insider bars

Flexible Order Flow

How familiar are you with order flow analysis?

Watch Chris' 2015 Order Flow Video*

*Since this was recorded, there have been over 60 updates to Insider Bars.

q & a

  What is order flow and how can it improve my trading?
Order flow analysis is a collection of analysis concepts based on auction theory which has come into its own with the growth of electronic markets in the past few years. Whereas traditional market analysis focused on price bars or candlesticks to break down market activity, order flow looks at activity at individual price points. When you trade with order flow, you have at your disposal far more information on market activity. This allows you to make better decisions and trade with less risk.
  How does Insider Bars analysis compare to the candlesticks I use now?

The best way to explain this is to walk you through a short example. Candlestick charts give you just four datapoints: Open, high, low and close. The candlestick body is colored to show the candle's direction. The example at right is three five-minute candlesticks of ES (S&P 500) futures, with the light body indicating an up candle and the dark indicating down. And as you will see, not only is the data limited but intraday candlesticks can also be very misleading.

Note: Candlestick options are also available in Insider Bars, but most users gravitate to some of its more effective custom bar options.

Here you see the same three candles on the left, compared to the same data using Insider Bars on the right. The Insider Bars bar is a modified HLC chart, with the close shown as a horizontal line connecting to the next bar. The "body" of the Insider Bars bar is the value area, the price range where most of the bar's volume traded. Value areas show you finely-tuned support and resistance within the bar.

Let's consider the third candle and bar. Looking at the candlestick, you would think the market tried to sell off, but then recovered. But Insider Bars tells you a very different story, that the market sold off and is trading at the top of its new (lower) value area. Insider Bars' analysis of the volume within the bar leads you to a completely different conclusion than you would have reached from the candlestick alone.

Now let's see what happened next (highlighted in red). For the Insider Bars trader, the big move down was no surprise, since bar 3 had a definitive shift lower in the value area. Not so good for the candlestick trader. If anything, the third candle looked bullish -- like a failed selloff and recovery.

So what have we learned here? There is no way our candlestick trader could compete with someone who has detailed data of what's taking place insider the bar. Another issue worth noting is the nature of candlestick charts on intraday data. The body of a candlestick, its most impactful visual element, is based on the open and close of the bar of a time chosen by the trader. One with a four minute candle will see a completely different picture than one using five minutes. With intraday candlesticks, it is easy to be fooled into placing emphasis on something that has no value at all.

Now think about how Insider Bars works. Its "body" emphasizes the market information that is most important to know, where volume is trading. Which would you rather have?

  There is lots of information with order flow. What do all the numbers mean?

Order flow analysis breaks down each bar into a lot of detail, showing volume at each price and also showing trades as at bid or at ask (or uptick/downtick). The traditional approach looks like this. And yes, there are a lot of numbers! All those numbers can present a problem for the trader. One reason is simply too much information. Another is the simple fact that they are numbers. Researchers now know that we humans do not process information numerically, but as pictures. So a numeric display must be translated by our brains before the data may be used. This slows you down when you need to make split-second trading decisions.

It gets even worse! The way these numbers are analyzed is by comparing the volume traded at the bid (left side, bearish) to that at the ask (right side, bullish). And since the bid and ask are not the same at any given time, this traditional display requires you to make these comparisons diagonally. So not only does your brain doing something it is not good at (extracting meaning from fast moving numbers), but it also must do it diagonally. No wonder you here the phrase analysis paralysis applied to order flow!

Insider Bars offers some old-school display options for those who want them, but its real advantage is in its ability to

  1. present information in a more brain-friendly way, and
  2. only show you the data you need for trading decisions.

Here are a couple of examples. The first chart uses price x volume histograms to show the volume at each auction point, and uses color to indicate its relative bullishness or bearishness.

This chart has all the useful data of the traditional order flow chart discussed earlier, but in a much more brain-friendly format. Of course, you can add text to a display like this if you choose. Insider Bars is designed to be flexible, to work with the way you trade.

The second chart simplifies interpretation even further. This Insider Bars display style is called Markers:

You really do not need to watch every trade at every price to use order flow effectively. You just need to see the anomalies, the auction points where bullish or bearish bias is extreme. And this is what Markers do: The detailed tick-by-tick analysis is still being done behind the scenes, but you are only shown what you need to know for decision making (blue is bullish, red is bearish).

  I have heard of VWAP and VPOC in connection with order flow. What's the story on these?

VWAP is the abbreviation for volume-weighted average price. Think of it as the volume-weighted moving average of the session's prices, and it can be used as a price target or an entry point, depending on your perspective. VWAP is a rarity in that it is a popular trading tool that actually works pretty well. You can also use standard deviation bands based on the VWAP as overbought/oversold indicators.

VPOC is the volume point of control. This is a derivation of a concept that dates back to Market Profile® in the 1980s. The original point of control was the price within a Market Profile® most frequented during the day. (Remember that Market Profile® is based on time, not on actual trade volume.) VPOC is simply the price where the most volume trades during the session. Both the developing current session value and the previous session value are used as support and resistance levels.

Also in this class of order flow indicators is the value area. Done properly, this is one of the most powerful tools in an order flow trader's toolbox. The value area is the area where most of the period's volume traded. It is the equivalent of one standard deviation bands in a statistical analysis. Note however, that it is NOT the same thing! And neither is it some derivation of the the old Market Profile® value area. The world is different now than when Market Profile® was created in the 1980s. Back then, actual futures volume was not known until after the session had closed. The Market Profile® value area was a great hack for the 1980s, but today there is no longer a need for a hack. Today we have volume data at our fingertips and can calculate population data realtime.

The traditional usage of these tools is on a session timeframe. OF•G expands on this, adding weekly, monthly periods -- plus you can do moving calculations of any number or bars or of days. For most markets, the weekly cycle VWAP and value areas are the most powerful.

  Is it hard to learn Insider Bars?

Insider Bars was designed from the ground up to be easy to understand and easy to use. It does not use the standard TradeStation inputs at all, instead using a custom modern user interface. See sample here. So there are no complex input codes to learn.

Please understand, however, that Insider Bars is NOT a buy when the indicator turns green automated indicator or strategy. It is a tool for discretionary traders. And by no means is it a silver bullet, which will magically transform your trading. If you are new to trading, you are going to have to work (and work hard) to understand order flow trading.

It's easy to use, and there's a lot of flexibility and customization to suit your style. It's a great value if you use volume profiling in your analysis. It's also very helpful for doing research and historical analysis. For me, I can't trade without them anymore.

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