A crude example of order flow…

I was running an order flow coaching session with a client recently and we came across this setup in CL that’s a great example of how if you allow the market to tell you its story, you can come across really nice setups.

Click to enlarge…

This is CL on 26 July 2019. It’s a 10 range chart with a 400% imbalance bid/ask footprint. Probably the most striking thing at first glance is the stack of selling imbalances in the 10:29:34 bar. This is most likely stops being triggered. Why? The zero volume on the opposing side of the imbalances. Stop orders convert to market orders when price trades. If the size of the stop order exceeds the available liquidity of limit orders, then we will move to the next price where there is liquidity and so on until there is more liquidity than that being consumed by the market orders (that the stops have converted to). Here we have 452 contracts hitting the bid (46+72+73+140+121) with no trade on the other side of the quote.

This mechanic is why stop runs occur (and new retail traders cry about their stops being hit). Let’s explore this a little. If I can throw decent size around I can take a view where stops are likely to exist. If I can push the market to this level and the stops trigger, these stops will consume the liquidity in the order book thereby moving the market further in the direction that I’m looking for, so if I can kick off a move that triggers some stops, I benefit from the liquidity consumed by the stops that I triggered, enabling me to exit at a better price.

Perhaps that’s what happened here. It’s pretty likely that there would be stops located around the day’s low. We’ll never know why this move occurred or who if anyone explicitly triggered it, but let’s see how selected emoji trading indicators can help us read the story of what’s happening and see if we can get any benefit from it…

Click to enlarge…

Here’s the same chart featuring the following emoji trading indicators, all of which are included in our Order Flow Suite:

So, aside from the stops being triggered that jumped out of the chart, what can we see…?

  • First of all, look at the bar that precedes the 10:29:34 bar where the stops were triggered. There was a Zero Print in the bar at 55.90. Small Prints picked this up and bookmarked the level. Much like the stops that triggered, this Zero Print told us sufficient volume hit the bid such that all of the limit orders were consumed with no opportunity for buyers to lift the offer when the quote was 55.89/55.90. Strong aggressive selling overwhelmed the passive buyers. Could this have been an aggressive seller capable of trading large size that was aiming to trigger stops they believed were in place near the day’s low?
  • The stops triggered. Fine. Nothing we can do here. If we’d joined in the action we’d have been late and selling near the low. More interesting to be a buyer after this type of activity, just as the presumed aggressive seller likely is now.
  • 10:31:11… things get interesting. After we’ve churned around a but, this bar closes with Unfinished Business at the low of the day, so, we know that:
    • there’s likelihood of aggressive selling activity at 55.90
    • this seemed to trigger some stops
    • and the low of the day at 55.72 is not low enough to represent a price that’s too low for sellers that’s highlighted by the Unfinished Business
  • This gives us a nice exit target of 55.72 and we can start looking for a short entry to trade down to at least 55.72. If you don’t know where you are going to get out of your trade, how can you consider getting in?
  • During the 10:33:42 bar, we trade back up to 55.90 – the previously identified price level where we think there was an aggressive seller starting their trade plan. As we get back to 55.90, Absorption Pro highlights that a strong passive seller is absorbing the aggressive buying at this price. This can only be a coincidence surely 😉 or is it a sign that the aggressive seller is looking for some more downside movement.
  • Now we know that 55.90 represents supply. We have a target of 55.72. We have 18 ticks of opportunity and supply above us at 55.90 to protect us giving us ample opportunity for a short trade with a very strong risk:reward ratio. Any short entry between 55.84 and 55.90 would give us a minimum 2:1 risk reward ratio and it’s clear that there was opportunity to get short in this price range and once short, very little adverse excursion while in the trade (which played out pretty quickly too!).

emoji trading software helps you visualize order flow events within the footprint chart that you may not otherwise see. Our classroom training and coaching allows you to understand these supply & demand events from first principles. In combination you can start to trade with greater insight and control.

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