cornhusker

Because when size trades, or everyone wants to trade at once, the liquidity then disappears too; not because it's all consumed as if it were just sitting there static, but because the bids were extremely thinned out and/or canceled. The market was offered down until buyers came in and a new working range was established. I'm not saying no trades happen in between, but for all intensive purposes the market quickly flocks to a new zone in which dealers can buy and sell in approximately equal volumes again. This is how fundamental information is impounded into a market. Those with the most working capital are the ones who can afford to do good research (so we hope), they then trade and the market responds accordingly. I'm making it sound simple, and in a sense it is, but there is a lot of strategy and trickery that goes on that makes the market very difficult to read.

That's exactly right.

Thanks for chiming in. To be more clear about the FX market, the banks do indeed make most of their money by their dealing operations. It is the large speculative funds that help determine the direction of price changes, but the banks are a crucial part of the equation. When mr bank dealer learns he has traded with mr. hedgefund, he immediately adjusts his quotes (shifts liquidity) while others in the market see this and seriously consider adjusting theirs. Some do, some don't. Those who don't will also trade with mr hedgefund, or one of his followers and regret it because they have nobody to trade with to offset their bad inventory. In the midst of this, fear moves all the liquidity to a place where the orderflows are more two-sided again, because as we've said, banks like their spread income. The first bank dealer could have speculated on what he learned from trading with mr hedgefund, many dealers do. This is the essence of trading, it will never change. Even in our age of robot traders, and computers gone wild, it's the same game. Trading is really about reading the other players and working to understand who's informed, who's not, and who's bluffing. It's an art really.

Alright, Kiwi, replace bank trader with "big speculators." My point is simply that trading is not the flashy video game or weekend word puzzle it's made out to be. Everyone gets caught up in all the old price data, abstract statistics, joe blow TA, ect, but none of those things move the market. I don't want to sound as if I'm ruling all of that stuff out, some of it can be useful, but it's peripheral to whats really going on. To illustrate this, lets look at EU and yesterdays strong bearish move. What caused EU to drop like it did? Leave fundamentals out of the answer and explain it in the context of orders, asymmetric information, adverse selection, fear, and greed. I leave logical things like FA out because I consider it pre-trade stimuli; fundamental info is aggregated into price later down the chain of events via orders and quote adjustments. I invite anyone to take a crack at the question. Regards, Cornhusker

I highly encourage what you are trying to do here, but you need to wipe the slate further. Stop thinking in terms of time-frames, and every other common TA garble. Many folks watch price bounce around their charts day after day, even year after year and they take things like TA too seriously. It's all a trap really. Do yourself a favor and put yourself in the shoes of a bank trader ( I see you trade FX). What kinds of things is a bank trader going to be concerned about? Is he going to buy because price has fallen 61%? Is he going to sell because price is just about to 'hit' the 100SMA? Are his eyes glued to a price chart all day long? What in the world is he up to? What kinds of risks/opportunities does he face? A little different angle: how were all the futures pit traders ever profitable down in the pits without precious price charts? How were they making trade decisions? Try to break on through to the other side, and when you do you'll be so far ahead of the curve you won't know what to do with yourself; break off the chains of retail trader thinking. Keep up the good work and go big red, Cornhusker

Hi Nate, I've thoroughly enjoyed all your posts and will continue to follow you in the future. I appreciate the depth and knowledge embedded in your comments. About your post I've quoted: Is there evidence to the contrary--that volume has no bearing on returns? I am most likely deeply misunderstanding what you mean, but isn't volume i.e. liquidity consumption at the root of all market returns? Or do you mean that volume right now has poor predictive value for price ten minutes from now? Maybe you mean neither. Thanks

Some trades really skew the flow though, and that is the point I was trying to make. Professional (size) demand creates reversal points/prices. I'm not saying it was an arb trade, just putting it into the context of the thread. Most arb trading is contrarian anyways, thus when size comes in it's going to in theory pull the respective instruments back. As UB said, it's not even about finding arb trades, it's about seeing the fingerprints the professionals leave behind when they're trades are placed. He clearly said that it's easy to see when they come into the mkt because they are greedy. Even for a stupid ******* like me using no high level programs can see this happen. June Euro for example just vomited out a series of 40's (size), all going off one after the other and sure enough a sell off ensued (albeit small), and a relative high was made. I call that greedy bolsheviks trading. I don't care why those trades were placed, I just need to see that they are there.

The trade by definition skews the flow anyways. Even if it was a multiple instrument arb trade, you could trade and add to the imbalance the arb trade caused. Like UB said, he doesn't really give a rip what the trade originators motivations were. If the market becomes imbalanced you trade it.

Hey UB, I just want to say I've taken a couple hours and gone through most of your posts, you are brilliant sir. Your trade intensity indicator is what I've been looking for, for a long time. I'm not one who wants to buy it or anything like that, but the evidence it offers is priceless. You have succeeded in unearthing decoding, as it were, hidden flows by big money. As most of us know who have been around for a while, there is no good reason to enter until the flow is on our side and most will never come close actually being able to verify this (or even grasp it's importance). TA is really illogical in most of it's forms. But what you're doing is the most objective example I've ever seen for coming up with a good or real reason for entering the market. I really liked your example of the statarb trade you identified with your flow indicators. When you saw the spike in consumption on three markets at the same time you probably inferred it was arb, but would you or do you enter directional trades on just one of those markets because of that spike? This may be a dumb question, but how many of your net flow change based entries turn into trades that have the potential to run for long periods of time? Do you let any of your trades run? Also, another silly question. Have you ever identified possible causes (PA, TA Setup ect.) that induced one of these automated trades? The evidence would be somewhat anecdotal and hard to prove, I'm just curious. I know the brains behind these things are probably far beyond mundane price/volume patterns. One more thing. Are you confident that you'll be able to find the new places these automated entries start hiding when the current methods change? Have you already had experiances like this? Sorry for throwing everything at you at once..Keep up the great work

Hey UB, I just want to say I've taken a couple hours and gone through most of your posts, you are brilliant sir. Your trade intensity indicator is what I've been looking for, for a long time. I'm not one who wants to buy it or anything like that, but the evidence it offers is priceless. You have succeeded in unearthing decoding, as it were, hidden flows by big money. As most of us know who have been around for a while, there is no good reason to enter until the flow is on our side and most will never come close actually being able to verify this (or even grasp it's importance). TA is really illogical in most of it's forms. But what you're doing is the most objective example I've ever seen for coming up with a good or real reason for entering the market. I really liked your example of the statarb trade you identified with your flow indicators. When you saw the spike in consumption on three markets at the same time you probably inferred it was arb, but would you or do you enter directional trades on just one of those markets because of that spike? This may be a dumb question, but how many of your net flow change based entries turn into trades that have the potential to run for long periods of time? Do you let any of your trades run? Also, another silly question. Have you ever identified possible causes (PA, TA Setup ect.) that induced one of these automated trades? The evidence would be somewhat anecdotal and hard to prove, I'm just curious. I know the brains behind these things are probably far beyond mundane price/volume patterns. One more thing. Are you confident that you'll be able to find the new places these automated entries start hiding when the current methods change? Have you already had experiances like this? Sorry for throwing everything at you at once..Keep up the great work