[Simplified Trading] Actionable Order Flow without the Tape

Introduction

When I first started trading the futures market, I spent a considerable amount of time and money learning how to “read the tape.” At the same time, and part of the training that I paid for, I was learning how to read and use market / volume profile. I not so quickly learned that reading the tape is one of the most subjective ways to trade the futures market, which means creating a repeatable system was that much more difficult. Even though, after about 2 years, I decided market / volume profile, time and sales, and bid / ask ladders were not for me, along the way I had learned many valuable concepts that can be applied much more consistently by looking solely at price action and using semi-traditional technical analysis. At The Indicator Club we like to present trading ideas through lots of examples and sometimes leave the details up to you; however, this proposed method is THE most comprehensive concept that we have ever presented to our readers. We highly suggest that everyone, no matter their trading experience, take the time to go through each section and every example in that section. The trading concept will be broken down as follows:

1. What is the Best Time-Frame
2. Multi-Time Frame Analysis
3. Defining the Long-Term Trend
4. Defining the Medium-Term Trend
5. Defining the Short-Term Trend
6. How to Enter The Market
7. How to Manage Your Stop
8. Setting Profit Targets
9. Putting it All Together

What is the Best Time-Frame

Choosing the wrong time-frame can break any great trading system—market participants, like long-term participants, tend to be more active on larger time-frames and participants such as high frequency traders tend to be more active on shorter time-frames, so it is our job to take the time and decide on a time-frame that makes sense for our methodology. In our case, since we are using a modified Renko bar, we also need to make sure the settings make sense in terms of the market we are trading. We will be using our ic Club Renko with the following settings:

• Open Offset: 1 tick
• Trend Size: 2 ticks
• Reversal Size: 10 ticks

We did not randomly choose these settings—we started with the reversal size. The reversal size was set to the point increment move from one tenth point move to the next (e.g. 46.10 to 46.20). We then set the trend size to 2 ticks because our reversal size was evenly divisible by the trend size AND we took into consideration how quickly the market (CL) moves, which we determined 1 tick was too fast and 5 was too slow. Finally, we decided on an open offset of 1 tick—this was strictly a decision based on the price action we want to see before we enter the market (more discussion on this later).

Multi-Time Frame Analysis

Our system utilizes a “top down” approach, starting with the Long-Term Trend, Medium-Term Trend, and Short-Term Momentum and eventually analyzing price action for Entries. The reason for this three pronged top down approach is that it’s an objective way of performing an analysis, as you start with the boarder view (Trend), and work your way down to entry (momentum / execution).

Defining the Long-Term Trend

We look at the Long-Term trend as a definition of the “big picture.” That is, where are we overall, and what predictions can be made about upcoming price movement over the longer term?

When defining the long-term trend, we have had the best experience with using a multi-time frame approach. In our case we will use a time-frame that is 2X that of our entry time-frame, so we will use the ic Club Renko with the following settings:

• Open Offset: 2 tick
• Trend Size: 4 ticks
• Reversal Size: 20 ticks

We will also use an oscillator called ic Cloud Trend that allows us to use any default, or custom bartype that is loaded in NinjaTrader. We believe in keeping things simple, so the way we will define the long-term trend is:

• Up trend: indicated by a green cloud
• Down trend: indicated by a red cloud
• No trend: indicated by a gray cloud

Defining the Medium-Term Trend

We look at the Medium-Term trend as a definition of the prevailing trend and current momentum, and we will use the bars that define our entries.

As we define different levels of trend, you will notice that we use different indicators and potentially different time-frames—we have had the best experience using combination of indicators instead of changing the length of any one given indicator (e.g. using a CCI(21) for the medium-term trend and CCI(45) for the long-term trend). For the medium-term trend we will use the bars that define our entries and will use the ic Chandelier Stop with the following settings:

• Price Type: AveragePrice
• Length ATR: 21
• Multiple ATR: 1.618
• Length Lookback: 21
• MA Type: SMA
• Enable MTF: False
• Step Function: None
• Period: 50

The trend definition is as simple as the long-term trend—we will be ready to start defining potential entries after the short-term trend is defined:

• Up trend: indicated by a green plot (should align with long-term trend)
• Down trend: indicated by a red plot (should align with long-term trend)

Defining the Short-Term Trend

The short-term trend will not only act as an indication of current momentum in the market, but it will also act as our trailing stop (more on stop placement later). To define the short-term trend and the trailing stop, we will use the ic Flipit with the following settings:

• Lookback: 13
• MA Type: SMA
• Enable MTF: False
• Step Function: None
• Period: 50

The trend definition is as simple as the other trend definitions—we will be ready to start defining entries in the next section:

• Up trend: indicated by a green plot (should align with long and medium-term trend)
• Down trend: indicated by a red plot (should align with long and medium-term trend)

How to Enter the Market

Now that we have finally determined how to define the long, medium, and short-term trend, it is time to review how to enter the market. Before we review all the rules and put everything together, we will review the entry in its most basic form. Note: Setup #1 will be covered to demonstrate conditions #3 and #4, which are consistent between setup #1 and #2.

For longs (setup #1) we want to see:

1. At least two red bars and then
2. At least one green bar and then
3. Once conditions #1 and #2 are complete, we want price to retrace 1-2 ticks (1 for aggressive and 2 for conservative) below the current Open
4. Place a Stop Limit or a Stop Market at the current open + 1 tick (with our current settings this would be at the prior bars Close)

For shorts (setup #1) we want to see:

1. At least two green bars and then
2. At least one red bar and then
3. Once conditions #1 and #2 are complete, we want price to retrace 1-2 ticks (1 for aggressive and 2 for conservative) above the current Open
4. Place a Stop Limit or a Stop Market at the current open – 1 tick (with our current settings this would be at the prior bars Close)

Why does this type of entry work so well? This entry style came about after looking at bid / ask charts (I will refer to this as order flow from now on) for hours on end. What I noticed was that when you look at the wick of a strong up bar, or the wick of a strong down bar, three things happen if the trend continues: 1) sellers in up bars and buyers in down bars get trapped near the very bottom / top (not a new concept for order flow traders) and/or 2) there is a lack of demand in down bars, or demand is met and exceeded (effort to move) in up bars (not a new concept for volume profile traders), or 3) [most common] there was no clear pattern or indication in the order flow that something important happened in the wick. Number 3 is the most important because I found myself trying to constantly “figure” out what happened and then I would lose track of the market, or miss a great trade. With the style of trading we are presenting here, we are suggesting that something happened in #3 that was extremely important, but we do not have the capacity to look at order flow and determine what that was. Instead of worrying about missing something in the order flow, I began to look at different style charts and how order flow looked in their wicks.

I then looked at the order flow relationship in range and renko bars and I came to the conclusion that renko bars give us a unique advantage in the three scenarios above. The great thing about the way we setup our renko bar is that it smooths price, so when we are in an up trend, especially the beginning of the trend, the market has made a statement that there is demand / an effort to move up because the bar is at least 10 ticks in length. That also means price needs to move 10 ticks in the opposite direction (down) to break our current demand. When we have trending bars (green bar after green bar), we take advantage of another aspect of the ic Club Renko, the Open Offset.

Since we set our Open Offset to 1 tick, if price moves 1 tick down, the current close will equal the current open. It’s not until price moves at least two ticks from where the bar opened until we start seeing a wick. Even though it’s only a 2 tick move to generate a wick, what the market is telling us is there is a lack of demand at the current price level and it is marketing lower to find buyers. The lower the market auctions, as long as a red reversal bar is not formed, the better for our order-flow and entry. Once price moves past our current open (moves down 2 ticks), the market then has to find enough market participants to move past its open + 1 tick, which means the market must move, at minimum, 3 ticks up. By this time we should have enough effort (buyers / demand) to continue in the direction of the trend (up)—this is when we hop on-board the momentum and manage our trade.

How to Manage Your Stop

Efficiently managing stops is one of the more difficult components of trading—the emotion, mostly fear, of watching and waiting for a trade to work out, or the decision to stay in a “loss” can be devastating to a trader’s mental health, so we have tried to put together a comprehensive set of guidelines to help minimize the thought process behind moving your stop.

For long setups:

• On the entry bar, if the bar closes down (red bar), then close your position
• Place your stop on the Flipit line (if green) minus 1 tick
• [Optional] When a green bar closes, if the low of the bar is greater than or equal to your entry price, move your stop to breakeven, or breakeven plus 1 tick. After you move your stop to breakeven, if the Flipit stays green and is greater than your current stop price, place your stop on the Flipit line minus 1 tick

For short setups:

• On the entry bar, if the bar closes up (green bar), then close your position
• Place your stop on the Flipit line (if red) plus 1 tick
• [Optional] When a red bar closes, if the high of the bar is less than or equal to your entry price, move your stop to break-even, or break-even plus 1 tick. After you move your stop to break-even, if the Flipit stays red and is less than your current stop price, place your stop on the Flipit line plus 1 tick

Setting Profit Targets

Before we put everything together, we need to look at our target placement:

• Target 1: 10 ticks
• Target 2: 20 ticks
• Target 3: 30 ticks (conservative), or trail until stop hit (aggressive)

Putting it All Together

Now that we have the basics and stop management down, it’s time to put all the concepts together in one comprehensive approach. The most important aspect of our system is to define when and how much we should be trading:

1. Set a goal to take one profitable trade before lunch (11:00 AM EST)
2. Trade between 8:30 AM EST and 2:00 PM EST
3. Avoid major news events (at least 5 minutes before and after)
4. Avoid holidays and days before major holiday weekends
5. Avoid the Christmas and New Year holidays by not trading from December 22 (give or take a few days) through the day after New Year’s day
6. Avoid (monthly) option expiration
7. Avoid rollover—do not trade on rollover day and avoid the day(s) prior to rollover if volume is less than average, or if you see a spike in trading on the next contract date

Before we get into the specifics related to entries, we highly suggest, if you haven’t already, reviewing each of the above sections (including all the examples).  For entries we will review two setups, but it is important that we take the first of the two setups.

Long setup #1

1. The long-term trend must stay green during rules #4 – #7
2. The medium-term trend must stay green during rules #4 – #7
3. The short-term trend must stay green during rules #4 – #7 (exception #1)
4. At least one green bar and then
5. At least two red bars and then
6. At least one green bar and then
7. Once condition #6 is complete, we want price to retrace 1-2 ticks (1 for aggressive and 2 for conservative) below the current Open
8. Place a Stop Limit or a Stop Market at the current Open + 1 tick (with our current settings this would be at the prior bars Close)

Long setup #2

1. The long-term trend is green
2. The medium and/or short-term trend is not green, then
3. One or more green bars later, the long, medium, and short-term trend are all green
4. Once condition #3 is complete, we want price to retrace 1-2 ticks (1 for aggressive and 2 for conservative) below the current Open
5. Place a Stop Limit or a Stop Market at the current Open + 1 tick (with our current settings this would be at the prior bars Close)

Exceptions (longs)

1. If the short-term trend turns red for 1 bar and on the next bar becomes green, ignore the red

Short setup #1

1. The long-term trend must stay red during rules #4 – #7
2. The medium-term trend must stay red during rules #4 – #7
3. The short-term trend must stay red during rules #4 – #7 (exception #1)
4. At least one red bar and then
5. At least two green bars and then
6. At least one red bar and then
7. Once condition #6 is complete, we want price to retrace 1-2 ticks (1 for aggressive and 2 for conservative) above the current Open
8. Place a Stop Limit or a Stop Market at the current Open – 1 tick (with our current settings this would be at the prior bars Close)

Short setup #2

1. The long-term trend is red
2. The medium and/or short-term trend is not red, then
3. One or more red bars later, the long, medium, and short-term trend are all red
4. Once condition #3 is complete, we want price to retrace 1-2 ticks (1 for aggressive and 2 for conservative) above the current Open
5. Place a Stop Limit or a Stop Market at the current open – 1 tick (with our current settings this would be at the prior bars Close)

Exceptions (shorts)

1. If the short-term trend turns green for 1 bar and on the next bar becomes red, ignore the green