand the logic, we can deploy these tools to help guide our tape read. Some of these algorithms are also being run on paper accounts for possible future automation. Eventually we plan to make our grayboxes more advanced which allow them to auto-trade the market with specific conditions set by the trader. This will help us cover more markets and trading hours.

We don't currently offer any of our systematic strategies or grayboxes but we are considering it because we've seen that trader's without a methodology struggle even with advanced tape reading tools.

it's interesting that you are choosing to complete for profits on small timeframes alongside other directional HFT/automation. that must be really hard work but if you can make it work good luck to you. I prefer to hold positions for a few days and remain Beta hedged.