Most Traders Misunderstand Delta in Orderflow Trading — Transcript

Full transcript

1. 0:00In the market, aggression and
2. 0:02effectiveness are not the same thing.
3. 0:05Delta and order flow measures
4. 0:07aggression, and price movement is going
5. 0:09to measure effectiveness. And if you
6. 0:11don't understand the difference, then
7. 0:13delta is going to end up costing you a
8. 0:14lot of money.
9. 0:16Delta is one of the most, in my opinion,
10. 0:18misunderstood tools in order flow, and
11. 0:21it's not because it's wrong, but it's
12. 0:23because most traders confuse aggression
13. 0:26with control. So, I'm going to try and
14. 0:28explain delta and how I view it. What's
15. 0:31up? It's Thrax. I'm back for another
16. 0:34video about order flow. In this video,
17. 0:36we're going to be talking about delta.
18. 0:38Everyone talks about delta. A lot of
19. 0:40people use it. Some people use it
20. 0:41correctly, and other people
21. 0:44um are kind of confused on what delta
22. 0:45actually is. Now, the traders that
23. 0:48misunderstand delta, you're going to
24. 0:50make mistakes um making decisions based
25. 0:53off of delta, because the most the most
26. 0:56important thing that you have to
27. 0:57understand when it comes to delta is
28. 1:00that it's measuring aggressive
29. 1:02participation, and participation
30. 1:05does not necessarily equal control.
31. 1:08In case you don't really know what delta
32. 1:10is, if you're not familiar with it well,
33. 1:13delta is the difference between
34. 1:15aggressive buyers and aggressive
35. 1:17sellers. So, if this is a footprint
36. 1:18candle, you have volume on the bid and
37. 1:21volume at the ask, and essentially, you
38. 1:24take the buy volume at ask and the sell
39. 1:25volume at bid,
40. 1:27and you subtract them, and then you get
41. 1:29a delta. It's going to be a positive
42. 1:30number, it's going to be a negative
43. 1:31number. What it's measuring is it's
44. 1:34measuring who is crossing the spread and
45. 1:36how much aggression actually occurred.
46. 1:38Um but, it's not measuring
47. 1:41who's positioned, who has inventory
48. 1:43advantage,
49. 1:45the higher time frame context, which is
50. 1:47incredibly important, and then future
51. 1:49direction. It's not measuring that.
52. 1:51Delta is just the evidence of initiative
53. 1:54activity. So, it's not evidence of
54. 1:56structural control, it's just showing us
55. 1:59who is aggressive. Are buyers crossing
56. 2:01the spread and lifting the offer? Are
57. 2:03sellers crossing the spread and hitting
58. 2:05the bid? And we can use that information
59. 2:08to make decisions, but we need to
60. 2:10understand
61. 2:11what it is, how it's measured, and how
62. 2:14we can actually use it. Now, let's take
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96. 3:18get back into the video. Now, there is a
97. 3:20difference between participation and
98. 3:23dominance, and it is time frame
99. 3:24independent. So,
100. 3:26aggression does not automatically equal
101. 3:28control. Participation is who is
102. 3:32initiating the trades, and then
103. 3:33dominance is who is successfully moving
104. 3:35price.
105. 3:36And price is only going to move when
106. 3:38aggressive flow overcomes available
107. 3:41liquidity. However, control is time
108. 3:44frame dependent. So, short-term
109. 3:46initiative can dominate locally, like on
110. 3:49a lower time frame,
111. 3:50but higher time frame liquidity can
112. 3:52absorb and reverse. So, delta is showing
113. 3:55who is pressing and who is aggressive,
114. 3:58but the response to that or the price
115. 4:00response is going to show whether that
116. 4:01pressure was actually effective.
117. 4:04So, you can have
118. 4:06higher time frame liquidity that absorbs
119. 4:09initiative dominance on a shorter term
120. 4:11basis or a lower time frame. Now, what
121. 4:14happens when we actually, let's say,
122. 4:16push up with positive delta into highs?
123. 4:18Well, it's context-dependent because
124. 4:21let's say that here are the prior highs,
125. 4:24okay? And we're watching delta, we're
126. 4:26watching order flow, we're looking at
127. 4:28the DOM, we're seeing where resting
128. 4:30liquidity is sitting.
129. 4:32At the highs, you might typically see
130. 4:34breakout buyers entering into a trade or
131. 4:36stop orders getting triggered for
132. 4:38traders who put their stop loss right on
133. 4:40the other side of that high, or even
134. 4:42momentum traders who are chasing. Now,
135. 4:45all of this is going to produce strong
136. 4:48positive delta.
137. 4:50Now, just because there's strong
138. 4:51positive delta does not mean that
139. 4:54inherently buyers are in control and
140. 4:56we're supposed to be going higher
141. 4:57because if price fails to extend
142. 5:00meaningfully after this imbalance, then
143. 5:03it's going to suggest that aggressive
144. 5:05buying encountered sufficient resting
145. 5:07supply. So, let's say that we have large
146. 5:11resting supply or large resting orders
147. 5:13here,
148. 5:14and buyers push into it. The orders are
149. 5:16absorbing all of that aggression. Now,
150. 5:20one thing to note though is that failure
151. 5:21to extend does not necessarily guarantee
152. 5:24a reversal, it's just showing us that
153. 5:26aggression alone,
154. 5:28from the buyers in this case,
155. 5:30may not be enough. And what we need is
156. 5:32acceptance to follow after the
157. 5:35imbalance.
158. 5:37And the same goes essentially for
159. 5:40negative delta. Now, negative delta does
160. 5:42not necessarily ensure downside
161. 5:45continuation.
162. 5:47So, large negative delta means that
163. 5:50sellers were aggressive. It does not
164. 5:52mean that sellers achieved dominance.
165. 5:55If price cannot continue lower,
166. 5:58let's say this is the scenario and we're
167. 6:00heading into a support, if price cannot
168. 6:03continue lower despite the sustained
169. 6:04selling and the large negative delta,
170. 6:07then that is going to indicate that
171. 6:08potentially absorption is happening by
172. 6:11passive buyers. But again, however,
173. 6:14absorption can actually serve two
174. 6:16purposes.
175. 6:17Those two purposes are position building
176. 6:20before reversal
177. 6:21or inventory transfer before an actual
178. 6:23continuation.
179. 6:26Price response after absorption
180. 6:28determines which one of these two it's
181. 6:29going to be
182. 6:31and that's going to help us make a
183. 6:32decision on a trade. Now,
184. 6:34delta is here to reveal effort, but
185. 6:37price progression following that effort
186. 6:40is going to reveal the outcome. Now,
187. 6:44people talk a lot about delta flips and
188. 6:46I use delta flips, too, but
189. 6:49some people need to understand that
190. 6:51delta flips only matter with structure
191. 6:54and then response because
192. 6:57a delta flip is really only meaningful
193. 6:59when it occurs at a structural
194. 7:01inflection point and it follows failed
195. 7:04initiative pressure and it produces a
196. 7:07measurable change in price behavior. So,
197. 7:11let's say delta flipping inside a
198. 7:13balance or con- solidation or chop,
199. 7:16whatever you want to call it, without
200. 7:18structural context is essentially noise.
201. 7:21But, it's important to clarify that
202. 7:24delta or a delta flip alone is not
203. 7:27necessarily a signal. It's just evidence
204. 7:30of shifting aggression and it must be
205. 7:32validated by price response. So, let's
206. 7:35say that we are looking at price coming
207. 7:38up into a key level. We have
208. 7:40positive delta as we come up and then
209. 7:43once we reach this key level we now have
210. 7:45a delta flip.
211. 7:47You see delta go from positive and a
212. 7:49meaningful change to a negative delta.
213. 7:52Sellers absorbed buyer aggression and
214. 7:55then we essentially flip and create a
215. 7:57sustained move down. The response shift
216. 7:59is what we're looking for. The structure
217. 8:02is the first thing that builds the
218. 8:03context, but a delta flip without
219. 8:06structure or
220. 8:08failed initiative or response shift is
221. 8:10like
222. 8:12um and I'm sure depending on what time
223. 8:14frame you're on too. If you go look at I
224. 8:16don't know like if you're on a 1-minute
225. 8:17time frame, you'll probably see delta
226. 8:20flips all over the place. Well,
227. 8:22I'm sure if you tried to take all of
228. 8:24those delta flips on a 1-minute time
229. 8:26frame as a signal, you're going to get
230. 8:28absolutely destroyed.
231. 8:30And the reason why is because we just
232. 8:31need to understand that if we are going
233. 8:33to use a delta flip as context,
234. 8:36then we need it with structure and we
235. 8:39need it with failed initiative and then
236. 8:41the actual response shift after with a
237. 8:43sustained move. How can price respond to
238. 8:46an aggressive imbalance? There's three
239. 8:48main ways. There is acceptance. Now this
240. 8:51is where you essentially have range
241. 8:53expansion or continuation and there is
242. 8:55follow through in the same direction and
243. 8:58this just means that the aggression is
244. 9:00effective. So price is moving.
245. 9:02Then there is absorption. So this is
246. 9:04where we do have positive delta and when
247. 9:07we start to stall, we still have
248. 9:09positive delta, but there's little to no
249. 9:11range expansion and then price can
250. 9:14potentially stall or even rotate or
251. 9:17reverse. And what this is essentially
252. 9:18meaning is that aggression is present,
253. 9:21but it's not producing any type of
254. 9:22continuation. It's not effective. Now
255. 9:26the third way is a pause before
256. 9:28continuation. So you could have a strong
257. 9:32imbalance, large delta,
258. 9:35and then you have a brief stall or pause
259. 9:38and then we continue and the move
260. 9:40resumes. And this just is basically
261. 9:42meaning that aggression pauses and then
262. 9:44regains control.
263. 9:46One of the most important things
264. 9:48to mention is that
265. 9:50absorption does not automatically imply
266. 9:53that there is going to be a reversal.
267. 9:56It's just indicating interaction between
268. 9:58aggressive and passive liquidity.
269. 10:01There's a lot of times where I talk to
270. 10:04order flow traders who maybe don't
271. 10:06really understand absorption and they
272. 10:10think that anytime they identify any
273. 10:12type of absorption going on between
274. 10:14aggressive and passive liquidity,
275. 10:16they're just assuming automatically like
276. 10:18it's a reversal.
277. 10:20Well,
278. 10:21no, because there could be absorption
279. 10:23and then a continuation after it was
280. 10:25just pause before continuation. So,
281. 10:28it's important to understand the market
282. 10:31conditions that we're in because they're
283. 10:33going to define the interpretation of
284. 10:35how we see certain things when it comes
285. 10:36to Delta.
286. 10:38So, for example, in strong initiative
287. 10:40environments or like let's just say a
288. 10:42trending day,
289. 10:43there's going to be directional
290. 10:44conviction,
291. 10:46thin opposing liquidity, and Delta
292. 10:48expansion is going to confirm
293. 10:50continuation. So, we're just going to
294. 10:51continue to go. Delta continues to
295. 10:54remain largely positive
296. 10:57and it's kind of one-sided trade. Now,
297. 11:00in balance conditions or what is
298. 11:02consolidation or range day or what
299. 11:04people might call it chop,
300. 11:06um you have two-sided trade. Now, in
301. 11:09two-sided trade, usually what happens is
302. 11:11we will have repeated rotation between
303. 11:13highs and lows. We'll have breakouts
304. 11:16that fail, breakdowns that fail, and
305. 11:18then if aggression is going to fade
306. 11:21inside of the range and you're going to
307. 11:23have Delta flips all over the place.
308. 11:25Now, using Delta in a situation like
309. 11:28this is probably not as effective as
310. 11:31using Delta in a different type of
311. 11:32situation or a different different type
312. 11:35of environment. And it's not that delta
313. 11:37is inconsistent, it's just that market
314. 11:40conditions change.
315. 11:41And delta just needs to be interpreted
316. 11:43relative to the environment that we're
317. 11:45viewing it in.
318. 11:47So, there is aggression
319. 11:49and then there is effectiveness.
320. 11:52And the purpose of this video is just so
321. 11:54that when you if you're using delta,
322. 11:56aggression is who crossed the spread,
323. 11:58who is pressing.
324. 12:00Effectiveness price actually progressed
325. 12:02or not.
326. 12:03If there is aggressive flow that does
327. 12:06not produce range expansion,
328. 12:09then dominance is not confirmed.
329. 12:12Delta is not predictive, it is
330. 12:14contextual evidence within the auction.
331. 12:17All it is is it's just showing the
332. 12:18effort, but price is going to show the
333. 12:21result. And your edge or our edge is
334. 12:24going to come from understanding the
335. 12:26difference. This is a very overview
336. 12:30of
337. 12:31delta.
338. 12:32The main purpose of this video is just
339. 12:34to understand I mean, you might hear
340. 12:37traders who say like,
341. 12:39"Oh, look at the delta. Look who's in
342. 12:41control." I mean, it's not it's not that
343. 12:43that's wrong, but it's just it's
344. 12:44incomplete.
345. 12:46So, we just need to understand that
346. 12:48participation is not control.
347. 12:51And we can use delta. It's a great tool
348. 12:54if you use it correctly. But, we just
349. 12:56need to understand what it is measuring
350. 12:59and what it is not measuring. So, that's
351. 13:01a quick one. If you want me to go deeper
352. 13:02into delta, I really can, but um this is
353. 13:05just an overview on
354. 13:07a misconception when it comes to delta
355. 13:09and how some order flow traders use it.
356. 13:11Hopefully, that helped you out a little
357. 13:13bit and I'll continue to make some order
358. 13:15flow videos. And until then, I will
359. 13:17catch you guys next time. Peace.