Transcription
[Music] You're probably using these candles. So what if I told you you have been trading with half of the information you could get? In this video, I will tell you exactly how to access a deeper layer of information to basically put your normal candles on steroids and give a boost to your edge and your profits.
While the biggest problem for newest traders is mindset, trading is still a very technical thing. Anyway, information has always been a determining factor between who is successful on the markets and who is not. And let me tell you something big, market participants are not day trading price action. The level of technology they use is way above yours. So the bare minimum first step you should make as a trader is to access the best level of information you can get. And especially if you're a day trader or a scalper, one of the best tools that you can use is hands down order flow. And I'm not talking about reading price action, trying to interpret what the underlying order flow, institutional order flow might be doing. Maybe I'm talking about subscribing to a data feed and accessing a new layer of data that tells you what actual order flow is doing. It's kind of different. And by the way, this video is actually a part of a series of videos I'm making on this channel on how to order flow and how to get an edge out.
In this video, we will dive deep into a type of chart which has become my favorite trading tool, firstly created by the company Market Delta, called the footprint chart, also known as order flow candles. But if you didn't see the previous videos on order flow, let me first introduce you to basic market mechanics. You have to know that in the market, there's two main forces, two main types of liquidities. And I'm not talking about buyers and sellers. I'm talking about aggressive buyers and sellers and passive buyers and sellers. Let me explain.
What you see here is an example of an order book, which is basically sell limits in the ask and buy limits in the bid. This is also called market maker liquidity or passive sellers and passive buyers. You can basically see it as a menu, as a catalog of the market. These are orders being offered to the market, exactly like in an auction. So these orders are basically selling, "Hey, here is 10 contracts for anyone who wants to buy or sell them." So they are passive. They are waiting for someone to go and buy on them or sell on them. And if in the market there were only these orders, the market wouldn't move a single tick. We will call this the best ask and the best bid, which is going to be the best price where someone can buy or sell the market.
This little bubble here represents aggressive buyers, so people actually buying, clicking the buy button and taking the initiative of accepting a slightly worse price as long as they can get filled. That's why we call them aggressive. The last price where at least one contract was executed was here. This level is the current price. Then an aggressive seller kicks in and sells 10 contracts here. So this seller actively clicked the sell button with 10 contracts. This is an aggressive seller who is consuming these 10 contracts that were in the order book. So now, in both of these levels, there is no contract. That passive liquidity has been consumed by aggressive liquidity, and the current price is now this level because this is where the last contract has been executed. Now, the best ask or the best level at which there's at least one sale contract in the order book is here. The best bid is here. So if price started here with the first contract executed and then went down here, if another aggressive buyer buys five contracts here, the candle will turn up and the new price level is this one.
Now, if we take all those contracts that has been executed and summarize them on the side of the candle, this is a footprint chart. So a footprint chart doesn't just show us the candle, but also what's the reason behind the movements of that candle. How many contracts were executed at which price level, and who was in general more aggressive?
Now, let's take a look at an actual example. This is an order flow candle, as you can see. And here we have the order book. So this is the bid, so buy limits. This is the ask, so sell limits. And we can already see in this level over here, 5325, which is going to be this level, there is 400 contracts, which is a bigger order than all the rest. So let's see how the market will interact with that order.
Now, more contracts are being executed here. 25 contracts taken from these 130. Then more contracts have been sold and bought. Those 130 that were here were executed. Now we're tapping into those 310 contracts, and as we can see, those contracts have been fully consumed. Now price reverses. Price starts tapping back into that area, and more and more contracts are being executed in the area. So in every level of price, there is always both sides of liquidity, always buyers and sellers in every level of price.
Now, let's get this out of the way and just focus on the footprint because these candles have many elements. As you can see, there's many colors, there's many things, there's many information that you need to understand. The first thing you notice is that in every candle, there is a yellow box, which is the level at which most contracts have been executed. So a shift in the point of control where the point of control is here and then it's here is the first signal of bearishness.
Then some of these numbers, as you can see, are more colored than others. The so-called imbalances in the order flow, or imbalances in the auction. So these 324 contracts are highlighted because they are at least four times bigger than 51. So imbalances are calculated diagonally because in the order book, this would have been the best ask, this would have been the best bid. So in that part of the auctioning process, there was a higher level of aggression on this level. That's why they're calculated diagonally. So when in a candle we see that there's a lot of aggression on one side, we call this an initiative or initiation phase. And if this number is at least two times bigger than this one, it would be highlighted as a sell imbalance. Or if it's bigger, more than four times of the counterpart, it would be highlighted even more. So this is a 400% imbalance, this is a 200% imbalance, this is a 200% imbalance, this is a 200% imbalance, this is a 400% imbalance. So we have two different kinds of imbalance. These numbers, 200%, 400%, can also be optimized eventually.
Then, as you can see, every auction develops like this. So usually in a normal auction, you will find a zero here and a zero here. So there's a zero here and a zero here, a zero here and a zero here. But not always. As you've seen in this candle, we have 54 here. Here there was supposed to be more contracts, but sellers were aggressive enough to push price lower and not finish this auction over here. So usually when we have numbers in both, we will call this an unfinished auction, and there's a good chance that these levels will be taken.
Then some of these boxes are more colored than others. This one is gray. The background of it is completely green. And this color is determined by the relationship between the contracts traded here and the contracts traded here. This is called the Delta, because it's the difference between these two. This version, by the way, takes also into account aggregate volume and absorption, which is a different concept. Maybe we will go deep into it in the next videos. But anyway, these colors mean a strong level of aggression and absorption at the same time, because 700 contracts were executed here. So there was a lot of aggressive buying on this level, but there was also a lot of passive selling on this level.
Then in most footprints, you can go into their settings and instead of ask and bid split, you can just put the volume and it will give you the total volume of that candle or the delta volume of that candle, or both the delta and the total volume, which would look something like this: Delta and total volume. Personally, I like to use this visualization. It gives me the total volume with that volume profile in the background. The color of each and every one of those bars is based on Delta, and still I have all the information about the imbalances in the footprint.
This instead is the five-minute version of the same chart. And sometimes I like to use the five-minute because it removes some of the noise and you can see things a little bit more clearly. So what we can see here as an example to give a context is that we had highs above here, and we're actually at the all-time highs. And what often happens at all-time highs is that there's going to be a huge phase of absorption here, followed by a phase of initiative. This is a pattern I love to use, which is called the RNI pattern, or response and initiative pattern.
So if we have an area where we want to sell, what we will wait for is above these highs to first have a phase of initiative where we see a lot of aggression and imbalances and delta. Once we reach the top, we have sell imbalances on top, which suggests us a strong level of aggression in those levels. An exhaustion in the last two levels where you can see from 300 contracts of aggression, aggressive buyers stopped being so present at these levels. Same thing over here, 400, and then 77 plus an imbalance right on top. Then I want to see this, a big war between big fishes. This is not hunting for retail stop losses. This is a war between huge market participants, HFTs, hedge funds. There's a lot of stuff going on over here. The last part of this absorption phase ends exactly here, where after the first seller aggression, we try to tap back into this level, as you can clearly see here. This bar is full of aggressive buyers that tried to buy into this level, but there was a seller front-running all of that pressure, absorbing all of those buyers. And right after here, a huge bomb of imbalances, lower volume, and high, high, high aggression starts happening. So we have the response phase and we have the initiative phase. R and I, responsiveness over here, absorptions, and then initiative.
Now, if you're an ICT trader, you would probably draw something like this and defining it as an imbalance or a fair value gap. Me, as an order flow trader, I would consider these imbalances, these cluster of actual order flow imbalance, or even these ones as a potential sell zone. But I would consider this as the order block because this is where the order block, or the block of orders, actually was. So this is the first block of orders, and this is the second block of orders where you have this absorption. And as you can see, we tap right into that level. Once we get here, we have an imbalance on top over here, imbalance on top over here, more imbalances, more aggression, then three imbalances in a row, which is a really high probability sell signal. And with unparalleled precision, we basically go down for the rest of the session.
But let's dive deeper and see how we went down. As you can see here, the same thing starts happening. We have the cluster of imbalance here, so this would be our area right here. We have new fair value, and right here we have another absorption. You see those 1,000 contracts here? We try to push back down, jump back up, 1,000 buying contracts are absorbed over here, and then the next candle is an initiative candle, a lot of imbalances, low volume, and then we find fair value again. So if you, as an ICT trader, would maybe consider this as an imbalance and as a fair value gap, with order flow, I can clearly see that the fair value gap is here because there's low volume and already here we started finding fair value. So the part that I would like to see fill is actually this one with a much higher precision. And again, I will notice that this is my absorption level, so my area would be something like this, from this level and the actual fair value gap with imbalances. And as we can see clearly, the level of precision that real order flow can give us can provide us not only with a higher win rate, but with a higher risk to reward ratio.
As we dropped off, we found liquidity in this area. The more we tried to go down here, the less interest there was. Volumes start dropping really quickly once we try to, once we try again to trade into those levels. Same thing over here, same thing over here. Another phase of absorption here, initiative imbalance on the bottom of the candles. So we trade back up into this area. So when we trade into that area, we see imbalances on top, an unfinished auction which has been pierced through, and then again imbalance on top, a new phase of fair value and responsive auction above here and here. New volume starts kicking in, and from exactly this point, we realize that a new fair value gap is about to happen. Would also just use this as a confirmation for the entry and enter one tick below. So we have our first imbalance cluster over here, and as we can see, every imbalance cluster or fair value gap was exactly tapped in and retested every single time. This is most common in the beginning part. In the latter part of the impulse, it's less and less highly likely to happen. And also in this last big initiative candle over here, this is the real fair value gap because here we actually found again fair value. A lot of orders were executed inside this area. There was a lot of absorption on both sides. These passive buyers tried to absorb all the selling pressure but couldn't make it. Aggressive buyers also tried to push up here but were completely absorbed. And right after this, we have a new fair value gap here, a new imbalance, but actual imbalance, not price imbalance, order flow imbalance. So it's highly probable that they will defend these positions taking in this area. And as we can see, as we tap into these two areas over here, exactly on this level, and as you can see clearly, after we found more fair value here, we tried another initiative here, but then as we can see from this imbalance on the bottom, price started running back up, ran right until here. And exactly there, with this 1,000 contracts, sellers start absorbing all the buying pressure all over again. New imbalance on top, 3001, new imbalance on top, 206, and we go down again.
Then when we try and tap back into this, exactly the same thing happens. Imbalance on top, exhaustion in aggressive buying, new imbalances, and we go down again. Then we run back into that level, apparently, and the situation is exactly the same. These big orders and positions are being defended. We have absorption of buyers here and imbalance on top here. We exhaust every buying pressure, new imbalance on top over here, new initiative starts. Buyers try to tap back into that level, and they get absorbed once more. This is a clear sign that they are not willing to let price go back up. And as we can see from here, once we finished this responsive phase, big imbalances tested, and we go down again.
The session then gets to its final phase where the most volume is traded. As you probably don't know, you probably think that most volume is traded at the beginning of the session, but it actually is traded in the last 10 minutes of the session because all the day traders, all the day trading algorithms, all the market on closed orders start exiting the market. And we end with a very bearish session.
So this was just an example on how you can be much more precise with real order flow and see what's really going on behind candles, see the fight between big market participants, and also understand that retails are meaningless in these fights, but that you, as a retail, can get really valuable insights on these fights, make more informed decisions, and also be way more objective because you don't have to guess that there's a fair value gap. You can see it with orders. When you see choppy price action, you might say, "Huh, there's not a lot of interest, there's not a lot of volume." But actually, if you see what's happening behind the candles, you will see that there's a lot of volume going on and there's a big market participant defending that level. These things you simply can't see with price action alone.
By the way, all of these templates that I'm using, I'm going to be giving them away for free. I will soon make public the platform that I'm using. If you want to stay tuned, subscribe to the Telegram channel in the description down below and subscribe to this channel if you want to see more videos about order flow. And I will see you in the next video. Ciao.