Order Flow Intro: Momentum

Alright guys, what's going on? This is Ryan, AKA Kenner and Clark and this is going to be a quick lesson on order flow, momentum and waiting for the market to show its hand. So what are we talking about now? A lot of what we talk about with regards to trading, the auction or a range, you know, talking about selling at value area highs and buying at value area lows. A lot of this comes down to mean reversion trading. Okay? It comes down to fading. What is the current direction on something like the lower time frame, the current direction of the market. So the market is moving upward through the center of a range, let's say for example, and approaching a higher time frame resistance, or in that time frame, the current resistance, the range high, the value area high. What we're going to be doing is likely taking the trade in the opposite direction. We are anticipating that the range is respected, that when price is above value that the bid pressure will step off, sellers will step back in and the prices will return to the mean. This is fading a move. So fading move is when prices are moving up and we are taking a position against the trend on the assumption that the trend is going to correct. Now there's a lot of times when the auction environment will shift. It goes from a period of ranging to trending. And some people get stuck in the mindset that they are still in a range and they're looking to fade every single move and they're not paying attention to the fact that the range is at this point a good distance behind us. Traders get stuck in the position of constantly trying to fade the market. So the market moves up and they think, well, I have to sell this. The market moves down and they think, well, I have to buy this, okay? And this is a dangerous practice. What it neglects is the potential for underlying momentum, the beginning of a trend, the beginning of new momentum, and if anything, the premature fading of any type of move lends to more of the momentum to follow. So when you're taking a position against a trend and the prices are still moving against you, you ultimately help the momentum that occurs as a result of you closing your position out, you essentially add to any type of momentum. If there was any momentum to begin with, the total or cumulative efforts of everyone who was trying to fade that move, when price continues to resolve upward, them closing out ends up causing more momentum. So what do we often see? And here I have a volumetric based chart. So we're looking at a volume cluster. This is a 30 minute chart of Bitcoin and this was about two weeks ago. And we're looking at an asset that is pushing up. And it's pushing up. And you can see based on this filter where the high volume occurred. So I have this filtered down so I could only see high volume. And I'm going to show you at the end of this how you can set up your delta cluster, for example, to only identify really high periods of buying or selling. Really negative delta or really positive delta. So you're not getting mixed up with all that noise in between. Because we're looking for extreme values. So an asset pushes up on high volume and high involvement. So it brings a lot of people into the market. There can be high volume, but there doesn't necessarily need to be a lot of trades. There can be a lot of trades, but not necessarily high volume. So we want to see both. Okay. And this is why sometimes looking at a tick based chart is essential. Although when we see that volume has been occurring across a period of time, something like the 30 minute time frame, the hourly time frame, and we've seen that it's been consistent, we can imagine that there's a good amount of involvement. Okay. Especially when we're at structural highs. Right. Areas that might be, or rather should be resistance areas where we would see two sides of the market. Well, obviously two sides, but both sides really step in. So what happens? Looks like the top of a range forms. Looks like a top forms in general. Yet a structural low is not really lost in this case. A structural low doesn't necessarily need to be the structure in which the range is forming. It could be the structure of the preceding high volume impulse that occurred before this new impulse. There's times when we talk about backside entry. I mentioned how continuation is never clean. And I mentioned how we don't want to violate previous market structure. Not violating market structure doesn't necessarily mean that we come into market structure and that's a violation of it. This range right here, you can see we come into this range. That doesn't necessarily mean violating it. Violating it is when we're actually changing the overall market structure. Now this is a larger retracement, but by textbook standards this is still into this previous range and it has not lost it. And this is just a deeper retracement than general than we would normally see. But we haven't really had any type of major structural low lost. The previous high volume high involvement area still acts as support. Basically the area where the high volume occurred is still maintaining its integrity in that when we put in a low after it we're not breaking that area. So that's what I was just referring to previously. Okay, so this range that we form right here where we consolidate, again, if I could fit the entire chart on, you would see that to the left of this were areas within market structure previously where we would assume they would have acted as clear resistance. And again, this white is not just low volume, and this blue is not low volume because it's a light gradient of blue. All I have on this chart right now are really high volumes. So the really dark blue is very high volume. The paler blue color that you're seeing right here, again, that's very high volume as well. So we put in a range and the high volume area that exists right here, again, this is where there's a ton of interaction. This area still maintains support when we come down and interact with it. Another thing we see is large negative delta prints and aggressive selling within microstructure. So within these structures, what we'll see is this is not on a delta cluster chart, but, but at this area, for example, you see how it lines up with this high. Within this high volume area. Within this low. Within this low. Okay. Within the low side of these structures, you'll see that there'll be a tremendous amount of selling. So if we look at a delta cluster chart, and I'm going to get to that in a second, you'll see that it'll be very dark red in these areas. Okay. And again, what we want to see with any type of use of when we're observing delta, when we're observing this type of feedback with regards to order flow, we want to see that not only do we have this heavy delta in the form of negative delta at these lows, but we want to see that we put it in and then we move away from it. So if we put in the negative delta, for example, and I'll draw this on the next chart, but if we put in the negative delta and then we resolve above that portion, so above that portion within microstructure, then the case can be made for those positions to be trapped. Okay. And the further we move from that and the more you get those buyers stepping in and those imbalances starting to shift in the form of buying imbalances, the more of a case can be made for these lows eventually being left in the near future, shorts build and price continues upward on added fuel of trapped faders. Trapped faders, trapped traders. Basically same thing in this case. This is how momentum builds. Someone takes the opposite side of the trade On a futures market, peer to peer exchange, that can be quite explosive, especially when there's a good degree of leverage that is involved when they're stopped out, when they're liquidated, we have upward price movement. In the case of taking shorts, we have downward price movement. If we're talking about squeezing longs out of position. But this is how a trend begins. It starts with everyone assuming that this is just a portion of noise. For example, when the trend changed with BTC recently, everyone assumes that because it wasn't the last top, it has to be this one, we don't lose any major structure preceding it. Again, trends are messy. I'll draw this out just to give you examples. Trends are messy, alright? So what happens is we get traders stepping in, selling price moves slightly upward, they're stopped out, they're pressured and you get further and further movements upward. And again, everyone is trying to sell the top without a major break. And that's the key thing to pay attention to. Waiting for the market to show his hand means waiting for a clear break of structure. At least a clear break of structure. Remember, the thing that we need to do in trading is establish some type of probabilistic edge. And how much more do you think it's in your favor to short if the market structure is beginning to break, if the series of higher highs and higher lows within microstructure is beginning to break. Not just lows that are put in because we see many times that areas come close to being violated. But again it ends up just bringing the market to a point where everyone is willing to jump into shorts. All right, on the anticipation that there's a breakdown. And the key word or the operative word right there is anticipation. Okay? Confirmation doesn't necessarily need to mean a daily close. It could mean confirmation of a level breaking. Alright, so a level breaking and clear violation of market structure. So now thinking of this after a continued break. So let's say that after this high, for example, and this is a really good example right here, you have a lot of volume right here. So a lot of volume. This really looked like a high. It looked like a temporary top. Okay? Everyone assumed that this would be the top. We come back down to the previous range that we created under the same assumption that again it was a top. There wasn't much volume down here, which is the first breakout off of the low. We had heavy selling. That's the dark blue right there. This is a volumetric based chart. But that's the heavy selling. If you looked at a delta chart Heavy selling in these lows. But again, with this structure right here, after we put in this low right here, and price moves back up and we stop out these shorts. All right, so we stop out these shorts. How willing do you think a seller will be to step back in and short price when it returns to the previous high volume area? So we talk about moving from high volume area to high volume area. So you get from an area where you put in a top short step in, they're stopped out. When we return to that area to treat it as support. How much selling pressure do you think will be created by returning to this area? Do you think that shorts are going to be looking to step back in at this price? Probably not. So we have a little less buying pressure there. Another thing that we have is market makers. They want to provide a stable bid and ask. They want to be delta neutral. They don't want to take any type of directional trades. There's argument that they do take or they do influence directional trades in their own positions with bitcoin and with cryptocurrencies. Because. Because it is unregulated. The possibility of this existing, I would say, you know, you don't want to say 100%, but I'd say 99.9%. Okay, that, that is occurrent. But that is very dangerous because what happens is there's something called flow toxicity. So a market maker wants to provide a bid and it wants to provide an ask. It wants to be in and out. You just want to capture the spread. When I say it, I mean the market maker, group of market makers, what have you. So a market maker wants to provide an ask on the presumption that they can also get out. If a market maker provides an ask and the market has momentum upward, that means that the market is going to move through their position and they're going to be underwater for that position. This is called flow toxicity, or rather flow toxicity is when there are periods of high volatility when they cannot provide a stable bid and ask. Because of this, market makers don't need to be into the market, they don't need to provide a bid and ask, and they can very well step out. So in this case, the market maker stepping out during a period of upward price movement means not as many asks being provided. So again, what is an ask? Essentially is. An ask is in order to sell. And if you think about a bunch of asks adding up together, that provides friction. So when there's a period of increased volatility, when there's a period where Price is beginning to pick up in terms of momentum and trend. The market makers are going to be stepping out. They're going to be stepping out of the way of that flow toxicity. And their lack of asks on the order book is going to provide less friction for any upward price movements. And this is going to be called a liquidity gap, a vacuum or an order book vacuum, in which case there's going to be no pressure on prices moving further and further upward. What we need to do is look for the market to show his hand. We need to see the market break structure. And this is microstructure. So I'm going to show you guys just the current chart of bitcoin. You're going to see exactly how this played out and how we don't really get much of a dip at all in really strong trends. What we do have is these periods where there's high volume. There's a lot of contention between buyers and sellers. Buyers in this case end up winning the battle. And all we do is retest the high of that previous structure. We don't get any kind of further dip. You barely really get pullbacks. Let's take a look at that really quick. This is the current trend. Okay, make sure I have my drawing tool down to the right size. This is the current trend. What you can see is that within the structure, there's all these little micro ranges. All these little micro ranges. Here's the high. You can see this little micro range right here. The lows, if you want to consider the low over the first rejection. So high, low. All right, again, we have a high over here. We have a low this entire period.

Every point that we advanced upward, Everyone assumed that this would be the point that corrected. What happens. You get the lows aggressively sold at these lows. There's aggressive selling of the lows on anticipation of a breakdown. So you get something like this where, for example, we do break the low and then price closes back above. This is what I say to pay attention for when you break a low. But price closes back above that low. In this case, you have trapped traders down here. And what you'll see on the delta print or on the volumetric based chart, when you're paying attention to order flow, you'll see usually some selling imbalances down here. So now when we're back above that structure, this is why we pay attention to delta. When we're above this structure where we have that print in delta, that is a trapped position. So now what happens? The market resolves upward and the Next area that it comes down to. And again, if we're looking at a volumetric chart, this area right here. And let me just get rid of these drawings really quickly. This area that we're looking at right here. So if we're looking at this area or this area, these are these areas. Okay? So these dark areas within the chart, this isn't the same exact chart as the previous one. So it's not the same exact example. But the areas where there's a lot of contention, like right here, are going to be the areas where we revisit. So you could see that all we really get is a pullback to the previous high. Same thing, we get a cluster here. It looks like a potential top is forming. You get some back and forth, you get a high, a high, a low. You never really lose the lows. What you see is the lows are aggressively sold, the lows are aggressively sold. The highs are aggressively bought though. So it can go both ways. Longs can be trapped up here as well. But now we have underlying momentum and this is where you need to pay attention to shifts in the environment. And one of the things that was very telling was, was bitcoin breaking out of its 43 day range. The side of strength was on part of the buyers. They have that extra energy in their movements. So another thing to point out, rather not another thing to point out, but the structure to point out, microstructure is that the lows of this structure right over here, loosely drawn obviously. So you can get the idea of this previous low and these lows. When we resolve upward, the first area that we come and retest is the previous high of the structure. Alright, we do a little bit of probing into this area and we lose a low of this structure. But you'll see this is actually looking at a 30 minute chart. And you'll see that actually on a 30 minute chart, we lose this structure ever so briefly. And again, we don't lose the lows of the previous high volume area and we're back above the lows of this area again. And what will you see here? You'll see very aggressive selling. Okay, the market resolves back above the midway point, you'll see that it retests the 50 point of this structure and it's upward and onwards constantly. So a very strong trend is not going to give us many opportunities to enter. And it's also going to give us a lot of opportunities to prematurely short. So what you need to see is you need to see macro structure break. So you notice how with each one of these moves upward, there is this consolidation period. So we have a consolidation period here, drawing all of these, it just kind of skirmishes its way upward. So you have consolidation here initially at the resistance breaks upward. This is the high volume area. We retest it, break upward, retest the high right around here, small grind upward, nothing really put in this structure over here. Break out of this, supporting this as a rounded retest, lose it briefly, but we don't lose the lows. And it's been this pattern the entire way up. And you can look for the same thing to occur over here. Likely you'll see that over here. And this is a little bit of an older chart now because price has moved, but over here, you'll get some more movement into these lows. And unless this previous low is broken with conviction, and at this point, one of the signs to actually pay attention to is in the beginning of a trend, the areas are going to be way more compressed. There's going to be way more compression and then more explosiveness. Towards the end of a trend, you do get more of an expansion of the range. We'll know that it's the end of the trend, at least in the near term, when we have two areas begin to become one. So, for example, we go from single area, single area, single area, single area, single area, single area, to now we have a major expansion, and we'll likely start having these two areas merge. Okay, so crude drawing, but the idea is we'll likely start putting in a clear structural top, and in this case, you just form another range. In order to say that there should be much conviction in taking any type of short, you need to have a previous structure lost. So. So, for example, what that would have looked like is that would have looked like us moving from this structure to within this structure and then losing the lows of this. So, for example, losing the lows at this point, at this point, you have something that actually would probably look like an inverse, rather a head and shoulders. Or in this case, if we talked about the preceding structure just moving down, where instead of coming back into the top side, we would want to have lost the lows of the. Of the previous consolidation period. Okay, so this is what you need to look for, because continuation is never clean. Okay. More often than not, this is how the market is going to be moving. It's going to be moving from one period of contraction to expansion after the other. So you need to see microstructure breaks. And microstructure means the structure that we see on the 30 minute time frame, on the hourly time frame, that just looks like these consolidation periods. And this is what it's going to look like though, when you actually have a top put in. You're going to have expansion after expansion and then you're going to start getting more exhaustive. Higher moves up with more back and forth. So you'll see that the range will start expanding towards the highs. Look for the range to start expanding towards the highs. Define the lows of that range. Define the highs of that range. And at this point being there so far, expanded for this example at least, in any case, if you do have a short, it's from the low of the expanded range. Okay. At this point we had actually had. Let me just redraw this. Because the expanded ranges actually form two. So you go from consolidation period to expansion, consolidation period to expansion. And now what happens is you have a consolidation period, expansion, and then we have a range that comes back into the previous consolidation period. It doesn't lose it, but you start forming this larger range towards the end of movement when there's a little bit more volatility, when it becomes a little bit more exhausted. So look for microstructure breaks. Okay? So if you impulse out of a structure, look for it to be successfully retest. So in this case, consolidation, breakout. Retest. Consolidation, breakout. All right, Consolidation, breakout. Retest. Consolidation, breakout. Retest. As long as these structures preceding it are holding again, continuation is never clean. It's never just going to look like this, you know, this perfectly like that. Okay. With all of this expanse and gap in between. All right, Line up your structure. Okay. Put your lines on the chart. Identify where your highs and lows are within even the 30 minute and the one hour time frame. These are going to be invaluable to you to define your lines in the sand. Okay? So during a period of high volatility, when there is momentum building up, it is completely normal to come back into the previous structure to violate the previous structure. But the same thing goes with backside entry. If we put in a consolidation period, move up again, put in a consolidation period, we have to take with consideration the previous structure. So when you have really tight structures, you can't just neglect this as being not noteworthy. So if we have a move up that looks like this, okay, then there's maybe more of a case for shorting this when we do have a breakdown, right? Because in this case we're likely looking to, if we lose this footing, test the previous structure when you have areas such as the one we're looking at right now where the trend is really strong, but we're going from squeeze to squeeze. The nearest market structure is basically right there. So if you lose the lows of something that follows afterward, you still have to take into consideration the previous structure. Alright? So when we test the lows in this case right here, we probe right here, we never lose the low of the preceding structure. Everything is really confined right now. So we have to deal with the current microstructure that we're given. We can't just assume that we lose this low and then the market is going to turn. You have to take into consideration the structure that preceded this. There's a ton of fighting that goes on. And what you'll see is the lows get sold. Okay. And at the bottom of these lows you'll have those really negative deltas. So over here, all right, over here you get more of a probe over here. But you can see that for example, we do sell into this previous structure. We don't lose the low, okay? So we don't lose the low with this. And again we actually end up closing above where the previous range was established. So we're back within the range. Alright? All of this that follows is just more of a sign of strength now at these lows. So right here, right here, right here, what we want to see is we want to see trap traders. Okay. We want to see that here too. We'll want to see these really negative prints looking at delta. So we want to see really high volume in the form of aggressive selling. So this is where using exo charts and filtering is useful. So what we can do is we can take exocharts if you have it on adaptive. Okay. So if you have it on adaptive, it's going to show you generically a low sensitivity setting. So it's going to be around 3. So this is going to include a lot of everything. It's still going to color based on different gradients to indicate where the high volume occurred. So the dark blue, the dark red, that's where the high volume amounts occurred. But if we're just looking for areas at support and resistance. So if I'm just looking at the previous structure here or the previous structure here or here. Okay. Or into these lows. If we're going to come down and test this, we don't have that yet. But I want to see that lows are aggressively sold. So I actually just want to see things that are relevant to what I'm looking for. So if I am and it's not just a confirmation bias in that sense. We actually just want to see that these values have been established because we're going to be looking at these values and seeing if we could get above them. Okay. Because when we get above them, we know we could potentially have them trapped. So now that we've filtered up, all right, we've turned the shade sensitivity up again, you could do this or you can go to fixed volume and you could pick a certain volume amount. So I have 15 million on now. So now I'm only seeing values in excess of 15 million. But you could go to adaptive turn this setting all the way up. And now we see where only the high prints were. Okay, so what you see right here, okay, red in the lows. Okay, red in the lows. Okay, red. Okay, red.

Very red. Again, red. And it's not just enough to see that the lows are aggressively sold and to say that this is, you know, a successful test of a support. And then it's going to hold. Because what happens is you have these lows aggressively sold, but price continued moving down. What you need to see is over here, over here that we're above these positions now. So when you get something like this, where you have market structure, you make a low, for example, and then you're back above, okay, in this case, you're back above where it was previously sold. So let me just delete this and draw a little bit of a better piece of artwork. So you come in, move down, put in a low. This area is aggressively sold. But now you're up here retesting the high of this structure. So in this case, all these trap lows. And now you're above the high of this structure. There's a strong case for this adding to any upward fuel or upward momentum. So you want to look for this type of evidence or behavior at exactly these points. All right? So at these points within market structure, within this trend, okay? So at these micro support and resistance flips, alright? So I mean micro, because these are small areas, right? These are small ranges. So this is the type of things that we want to pay attention to, or rather, these are the types of things that we want to pay attention to. And now again that this range is starting to extend, expect that we start merging these two points. Okay? And in this case, if you're looking for a short, I would not take any shorts until a preceding area of market structure breaks. So. So again, market structure can be pretty messy, right? You could just go from period like this, where all of the ranges are pretty close and in this case, it doesn't make sense to sell the low of just one of these ranges. You would want to see the previous range break, an indication that the trend is potentially shifting. So that's that, guys. Hopefully this has been informative. If you have any questions. Absolutely. Feel free to reach out. This is Ryan with block roots. Exercise, proper risk management and trade effectively.