Order Flow Intro: What is Positioning?

So let's talk about positioning. And a lot of our trading on the low time frame and the high time frame revolves around identifying market positioning. So what we're talking about is, is there one side of the market, whether it is long or shorts that are overexposed, crowded, or over committed, okay? This especially matters in a market with high leverage, or rather in a market that allows the use of high leverage across multiple exchanges. And we know that's the case with crypto. So what we're looking for is a sign that one side has gotten over committed and potentially trapped. Okay? One side that previously had control has lost control and is now trapped and caught off sides. And what we're talking about, when we talk about a market, or rather one side that is offsides, we're talking about them having commit through a level. So let's say we're talking about a key level within market structure. They've committed through the level, such as this level down here, breaking the low, They've gotten aggressive through the level. You see a ton of selling, and then they've lost this level. So now they're caught off sides. And when they're caught off sides, their behavior will dictate the next move, okay? Or the moves to follow. So when we're talking about positioning, that's what we're talking about, okay? Now, in any market, you have three conditions, right? You have a sideways market, an uptrend or a downtrend. Now, in a market that is trending upward, the dominant positioning is long. This is the popular trade. If you are in a bull market, the most popular trade to be in is a long. Okay? But what we should understand is that what is responsible for this trend continuing after these corrections is the poor positioning by one side of the market. With each time that the market turns, shorts get in poor positioning, the further and further that they get into positions, right? So if shorts don't get in position at the high, if they get into position more towards the low, closer to the turning point of this trend, they get caught offsides, and their poor positioning leads to the moves upward. Okay? So for every correction in a bull trend, there's a short, or there are shorts, rather, getting in poor positioning, anticipating a further correction. And then as the market trades back against them, we see that they're closing out of their positions, leads to a push upward. So when we talk about the market getting crowded, think about a trade as if it was a room. So let's say that in this case, that the market is moving upward. This is a bull trend. That in this case down here, this is a room for all the shorts to congregate in. Shorts are getting very aggressive into this level. This is our little room in our house. Okay. Shorts are getting very aggressive into this little room. And then as the market begins to tick against them, for all the selling pressure that they added, they were unable to move the market down. As the market begins to move against them, they are forced to exit their positions. Now the thing about this is when they entered in, they might have entered in very peacefully and in an orderly fashion. But now when they're forced to exit, the market is not waiting for them and they only have one exit to use and that is the same door that they walked in. Okay? So a very crowded room trying to exit all at once leads to a very violent reaction. Now the same thing can be said for bear markets or bearish trends. When the market is moving downward, we see that we have a shift in participation or positioning rather in these rallies. So as the market begins to correct, you get longs, they get in down here and they're in good positioning. You get longs, they get in here and they're in semi decent positioning. But then you get the longs that occur more towards the end. They're starting to hop in whenever there's less and less movement for all of the extra action or all the extra activity that's coming in. So when they get into this position, they're in poor positioning. The market begins to tick against them. When they all close out in unison or close to unison, it's their activity that helps the market move further down. So there's this concept that markets need to sell off before they can move up. And markets need to rally before they can move down again. And it's because it constantly needs to capture one side offsides or in poor positioning in order to use them as fuel to carry on. So that's what we're talking about when we talk about positioning. And again, this is going to be the foundation that we use when we're trading lower time frame order flow, even if you're trading 5 minute charts or if we're trading higher time frame position trading and swing trading. Now we're going to be using different tools depending on what time frame we're trading. Okay. And before we get further into this, just understand that there are tools that do help you see and rather do help you get an idea as to what this positioning is. And we're going to go over those. But then there are those that are these websites that list long and short data, I just want to cover that because long, long and shorts on futures exchanges are at parity. So just to clear the air, for every long there is a short. But you do have to remember there are different types of longs and shorts. Sometimes you have longs getting far more aggressive than shorts and they're buying up all the available supply and prices rising up drastically. Now if you assume that one person can get in over a range of prices and they might be employing high leverage, well now you can see when positioning comes into play, when they are stuck and price is no longer moving up with them and they have gotten aggressively into position and no one is behind them to support them in the bid, when that price rolls over, they're forced to close out. And again that helps to that downward selling pressure. So longs and shorts are at parity, meaning for every long there is a short. But there are different types of longs and shorts. And this is exactly how we end up with a market that is able to move to begin with. Okay, so for higher time frame positioning, if we're trading something like a weekly chart, a daily chart, a four hour chart, if we're taking more investment type positions, swing trading, position trading, we could use tools such as funding basis, commitment to traders, options, SKU. And if you go to OkX, you can see that they have their own native tools here. So for example, you can look at something like futures basis, alright, you could look at the basis between perpetual swaps and for example spot Bitcoin. So what this means is let's say that the market has been moving up aggressively, okay? So imagine that we're looking at the bitcoin basis and the market has been moving up aggressively and now has begun to more or less consolidate. If we are looking at the price chart and it's doing that and we see something along the lines of this with basis where basis has been going up, okay, if you were looking at okx, it'd be more like this. So there'd be a big difference between the basis and the spot price, alright? Or the basis in this case and something like Coinbase or okx and you're looking at a perpetual swaps and then you're looking at a spot. So if you start to see that the basis is very high and you have something like a positive funding rate and the dominant trade is clearly long and longs are paying to keep their positions open, well then this might be a case for poor positioning or an area where longs can get into poor position if they continuously enter because what you have is price not continuing to move up, it's moving sideways and ranging now. But the higher time frame tools that we use, such as funding basis, term structure, they're all indicating to us that the market still is getting long. And we have that detachment between spot and perpetual swaps, which might be a sign that the trade at this point has become crowded. And when you know that all those longs are currently paying funding and they're currently in position and might be using high leverage again if the market begins to tick against them. This positioning, this crowded trade up here is what causes the massive sell off. So on the high time frame we can use something like funding. So a very positive funding rate, a very high basis, which on OkX is, is seen as a positive basis if futures are trading at a premium and a negative if they're trading at a discount. Even though the correct terminology would, in traditional markets mean that if there was a positive basis that spot was above futures. But still, that's how they use it in crypto. And on okX you could use something like funding commitment of traders. Even so, commitment of traders is published by the CME. So you could go onto the CME's commitment to traders. That shows you leverage positions, asset managers, dealers. It's a little bit less useful for crypto because crypto native exchanges are a little bit more dominant. But again, these are tools that we would look at on the higher time frame to potentially begin to build a case for maybe one side or the other getting crowded. The same can be said in a market that is moving down and you have aggressive shorts as the dominant trade. Well, then you're probably going to have at some point a very negative funding. And that'll be a helpful tool to look at or rather a helpful piece of information to pay attention to to identify maybe the market that has gotten a little too crowded in that short trade. And then what happens is we have violent reversals or at least temporary violent unwinds of that side's position. Now on the lower time frame, that's where we're going to use the things that we're going over within this course. Okay, we might look at something like the footprint chart. So if we're looking at this footprint chart right here and we were to say which side was getting a little bit more aggressive, which side was getting into position a little bit more aggressively, we might say that in this case it is probably the shorts. All right? And we could substantiate the case for this happening by looking at something like, or this we could substantiate the case for this being evidence that shorts getting a little bit more aggressive by looking at something like open interest. So we can see that right now the delta is mostly negative. You can see there's a ton of volume on the side of the bid. So we know that shorts are getting very aggressive into this move. So this is a potential setup for one of these reversals because one side of the market is getting overly aggressive into a level, okay. They are getting a little bit over committed. So as we said down here, when the market breaks this level, it's a little bit obvious that this level was used as that trigger point. So once the market breaks this level, you get a ton of shorts committing through this low. And what we look for is the evidence that one side gets a little over committed and then gets trapped offsides. Which means in this case that after all this aggression into the low, the market is able to trade back above. So remember, if you see that there is just a lot of selling that comes into the market, it doesn't necessarily mean that that trade is caught off sides or over committed or at all crowded. Yet what we need to see is that for all the selling that's coming in, the market is doing nothing more to move down. Okay? So you know, as the saying goes, if everyone is sold and the market is not moving down, well then if the market is not moving down, who is left to sell? What is going to make the market move down? So we could look at things like footprint, right? So we could see right here where most of the volume is coming in. And again, we would look at open interest to make sure that this was all for new business and not longs closing out. So we could also look at something like cvd. So when we look at cvd, we get a really good idea of where the aggressive activity is coming into the market. So we could see where buyers and sellers have intention and where they have intention over time. So when we look at something like this, so we're looking at CVD making a much higher high than price action. We know that in the right hand corner, rather on the right hand side of the structure, that buyers have gotten very aggressive into this high for not nearly as much movement as we've seen in delta activity.

We know through looking at something like CVD where there are divergences and where there might be one side of the market that is in poor positioning, we say it's poor positioning when they're over committed and the market trades against them and they're Potentially trapped. A really good example is this over here where we have equal highs. But in this case, the market has gotten much more aggressive through this right high, and instead price has done nothing to move continuously upward. We've gone over this in all the other videos. At this point, we just want to cover what the idea rather what the term positioning means. So for those of you that are watching this for the first time and have heard me use this term before, this is exactly what we're talking about. So the next tool that we could look at is volume profile. But volume profile is not exactly going to show us what side of the market got involved on its own. So if we look at something like volume profile, and we'll open this up, we see the volume profile, but unless we put the delta on this, there's really no indication as to whether or not there are aggressive buyers or aggressive sellers on this structure. But again, you can go ahead and adjust your chart and place the delta on the volume profile and at each level, see if there was a negative delta or positive delta. And if you have a move through a level, you'll be able to see whether one side was getting more or less aggressive on that move through the level. So if you see that above the break of the high, that buyers get much more aggressive, but price falls back within, we could see that over the course of time, if buyers were getting aggressive across the structure, and we have more evidence at that point that maybe they are potentially offsides and in poor positioning. So the last thing that we can use is something like vwap. Okay? So VWAP does not show us specifically any kind of indication of delta or sellers getting aggressive or buyers getting aggressive. But where we sit in relation to VWAP is an indication of that. So typically when the market is breaking above vwap or auctioning or trading above vwap and we're trending, we would say that the bulls are in control, okay? Because what a market that is moving up is doing is constantly stretching away from fair value to the upside. And what VWAP is, is a place where we could consider the market is establishing fair value over time. So it's a volume weighted average price. It technically is fair value. So over time, the VWAP is showing us where buyers and sellers are putting risk on. And if we're above vwap, we would say that bulls are in control. So bulls are the dominant positioning. And if we're below vwap, we would say that bears are in control. And this is just one type of vwap. But the best thing to use is some type of anchored VWAP or multiple anchored VWAP periods. So look at VWAP and just consider it as the area where buyers and sellers or risk was put on. So if we're under VWAP right now and we're considering that one side might be offsides, well, at this point we might be able to say that longs are in poor positioning because we could see that we're currently trading below V wap, the bears are in control and that if there's any side that's trapped, it might be in this case longs. Right. This is where most of the volume came in. If shorts are under here as well, well, they're in better positioning, at least relative to this V WAP because we're currently under it. Okay, so these are the different tools that we use and all the things that we're going to get into more detail on. I know we've gone over these things in earlier videos, but I just wanted to make sure that I drove home the point of what we're looking at when we're looking at positioning, or when we're talking about positioning, rather what we're looking for. So that was a mumbled sentence or a jumbled up sentence, but that's the general gist of it.