11/07/2017 ES Orderflow Narration

 Educational Content  Comments Off on 11/07/2017 ES Orderflow Narration
Nov 072017

I pointed out a change in volume density characteristics early in the room today and as it turned out the view happened to have some merit. Essentially I said that for several sessions now as new highs were retested and/or broken we have seen the classic “P” shaped volume profiles so characteristic of aggregate short covering behavior. I’ve highlighted the recent profiles more indicative of short covering into recent new highs in green and contrasted in red the difference in today’s profile in the image below, along with the key structures in play in orange. Its pretty elemental actually. If the highest volume in a session occurs near/around the high of that session, what is more likely? Do new buyers generally like to buy the high tick, or is it prior sellers on the wrong side that tend to puke out at the high tick? So with that regarding today we noted that though we broke to a new high in Globex the profile this time just thinned out into nothing into the high indicating a potential change in trader expectations. We saw a ton of volume in pink on the retest of the OH in the cash session though, but once that flow was complete I mentioned in the room that the long side felt exhausted to me. It turned out to be true at least in the short run starting with the largest size leading out short on that last push up in pink followed by a steep second push failure in red on thin relative volume.

For those who did decide to sell into the retest as intraday swingers the structures below to look to scale into should have been very obvious starting with the yesterday RTH high potential former R turned S from above 90’s we had just broken out of. Remember guys, we can never control how close the structures will be and they will naturally expand and contract relative to each other with changes in volatility. So next we pulled back into the YH and saw new passive buyers looking to buy a pullback stepping up against late chasing sellers in light blue. Note once again size leading out against the market as net buyers into that push back down. I can’t imagine not scaling at least some into that action or the second push low failure on paper thin volume in dark blue that followed, but of course each of you has your own evaluation process. Though kind of on the fifty yard line I also highlighted more seller absorption in purple as a potential scale spot for the same zone as I did in light green as well with peak volume density around the YC 88’s. The next structure below for those running multiple scale overlays was the Globex low 86’s based on and meeting the prior super major former R turned S 85’s from 11/1 & 11/3. Plenty of trapped shorts on the first push down there in dark green ending with a strong long finish lift off the lows led by size followed by a paper thin second push failure in lime green from seller exhaustion and the world leading out long from there in the stats. Another textbook section of price action and flow illustrating the predictability of crowds around the known key market structures. Plenty for everyone today both shorts and longs, swingers and scalpers…


About the Author

Discovery Trading Group is a unique dojo focused on mentoring aspiring futures traders since 2010. It’s emphasis is on guidance in building bespoke processes and risk overlays rooted in market structure, price action and orderflow, with sound adaptable risk management as a priority.


 Posted by at 4:30 pm  Tagged with:

10/31/2017 ES Orderflow Narration

 Educational Content  Comments Off on 10/31/2017 ES Orderflow Narration
Oct 312017

Textbook PA and flow action at this key structure today which member Geoff and I happened to be watching in the room and discussed in chat. We expected the spill past the OH line in the sand with spill up to the next minor 75’s structure above as marked and of course figured that either the bears would sell it hard as a headfake and/or the bulls would step up hard into a pullback back into the 73’s from above. As it turned out both unfolded as expected, but more importantly a very tight range was formed and the edges of which would end up being very exploitable “uncle” lines for whichever side turned out to be wrong and were forced to puke (in terms of those intraday swinging structure to structure). The swing shorts would be betting that the pop was a headfake and looking to trade back into the 68-70’s we had rallied from and the swing longs buying the pullback would be looking to bet the rally continued and trade into the yesterday high 77’s structure. Business as usual for most DTG swingers depending on what your bias was at the time.

So we popped up above the OH in purple but buyers quickly exhausted into the high there which was also I’m sure a layup for the short scalpers. From there as expected we pulled back shallow into the 73’s structure and saw the aggressive sellers get stepped up against massively by passive longs in light blue. This was followed by a second push low failure in dark blue on paper thin volume with new sellers totally disinterested. Either of those spots I’m sure jumped off the page for the swing longs. From there we saw the most epic battle in light green as the world wanted to keep buying but the passive sellers now were stepping up giving the bulls all they wanted. Obviously if you were a swing bull from just prior that should have made you very nervous and I’m sure plenty of you threw in the towel there. Despite this action since it didn’t really occur into the current highs I’m sure the swing bears passed on that action. But for those willing to take a shot into the afternoon the action in pink may have interested you. The bulls once again pushed hard, this time buying into the case high but got absorbed hard. Note in the stats also the largest size finishing net sellers into that push against the broad market. But alas the shorts got no traction as the buyers continued to accumulate and the new case high headfaked just enough in light red to force many prior intraday shorts back out. Again though, note the largest size selling into that push as well so perhaps the more savvy were able to hold on realizing that in the aggregate it was the longs who were the most trapped. This was confirmed with a super thin hard rejection of the highs in dark red as the bulls finally lost interest and we subsequently rotated hard back down. The first wave bailed back into the VWAP which was then the same case 73.25. And finally longer term longs were also forced to throw in some towels as the market makers pulled bid liquidity in dark green just under the interim support line that had developed for the day.

All in all action like this may be the most valuable for you to review because it illustrates that any and all analysis including that of the order flow is simply an analysis of what IS at that time and it does NOT predict what will be even in the very near future. Its just a continuously evolving auction guys. All you can do is segment the action via your intersecting criteria and see what unfolds relative to your risk/reward overlay on a trade by trade basis. Of course over groups of trades reading the flow well can have the ability to keep losers smaller relative to winners over groups of occurrences when you do happen to have it right…


About the Author

Discovery Trading Group is a unique dojo focused on mentoring aspiring futures traders since 2010. It’s emphasis is on guidance in building bespoke processes and risk overlays rooted in market structure, price action and orderflow, with sound, adaptable risk management as a priority.




 Posted by at 5:01 pm  Tagged with:

03/12/2015 Mr TopStep Bootcamp

 Educational Content, Videos  Comments Off on 03/12/2015 Mr TopStep Bootcamp
Mar 122015

Mr TopStep bootcamp where RG covers a variety of topics: market structures, gambling, charting, reading order flow, price patterns, and HFT.

 Posted by at 3:09 pm
May 202010

I’m probably stating the obvious for many of you, but the moral of the story is always follow the money supply starting with a macro view and all the way down to watching for shifts in what I call “The BIG three” intraday.

First up, the 10s. Ten Year US Treasury notes are perhaps the most widely used and regarded measure of risk appetite in the world. Money isn’t created (usually). As a “first stop” it flows between the S&P 500 index and the 10s in a very reactionary manner initially and from there it is chopped up and allocated to various asset classes with more detail. But if something happens that is bearish, there will be a quick move to park in the 10s and if something is bullish money will flow from the 10s into the 500 initially. It is important to note that we are in a HUGE, organized uptrend in the 10s. Notice how it is mostly uniform and not all messy like the ES? This is a really good first clue that global money is being positioned for flight to quality. Kind of like a bear settling in for a long winter hibernation. I don’t profess to be a macro God, but when I see this I pay attention. Also note that the volume is steadily increasing to the long side. Last year at this time the 10s were trading 5-600K per day. Yesterday we traded more than 1.5M and we are averaging over 1M contracts each day with the net pouring into the long side. Not good for stock indices.

Next is the Euro. Directly correlated with the 500 for quite some time now – especially during price shock conditions. Right now the EU is likely in a move to return to parity or close to it. Without going into a huge explanation of exactly how and why the Euro tracks with the S&P, just know that with the global debt issues being at the fore front right now, everything is tied to the currencies and value against the dollar in particular. Like the 10s, note the uniform down trend with increasing volume to the short side.

Finally, remember to pay VERY close attention to the Euro/Yen cross. Also known as the carry trade. The EUR/JPY cross has succeeded in calling most every major turn in the equity markets WAY ahead of time. Why? Like I said, follow the money. The world money supply is about debt and using borrowing at various efficiencies between world banks to create spread ops as well as to use as a hedge against risk appetite. Basically, the core benefit of the trade is the ability to borrow money for free in Japan at the central bank level. Actually it was really free (as in zero) until relatively recently, but it still may as well be as it is right at a mere 9 basis points. The idea is to borrow money in Japan at 9bps and invest it in US an/or European equities for a nice return and use the ECB tied to the Euro as a backstop as a hedge. Obviously there is a built in “free money” trade, since at the worst case you are borrowing for 9bps points and returning 50bps at the ECB for a difference of 41 basis points in your pocket. What is the catch? If risk appetite shrinks because the equities investments lose more than 50 bps you are upside down on the trade and the cost of borrowing is the minimum loss. This is why the carry trade is the ultimate barometer for global risk appetite. If the biggest and brightest who control the biggest pools of money in the world are pessimistic enough not to grab the free money you probably want to pay attention because obviously it trickles (or pours) down into the equities rather quickly. When the cross goes up it is bullish for equities and when it declines it means risk appetite is shrinking so money will flow out of equities. In turn the Yen declines against the Euro and the money shifts to fixed income, best reflected initially in the 10s almost always. Once again, note the significant down trend and the increase in volume as the selloff deepens.

One last thing about the carry trade: Notice in the following chart plotted against the SPX how the cross leads every major turn in the equities markets. Follow the money. This is all daily stuff obviously but you need to be watching the big three everyday and use them to spot trouble that might run you over at your key levels. Remember: Equities CANNOT win a tug-o-war with fixed income or currencies. The money is just too big and dwarfs them in every way. The S&P against the 10s or the EUR/JPY cross is like Pee Wee Herman against Sly Stallone in an arm wrestling contest…

 Posted by at 8:32 am
Apr 212010

By request I have annotated some images of the MarketDelta Plus charts we use each day to trade the ES. Other than a few market internals, real time news from Bloomberg, and a few other correlated markets and sectors this is all we use. The 1440M footprint and daily composite profiles are only used to help gauge sentiment and understand what institutional and/or postion traders have done or might do. The real nuts and bolts of our trading is limited to the split profiles chart and the 6PF entry chart. We identify potential trades and plan our session from the former and use the later to time entries (or not enter at all because we don’t like what we see) by watching order flow. After the first webinar on 4/27, we will be doing two more webinars for MarketDelta over the following two weeks. The first will be devoted to how we identify trades in large part by using the split session profile chart here. And the final one will be on how we read order flow in real time using the 6PF entry footprint chart. In the meantime, you might want to take a look at how we are set up if you are a MarketDelta user and/or import the chart definitions from charthub.com if you like. Here are the direct links to import the charts followed by the annotated chart image files. Enjoy…





 Posted by at 1:56 pm

Pre-Market Trading Sheet Tutorial

 Educational Content  Comments Off on Pre-Market Trading Sheet Tutorial
Apr 042010

Each day prior to market open every member of our trading team creates a sheet comprised of 4 main sections which we we work directly from during the trading session. These sheets contain everything we need to know to execute the plan for the day. They are also uploaded each day on the blog in the posts titled Pre-Market Commentary. For many of you they may be self explanatory, but for those new to us what follows is an explanation of each section in detail…

Commentary Section:

-This may be the most important part of the sheet and actually the impetus for this blog. We find that writing down trade ideas, instincts, gut feelings, etc. REALLY helps solidify the trading plan for the session. Furthermore, the simple act of knowing that others will read it forces you to consider what you write more carefully. I can’t stress enough how much this has improved our trading and I suggest you all start doing it. You can then compare what you write to what we write and if it tends to be the same day after day it can be a real confidence builder for those lacking in that department.

-Whether you pick up ours at the end of the day, or you happen to be one of the pre-market members, you will notice that the important clues about which levels are more or less likely to hold, where we will procede with extra caution, and overall macro pressures interacting with some of the levels end up being what determines success or failure on most of the trades. Remember, trading is gambling and you are simply choosing one side of a binary proposition – like a coin flip. If you take out costs of trading you are left with a default even money proposition. What determines consistent success is your edge. Your edge comes from the way you interpret what is more or less likely to occur at a level along with analysis of order right at the actual moment of trading.

-The levels we are providing ARE where the most contention between buyers and sellers is likely to be. They come from actual trading and they don’t lie like indicators all trying to predict future behavior using time based analysis of the past. There is no time basis to our levels. Just how much traded at that price the last time the market was there. But this is also why we keep saying that our trading methodology isn’t a system and you have to stop trying to turn everything into one. Our trading works BECAUSE it isn’t a system. Here is an example: Let’s say 1178 is an interim high and also the daily R1 and an acceptance and rejection area on two previous days. Will this area be important? Of course. No-brainer. But will you short a move up to it, or look to trade a breakout above it? This is where our (or your) commentary comes in. What is going on in the world, news, correlated markets, volume, weather, holiday schedule, etc.? Your best guess as to how this all fits together is how you will hypothesize what you expect will happen and decide what you will do when price gets there. Then you will carefully watch order flow and if it confirms what you expect trade in your chosen direction. It is really quite elegant and simple. You have to pick a side and have an opinion.

Sentiment Section:

-This section contains a few key items we use for handicapping reaction at key levels. Each item is a section of time from the big picture of what is going on from a daily perspective all the way down to how the market reacted to 8:30 news, if any.

-We do NOT make attempt nor care to predict direction, but rather to have a sense of what the general pressures on the market are in order to determine the likelihood a key level we are trading will hold or fail. Our analysis here is based 100% on volume, market internals & discretion, not rigid patterns.

-It is broken down by daily, overnight, news, & gap volume with an assessment of how MUCH volume in that direction there is relative to what is typical for the period. The idea being that we can assess the overall commitment of traders which if significant will place upward or downward pressures on the market at key levels.

-For example, if overnight volume was to the short side and the institutional order shorts represented 70% of their portion of the volume which was also twice the usual volume for the time period, that may signal that position traders are shifting down. If the daily volume over the last few days showed a similar pattern, this is even more powerful. Now imagine there was lots of short volume after a news announcement as well. When the cash market opens and the futures trade down to test the overnight low will you be extra cautious? Not fade it at all because down side pressure may be big enough to break the market down making that not a very high probability trade? You get the picture. There is never one answer, but you need to know and analyze this stuff. Something to remember about volume analysis. Volume is the truth. It is what really shows the market for what it is and no move is really important without it. It shows commitment of traders. period. And just because bars are moving up or down doesn’t mean any volume is trading in them. Any trend with low volume is suspect and any range with high volume to one side is a potential leading indicator. Don’t think of bias as predicting direction. Think of it as handicapping which levels you think are most likely to hold or break. If the overnight low is a trade you are considering fading (going long when price falls into it), if you have a short bias you might want to consider passing on the trade or just scalping it as there are underlying downward pressures on the market. But if you had a long side bias, that means you think the lows are more likely to hold so you can feel better about trading back into the range for a bigger distance.

Potential Trade Section:

-These sections identify the potential trades we are looking at for the morning session.

-We are not saying these will happen, just that if price gets there we will be watching order flow and potentially trading if everything reacts as we expect.

-We are prepared to change our mind about trading or in which direction at the last minute, but we have come to trust our choices and chances are, we WILL be trading one or more of them every day.

-Instead of waiting for the market to produce some pattern or a bunch of indicators to line up, typical professional short term traders trade price itself.

-It is also a natural and easy way to prevent over trading as it forces you to identify just a few low risk, high probability trades each day which you know ahead of time.

-IMPORTANT: Our levels are almost always very close in terms of identifying where the “fights” between sellers and buyers will occur, but are never meant to be exact. Many times they are – to the tick, but the idea is to time entry based on order flow and realize that the rotation may fall a little short or even probe past the level. You have to watch the order flow and just know that price will probably stall at least temporarily somewhere near these levels. All we know is that these levels have been previously important areas of high or low acceptance or rejection as shown by commitment of traders (volume). We don’t need to know any more. We just need to watch price and trade in the direction we expect price to move based on our complete analysis.

-A “fade” means that price moves up or down to a key level and we are betting it will reject there and rotate in the other direction. A “break”, means we will look to trade a breakout or breakdown in the direction of the current trend at that level. We rarely trade the breakouts and trade far more fade trades. Fades generally allow for far less risk and in the ES, contrarian trades are higher probability as they suit the ES market characteristics better. The ES is NOT a particularly good trending market in our view. Occasionally, we will write scalp in the box, which generally means that if we trade it we will be very careful and most likely just try to capture 1-3 ticks from the volatility as opposed to targeting a key level.

-There are up to two potential targets for each trade. We normally just trade to the first one, but no doubt some readers will trade for larger profits and we do occasionally trade for additional targets when the market is really moving.

-Again, we can’t stress enough that these levels are not absolute. But they are the most accurate anyone could ever come up with. Previous volume is truth and is all we have to go on other than discretion and fundamental analysis of the bigger picture. When we do enter, we are managing each trade carefully and discretion is of key importance. Our target levels are also very likely to be accurate as previous acceptance areas are magnets for price, but we are always ready to hop out and take profits or accept a smaller loss if the trade moves against us. There are no absolutes in discretionary intraday trading.

Key Market Levels Section:

-Each price is taken directly from our assessment of volume at price filtered by discretion. As in the trade identification columns these are NOT absolute levels. Just our best guess where price will be either accepted or rejected because it has been previously. Until price is accepted as fair value by both buyers and sellers it will run out of supply and be rejected whether it is an unfair low or unfair high.

-Professionals refer to this supply related reaction as responsive buying or responsive selling. Trade entries can be in either direction and will be identified specifically in the potential trade section to the left. Generally speaking rejection areas are trade entries for us, although sometimes we will enter at an acceptance area as well. Once in a trade we like to target acceptance areas which are the opposite of rejection. These are areas that have previously traded with a lot of volume. “Comfort” areas where both buyers and sellers have previously agreed on value.

-The main function of the price ladder is to identify all key high and low volume prices likely to be encountered in the first hour of trading only. Each price is either a nearby volume high or low, overnight or previous session high or low, and/or floor trader pivot point. Many times the prices we list will end up covering the whole day, but we generally only trade once or maybe twice in the first hour in a typical day so we really only try to put up the levels that could be hit during that time with a bit of cushion for wild conditions.

-Regarding the pivots, we are old school and have used them since the old floor days. Though just silly math calculations that have no real meaning in terms of traded volume, etc., they have an uncanny way of curve fitting themselves to price and price action so we still look at them. Lots of traders still look at them too and the market WILL react to them. Of course when the market does react, nine times out of ten it will also be because there is a key volume area there also, but the pivot ends up being a bonus. In fact, this is a way that we frequently add confidence to a handicapped trade. If a price is a key rejection area and happens to be the daily R1/S1 or R2/S2 they tend to be even more powerful. Not as absolutes but it is nice to know when they “agree” with a key level we already identified.

-We also assign a strength level to each potential trade levels in order to handicap the odds of it holding or giving way, which of course can affect outcomes. “3” levels are generally REALLY major levels in an intraday sense which are likely to be interim highs and lows, important even numbers, etc. “2” levels are also very strong and likely to be important levels in a longer term or composite time frame sense. “1” levels are usually overnight or yesterday highs and lows that don’t have other pressures adding to them.

-As an entry/target example consider the following levels from the chart section below, if we shorted 1187.25, we might target 1186.75 or even trade on to 1185.50 depending on objectives and market conditions. Notice that 87.25 is a rejection area and 86.75 and 85.50 are acceptance areas.

Putting it all together:

-A very popular question is how do we put all this together? It is really quite simple and intuitive. Analysis starts with identifying a level you are considering trading today. First you will look at the level and confirm it is a rejection area. Then you will study strength and other factors such as whether it is a previous high/low or pivot and based on the overall sentiment, decide how you want to trade it. If a level was particularly strong and was also a high/low  pivot you might feel even better about the trade. Once in you would pick the next acceptance (or rejection) level to use as a potential target or guide for your trade. If you are in and know where the next rejection area is, you will probably want to consider coming out before you get there as if you get the typical responsive activity there it may eat into your profits. The reason we have so many levels close together is to give options on trades. Any level that is not your entry level can be used as a trade targeting guideline. Beyond those, other entry levels may also be used as targets.

 Posted by at 7:59 am