The Only Orderflow Basics Video You'll Ever Need... maybe - Complete Beginner Course EP. 2 — Transcript

Full transcript

1. 0:00These are order flow charts, and they
2. 0:02allow you to have a deeper layer of
3. 0:04market information that 90% of retail
4. 0:06traders aren't even aware of and can
5. 0:08give you an almost unfair advantage on
6. 0:10all other price action day traders. As I
7. 0:12said before, it's like having a normal
8. 0:14bow and arrow or using a ballistic
9. 0:16professional option. In both cases, you
10. 0:18have to be the one who's [ __ ] good at
11. 0:19throwing the arrow. But once you master
12. 0:21it, the chances of being completely
13. 0:23accurate and precise are way higher with
14. 0:25the ballistic option. Or it's like using
15. 0:27a normal sniper rifle versus using one
16. 0:29with a night vision optic. With the
17. 0:31upgraded version, you can see things
18. 0:33that you simply cannot see with a normal
19. 0:35one. This is why you should consider
20. 0:37implementing order flow in your
21. 0:38strategy. This is the second of a series
22. 0:40of videos I'm making about these tools,
23. 0:42which is a complete video course that
24. 0:44will take you from zero to step-by-step
25. 0:46learning how to read and interpret
26. 0:48correctly what order flow is doing and
27. 0:50implement new edges and new strategies,
28. 0:52especially if you're a price action
29. 0:54trader. Cuz not only order flow can help
30. 0:56you being way more objective in
31. 0:58understanding short-term market
32. 1:00mechanics, because you don't have to
33. 1:01guess where an imbalance is. You can see
34. 1:04it with orders. You don't have to guess
35. 1:06where a stop run is or where liquidity
36. 1:07is, cuz you can actually see them. So
37. 1:09not only will you be way more objective
38. 1:12with your market view, but this new
39. 1:14layer of objectivity can radically
40. 1:16mitigate the amount of interpretation
41. 1:19and discretion that you might need in
42. 1:21your price action strategy. So as I
43. 1:23said, this is the second of a series of
44. 1:24videos I'm making about this tool. So
45. 1:26subscribe to the channel and click the
46. 1:28bell if you want to see the next
47. 1:29episodes. In case, I will leave you the
48. 1:30link to the full playlist down below. In
49. 1:32this specific video, we will talk about
50. 1:34the order book or the depth of market.
51. 1:36So today, I will try to open your mind
52. 1:38on how price actually moves. Why does
53. 1:41price move? Which is a mechanic that 95%
54. 1:45of retail traders have no idea of, which
55. 1:48is [ __ ] crazy. So buckle up, take a
56. 1:50pencil and paper, and enjoy the video.
57. 1:52What we will learn now is market
58. 1:54mechanics. And I'm talking about the
59. 1:56real market mechanics. A lot of people
60. 1:58don't even know how prices are
61. 2:01delivered. What's the actual mechanic
62. 2:03behind it? Let's start by saying that
63. 2:05markets are made of orders, you know,
64. 2:06buy and sell orders. These orders are
65. 2:08also called liquidity. A market is
66. 2:10defined liquid if it's easy to find a
67. 2:13counterparty to your trades. So,
68. 2:14liquidity is the counterparty. So, any
69. 2:17order in the market is liquidity. And
70. 2:20most people in the price action smart
71. 2:21money space think that liquidity are
72. 2:23just buy stops or sell stop or stop
73. 2:25losses above a high or below a low.
74. 2:27Supply and demand traders instead think
75. 2:30that liquidity is resting order in a
76. 2:32previous area of a supply or resting
77. 2:34orders in a previous area of demand.
78. 2:36Orders that were left there in that
79. 2:38zone. All of these are true, but
80. 2:41partial. Because you have to know that
81. 2:42you have two different kinds of
82. 2:44liquidity, market makers and market
83. 2:46takers. Also known as passive liquidity
84. 2:49and aggressive liquidity. To understand
85. 2:50this even better, you can imagine the
86. 2:52market makers as a menu. The catalog of
87. 2:55the market. So, you have a bunch of buy
88. 2:57orders in the menu and you have a bunch
89. 2:59of sell orders in the menu. So, here's
90. 3:01there's buy orders and here's there is
91. 3:04sell orders. This is the menu. So, as
92. 3:06long as there's a menu, there are some
93. 3:08goods that are being, let's say, sold.
94. 3:10But if no one is coming to buy them,
95. 3:12nothing will happen. So, outside here,
96. 3:14you have the clients who wants to take
97. 3:16stuff from the menu. These are market
98. 3:18takers or aggressive liquidity. The menu
99. 3:21is market makers or passive liquidity.
100. 3:23So, there's one side of the market, both
101. 3:25buyers and sellers, which are presenting
102. 3:28their order like a menu, like an
103. 3:30auction. And then, there is aggressive
104. 3:32liquidity, which are the clients who
105. 3:34actively go and take those thing in the
106. 3:37menu. The real life version of the menu
107. 3:39is this, which is the order book. Also
108. 3:41known as CLOB, the central limit order
109. 3:44book, or the depth of market, DOM. So,
110. 3:47these are buy orders and sell orders.
111. 3:50And more technically, they are buy
112. 3:52limits and sell limits. So, these are
113. 3:55passive buyers. These are passive
114. 3:57sellers. They are waiting for some
115. 3:59client to come and order something from
116. 4:01the menu. So, all around here are a
117. 4:03bunch of clients, are a bunch of market
118. 4:05participants that are going to interact
119. 4:08with this menu trying to buy and sell at
120. 4:11the best prices. Now, the first level we
121. 4:13will call the best bid. This other level
122. 4:15we'll call it the best ask. So, the
123. 4:17level at which there is the first
124. 4:19available buy contract in the book is
125. 4:21called the best bid. Same thing for sell
126. 4:23contract in the ask. Now, just to give
127. 4:25you an example, this is an actual order
128. 4:28book. This is the price and this is the
129. 4:30ask. So, as you can see, I drawn it
130. 4:31pretty [ __ ] accurately. So, I think
131. 4:33the video deserves a like just for that.
132. 4:35So, if these are limits order, which as
133. 4:37we discussed in the previous video, can
134. 4:38be entries like a simple buy limit and
135. 4:41sell limits. But also, take profits cuz
136. 4:43if I bought, say here, I will put my
137. 4:46take profit right above here as a minus
138. 4:48sell order. Instead, all the rest of the
139. 4:51liquidity, which is aggressive
140. 4:53liquidity, is people actually clicking
141. 4:56the buy or sell button, so market orders
142. 4:59and stop orders. So, what you would
143. 5:01consider a breakout entry or a stop
144. 5:04loss. So, same example, if I bought here
145. 5:06one contract and here I'll put my take
146. 5:08profit, which is a sell limit because
147. 5:11it's above the price, I will put my sell
148. 5:13stop below here. But here there's buy
149. 5:15orders. There's buy limits in the order
150. 5:18book, so I can't put my sell stop in
151. 5:20this part of the order book. My stop
152. 5:22order will be set in my brokerage
153. 5:24account, will be executed at the best
154. 5:27ask or the best bid. So, let's say you
155. 5:29buy now one contract market, you will be
156. 5:33executed exactly at this price. Why?
157. 5:36Because if you're buying and you want to
158. 5:38buy now, the first contract available
159. 5:41for sale at the best price you can get
160. 5:43is right here. So, let's say you buy one
161. 5:45contract from here. This from six will
162. 5:48become five contracts. You just ate one
163. 5:50contract that was in the order book. So,
164. 5:52this, which is the last price at which
165. 5:56at least one order has been executed, is
166. 5:58the current price. Now, we're going to
167. 6:00take this contract and save it as a
168. 6:02reminder in this other table here, which
169. 6:04is what we're going to call a footprint
170. 6:06or an order flow candle. So, one
171. 6:08contract was taken from those six has
172. 6:10lifted the ask, we say. So, one contract
173. 6:13has been executed here. Now, let's say
174. 6:15that someone else is coming and wants to
175. 6:17sell market a contract. Sell minus one
176. 6:21market. It will be executed at the best
177. 6:23possible bid, at the best possible level
178. 6:26where there is at least one buy contract
179. 6:28in the menu. So, one contract of those
180. 6:30fives will be taken, so this will become
181. 6:32four, and we will remember this was
182. 6:34executed here. There was one order that
183. 6:37hit the bid. In all of this, we have
184. 6:39candlesticks. So, the first order was
185. 6:41executed here, so here is the open of
186. 6:43the candle. Last order was executed
187. 6:45here. So, now the candle, first of all,
188. 6:48will turn as a short candle. Here we
189. 6:50will have a zero and a zero cuz zero
190. 6:52contract has been executed at those
191. 6:54level. But, let's make another example.
192. 6:55Let's make an example where a guy comes
193. 6:57and wants to buy market right now
194. 7:00because he needs it, he can't wait any
195. 7:02longer, 10 contracts. Where is he going
196. 7:05to execute those 10 contracts? Well,
197. 7:07five of them will be executed, if he
198. 7:09wants to buy them, they will be
199. 7:11executed, five of them. So, five of them
200. 7:13will be executed right here. So, five
201. 7:16contracts goes away from here, here is
202. 7:18zero, and those five contract will be
203. 7:20added to that contract that was executed
204. 7:22here, so we will write six. So, he
205. 7:24filled five contracts here, but he still
206. 7:26needs five more to fill his order. So,
207. 7:28five of them will be taken from these
208. 7:29nine. So, this will become four, and
209. 7:31five contracts will be executed right
210. 7:34here. Because since now there's zero
211. 7:35contract here, the best ask will become
212. 7:38this one. So, these 10 order has been
213. 7:39executed, and now the candle from here,
214. 7:42went in one order in one millisecond
215. 7:45here and became a long candle and left
216. 7:48us a little wick over here. So, the
217. 7:50current price is this one. The current
218. 7:53price is the last price at which at
219. 7:54least one order has been executed. Now,
220. 7:56let's say that at the same time someone
221. 7:58wants to come and sell 10 more
222. 8:00contracts. So, if someone wants to sell
223. 8:02market 10 contracts, they will be
224. 8:04executed at the best bid. The best bid
225. 8:06is here, but only four contracts can be
226. 8:08executed here, which will go right here,
227. 8:11adding to this one contract. So, they
228. 8:13will become five contracts and five more
229. 8:15of those contract will be executed at
230. 8:17the new best bid, which is this one. 10
231. 8:19contract will be here, five more
232. 8:21contract will be executed right here.
233. 8:22The candle will turn and will leave us a
234. 8:25wick above here. So, now as you can see,
235. 8:28the distance between the best bid and
236. 8:30the best ask is a bit wider. This is the
237. 8:33raw spread or the bid-ask spread. So,
238. 8:36where there is no liquidity, there is no
239. 8:39market. So, we are starting to
240. 8:41understand some very important things
241. 8:44that where there is no liquidity, there
242. 8:46is no market and there is no price
243. 8:48action. But we also understand that who
244. 8:51moves the market isn't passive
245. 8:53liquidity, but all those aggressive guys
246. 8:56that took an actual action and didn't
247. 8:59simply wait for their buy order or sell
248. 9:01order to get filled, maybe. But who
249. 9:04couldn't wait and accepted a slightly
250. 9:08higher price as long as they could buy
251. 9:10or sell. So, aggressive liquidity is
252. 9:13people accepting worse prices as long as
253. 9:17they can buy or sell. They are the one
254. 9:19who are actually moving the markets. So,
255. 9:21who moves the market, who moves the
256. 9:23singular candle are aggressive
257. 9:25liquidity. So, this also means that that
258. 9:28the speed at which price goes down or
259. 9:31up, both depends on how many aggressors
260. 9:34there are, but also on how many passive
261. 9:37sellers there are. Cuz you can
262. 9:39understand that there if there is a 100
263. 9:42or 1,000 contract order right here, if
264. 9:45around the same volume of aggressive
265. 9:47sellers try to hit this price and try to
266. 9:49sell here, it's very hard for them to
267. 9:52break that level. So, if you will, the
268. 9:54first type of actual support and
269. 9:56resistance are sell limits and buy
270. 9:58limits. These are the actual supply
271. 10:01zones and demand zones. The best demand
272. 10:04zone in this area will be these 1,000
273. 10:06contracts right here, cuz they will
274. 10:08cause price to have a struggle here or
275. 10:10eventually give up and not attack that
276. 10:12level anymore. Now, let's simulate other
277. 10:14order that has been executed or were
278. 10:16executed at these prices. The footprint
279. 10:18is really cool because it tells us it
280. 10:20gives us a very detailed information
281. 10:23about aggressive buyers on this side and
282. 10:25aggressive sellers on this side. And
283. 10:27please watch out, these are not just
284. 10:30buyers. If this part has more contracts,
285. 10:32it doesn't mean that there were more
286. 10:34buyers. There's no such thing as more
287. 10:36buyers. Every buyers need a liquidity,
288. 10:38needs a counterparty. So, every contract
289. 10:40that was executed here was an aggressive
290. 10:43buyer buying from a seller. So, there's
291. 10:45no such thing as the market is long.
292. 10:47Market is not long. Market is bullish.
293. 10:49Price action is bullish, but the market
294. 10:52is always both sided. So, what
295. 10:54footprints and order flow candle gives
296. 10:55us is a detailed explanation of who was
297. 10:58more aggressive. But these are still all
298. 11:00volume. That's why a very appreciated
299. 11:02version of order flow is volume profile,
300. 11:06which very simply adds the contracts,
301. 11:08makes an addition between sold at the
302. 11:10bid and bought at the ask. So, here
303. 11:13there will be 0 + 5, so let's say 5.
304. 11:15Let's say this equals 5. 7 + 6 13, so
305. 11:19around here. 5 + 4 = 9. 5 + 0 = 5 again.
306. 11:23So, this is our volume profile. It shows
307. 11:26us the total transaction on every price
308. 11:29level without any clear distinction
309. 11:31between who was more aggressive, which
310. 11:33by some can be just considered as noise.
311. 11:35One thing you will often see is that
312. 11:36there will be a level which has more
313. 11:38contracts than other. More contracts
314. 11:40were exchanged on this level than all
315. 11:42other levels. This level is defined as
316. 11:44the point of control, POC, which is the
317. 11:48point of the candle where most contracts
318. 11:50were traded. Now, as I told you, this is
319. 11:52the sum of bid plus ask. If instead of
320. 11:56sum we make a difference between ask and
321. 11:58bid, we will get the so-called delta
322. 12:00profile. So, 5 - 0 = +5, 7 - 6, 6 - 7 =
323. 12:07-1, 4 - 5 = -1, 0 - 5 = -5. So, the
324. 12:12delta profile is simply showing us in
325. 12:15each of the individual levels who was
326. 12:18more aggressive at the end of the day.
327. 12:19Now, this is an actual order book, and
328. 12:21as you can see, it's way faster than the
329. 12:24one I drew to you. And all these
330. 12:25contracts that you see here are not
331. 12:27going to stay there forever. They can be
332. 12:29put there, they can be withdrawn. So,
333. 12:31this is not necessarily the best way or
334. 12:33the most effective way to look at the
335. 12:35order book. Instead, we can use heat
336. 12:37maps, which basically gives us a map of
337. 12:40the order book that shows us exactly
338. 12:42where the highest liquidity areas are in
339. 12:46the market. In the next videos we're
340. 12:47going to see how market interacts with
341. 12:50those zone with these zones, how they
342. 12:52change through time, and what to do with
343. 12:54them. All right, if you understand
344. 12:55something new from this video or you
345. 12:56understand better how the order book and
346. 12:58the depth of market works, leave a like
347. 13:00and subscribe to the channel. And if you
348. 13:01have any other question, leave it in the
349. 13:02comments. And I'll see you in the next
350. 13:04episode. Ciao.