Thank you for reading this article, courtesy of NOFT-Traders.com. The information in it is designed for beginning, intermediate, and advanced traders. The authors of this chapter are leading experts in trading futures.
As you read this chapter, you will be exposed to multiple strategies for identifying and potentially profiting from Institutional Order Flow that have high probabilities of success and/or profit. This chapter is divided into three critical skills every trader must master, including:
1. Spotting Institutional Order Flow
2. Order Flow Sequence Tracking
3. Nailing Your Exits
4. Your Next Step
At NOFT-Traders.com, it is our sincere hope that you take away several strategies that you can use when you are done reading this book. You will learn about Institutional Order Flow and how it affects the futures markets. After reading this book, you will have a much better handle on how to spot large Institutional Order Flow, and how to trade with the larger institutions instead of againstthem.
1. Spotting Institutional Order Flow
You stand in the ocean. The waves pound your back. The force staggers you. But it is fun. The water rushes out. The current is powerful. It pulls you outward.
A trough has been created by the heavy current. But you feel safe. Your feet are firmly planted on the bottom. Suddenly, a much larger wave hits your back. It knocks you from your feet. Your footing is gone!
The water from the previous wave flows out, holding you in its powerful grip. It won’t let go! It is dragging you out to sea. IT’S A RIP CURRENT!
Will this be where you meet your maker…?
If you know how to swim out — no. If not? Then you’ll be another rip current casualty.
And the same holds true in your favorite Futures market…
As if they too are caught in a rip current, powerful institutional forces are dragging your futures trades away from you. You don’t see these forces, but you can feel them. You know they are there and you feel powerless to escape their grip.
Surely, you think, there must be a way to escape this fate!
You are right. There is.
You can learn to see the unstoppable forces that create a rip current. And there is a way to see those same currents building in the futures market.
When you can see these powerful currents, you can escape them. Then you can save your trades from the institutional currents.
Even better, you can start to swim WITH them.
Why should you care what the institutions are doing?
A narrow break in the sand produces a rip current when the water flows out. Large block orders in a narrow range create the same current in the market. As the institutional money flows in or out, it carries everything in its path with it.
The money creates the current flow. Your small orders are in the way and are grabbed by this powerful institutional current. You then watch helplessly as the unstoppable force of order flow drags your orders out to sea. The institutions then become the sharks that feed upon your helpless orders.
If you don’t know where the institutional current is going, you will be constantly swimming against it. And you just can’t win that contest. Those who continue to try will drown.
Trader’s portfolios will simply become lunch for the institutional sharks that are waiting for every order the rip current delivers to them.
A way you can win WITH the institutions.
How does that happen? You go with the flow — the institutional order flow.
You look for where the powerful institutional currents are taking the market. Then you just go with the flow. You start to swim with the sharks instead of fighting hopelessly against them.
To do this, you must learn to see the currents they create and where they are flowing. The flow of institutional money creates these currents. Order flow tracking allows you to identify them.
How do you see institutional rip currents?
Beach areas with known rip currents are often easy to spot. The local authorities will usually put up clear signs. These signs will warn of the potential danger. They also sometimes provide instruction on how to escape a rip current.
Swimmers are expected to heed these warnings. After all, their lives might be at stake.
Unfortunately for traders, the futures market doesn’t post warning signs. You are expected to know the risks involved and how to protect yourself. You had better know how to swim in the current if you don’t want to drown.
Sometimes these risks are easy to see. Sometimes they are not. Experienced swimmers and seasoned traders know what to look for. If you don’t, you may not see the warning signs. But, just because you don’t see them, doesn’t mean they aren’t there.
To the inexperienced eye, the picture below looks perfectly normal. A nice piece of isolated beach for taking a leisurely swim. However, a seasoned swimmer would immediately see the hidden danger of a rip current.
If not, maybe the water and the futures markets aren’t safe for you…YET!
The first picture is quite representative of a public beach. Highly visible signs warn of potential unseen danger. The second picture is much more like the futures market. The same real danger is present. You are just expected to spot it on your own.
Seasoned swimmers don’t drown; seasoned traders don’t go broke. The secret they share? They know how to spot a dangerous current and what to do about it.
Order flow tracking allows traders to spot the institutional rip currents like an experienced swimmer reads the ocean.
We will never eliminate the rip currents in the ocean or the futures market. We can, however, learn how to navigate them safely. To do so, we need to understand order flow tracking technology.
Does this really work?
It sure does. It works so well that entire programs, like our NOFT technology, have been built around it. This technology allows you to literally rip the cover off the market order flow. Then you can view and analyze the currents hidden inside.
In other words, it lets you see the unmarked rip currents. Swimmers drown in rip currents because they fight against them. Traders drown in order flow currents for the same reason.
When traders look at a candlestick chart using order flow tracking technology, they can actually look inside each candlestick in the chart and see each trade that was executed to produce the result represented by that single stick.
When the buyers are in control…
Traders looking inside each stick will see more valuable information. The trades are broken down into two columns. The left-hand column in each stick shows trades executed at the bid price. The right-hand column shows trades executed at the ask price. This allows a trader to determine whether the buyers or sellers are acting more aggressively.
In the stick shown above, you can see that far more orders were executed at the ask price than the bid price. The aggressive buyers were driving the market during this time. The order flow was with the buyers. This would push the price higher.
This stick shows an example where the order flow volume was being dominated by aggressive sellers. The imbalance displayed here tilts to aggressive sellers compared to buyers. In this instance the price pressure is going to be to the downside of the market.
Do the institutions use order flow tracking?
Not really. They are the ones creating it. The institutions are trading based on pure market value. They are moving large sums of money. To do so, they have to trade aggressively. But don’t think the institutional sharks didn’t see your orders on the lunch menu. Institutional order flow creates the current that moves tasty morsels like your orders onto their plates. That doesn’t mean just one institution. The market moves from the combined influence of all of the institutions. And they are all trading on their perceptions of value. Now can you start to see why these currents are so powerful?
Take a quick look at what happened at 10:00 A.M. and 2:00 P.M. on October 8, 2015, in the gold market.
Order flow tracking technology would have shown you the aggressive buy demand building as those orders were entered. Do you think any institutions were caught off-guard by these moves? Or, do you think they were the ones who caused them?
Order flow tracking technology would have also allowed you to see the buy demand disappear as the market peaked around 2:20 P.M. If you had known the aggressive buy orders were disappearing, you could have gotten out before the big drop that followed.
How many individual traders watched helplessly as their orders were dragged out to sea and served as lunch to the institutional sharks? This is why understanding and effectively using order flow tracking is so important.
Would you have seen this coming with your current trading technology? Or would your trades have been the main course for the institutional sharks?
You could have seen it coming if you had — and knew how to use — the right order flow tracking technology!
But how does this help the little guy?
Experienced swimmers and experienced traders do not fear rip currents. They know how to swim WITH them until they safely exit to their plan. Good traders know how to swim with the flow as well.
The first rule of trading: don’t lose money. Understanding order flow tracking will help get you there. It shows you where the potential danger exists.
The second rule of trading: know the risk.
When you can spot the rip currents of order flow, the risk of OTHERS becomes YOUR opportunity. Good traders profit by feeding on the trades of the less educated.
The institutions are the big sharks. The good traders just learn to swim along with them,nnoticed and out of the way, like little futures market remoras.
These are small examples of the power of order flow tracking. This technology can allow you to spot the rip currents in the market and profit — rather than drown — in them.
The experienced swimmer can spot a rip current and turn a dangerous situation into a safe one. Order flow tracking allows good traders to turn dangerous risk into profitable opportunity.
It shows us how to spot the powerful money flow in the futures market. It shows us how to swim with it instead of fighting against it.
The swimmer fighting against a rip current tires and drowns. Traders fighting against order flow are swept out to sea and devoured by the institutional sharks.
Would you rather feed the institutional sharks or let them feed you?
What you see here is just the tip of the iceberg in terms of order flow tracking. Hopefully, you now see the gap in your trading approach it can fill.
The institutional rip currents are always there. The institutional sharks are always looking for their next meal. It’s time for your portfolio to start swimming with the institutional sharks instead of being eaten by them!
It’s lunch time in the futures market. Would you rather sit down to dine or be served as the main course? If you are not using order flow tracking, you should seriously consider it.
If you want to learn more, our NOFT program teaches order flows from A to Z.
2. Order Flow Sequence Tracking
You never want your car or your trading account at the bottom of a stacked imbalance. It will not end well!
Why Size Really Does Matter When It Comes to Stacked Imbalances
We have all heard the jokes about “size doesn’t matter”. There are probably places where that is true. But those places are not in the futures markets, where the monster trucks of institutional orders rule the day.
When a monster truck is sitting on top of your improperly parked car in a parking lot, the imbalance is easy to see. It is also just a bit too late to do much about it.
The same thing applies to the institutional traders in the futures markets. Their orders are sitting there with the motor running. They are big and powerful. When they are kicked into gear, you had better not be in the way.
These orders will roll right over yours and never even notice that they squished them. They won’t care, either. But you will!
What are stacked imbalances and why are they important?
Monster trucks are moved by powerful engines that generate hundreds, if not thousands, of horsepower.
The markets are driven by the horsepower of the monstrous amounts of institutional money. The power of these moves is only limited by the amount of throttle the institutions apply. The fuel comes in the form of their large orders.
When these huge institutional interests align, strong imbalances can result between aggressive buyers and aggressive sellers. The imbalances created can be massive and extend over a wide range of prices.
Would you want your car sitting in the path of a monster truck just as the driver floored the accelerator? Then you dang sure don’t want your trading account parked in the path of the institutional money when it moves, either. Especially when it all decides to move the same way at the same time!
How do you find them?
It is pretty darn easy to tell when a big truck starts to move and which direction it is going. All you have to do is look. Then get the hell out of the way…fast!
Technology allows us to see inside each candlestick in the chart. It also allows us to see how large the institutional order imbalances are. We can even paint them up like a monster truck so they are easier to see
When the institutional money is active in one direction, the imbalances can be seen by looking inside a candlestick chart. This is not hard to do, but it does take some basic technology, such as our NOFT software.
Once you are able to remove the skin of a candlestick chart and look inside, then you can read the imbalances. The chart is read diagonally upward, from the left side to the right side of each stick. The two arrows in the third stick on the chart below illustrate this process.
You can now see how easy it is to spot the really large imbalances that exist. When you have several large imbalances in a row, it becomes a stacked imbalance.
In the third stick of the chart, you can see how the aggressive institutional buyers all hit the throttle at the same time. If you had been watching this in real time, you could have seen this monster coming your way.
What good does it do to see these monster orders?
Well, if you happen to be in their way and constipated, they should scare the poop out of you! So, there’s a bit of profit from what you save on Ex-Lax. Not enough? But wait! There’s even more!
We know that the institutions tend to act in the same way, over and over around the same price points. In the candlestick chart above, you can see the consistent action between 2025.50 and 2026.50 all the way across. Using technology to paint up the stacked imbalances makes them really easy to see.
You can also see that the most aggressive action is on the part of the buyers. This action shows up on the right side of the candlestick.
This holds true until the institutions finally get their payoff as the last candlestick explodes upward. If you had been watching this buildup over time, you could have seen it coming and had several opportunities to open a long position right alongside the monster trucks of the institutional money.
What’s in it for you?
Monster trucks are not just easy to spot -- you really can’t miss them. They are very large and usually brightly painted.
Stacked imbalances in the markets are hidden inside a candlestick. That doesn’t mean we can’t uncover them. Then we can paint them up like the giant monster trucks of the market that they are.
This can be done quickly and easily, and it is very effective at revealing these monster trucks of the futures markets for us. Once we can see them, we can avoid being run over by them.
When the imbalances are stacked in your favor, you can do more than just avoid losses. Hell, you might even decide to hop up in the cab with one of your trades and crush the account of someone who did not see YOU coming!
You might even end up needing your own monster truck to haul your profits to the bank.
3. Nailing Your Exits
Race car drivers and futures traders can both use the draft of more powerful competitors to pull them along by staying close.
Avoid the Crash and Pocket Cash by Drafting the Institutional Traders
The image of high-powered machines traveling 200 mph just inches apart is riveting. You don’t have to be a racing fan to be captivated by it. One tiny mistake and a very expensive car (and maybe even a driver) is destroyed.
Why does the driver of one of these cars get so close behind the car in front of it? It is called drafting. These cars travel at such high speed they create a sort of vacuum behind them. This drafting is strong enough to pull another car along with them if the driver stays close enough.
In the futures market, the same condition is created by the movement of the institutional money. One of the key ways to spot this drafting opportunity in the market is by following the COT moving average.
Traders who use this can tuck in close behind the institutional traders and get pulled along with the vacuum they create.
What is the COT Moving Average?
The COT is the Commitment of Traders report. It displays where the heaviest volume intersects with the price of an asset. Having this information reveals a couple of pieces of valuable information to traders in general, and retail traders in particular.
The COT moving average shows traders which direction the institutional order volume is driving the price. It gives traders a level of confidence that their orders are drafting on the price momentum being created by the institutional traders.
Keep in mind that moving averages are based on trailing data and are lagging indicators because of that. The market will always change faster than any trailing indicator can show. This is clearly shown in the chart above, with the indicator always following the current trend in the price.
Where Can Retail Traders Find the COT?
Many trading systems, like NOFT’s, include the COT report. They also provide the capability to display it in a single candlestick and as a moving average. The moving average can even be displayed with an offset to shows it as a band rather than a single line.
The actual trading system you are using will determine where you will need to look to find it. In the NOFT system it is found in the tool selection area.
Once selected, the COT moving average will be displayed right on the price chart.
Why Does This Benefit Retail Traders?
Retail traders face a lot of obstacles and risks in the futures markets. One of the primary dangers affects traders who are unaware of what actions the institutional traders are taking. That is the money that drives price trends in the market and presents the most risk or opportunity for retail traders.
The COT is not the only trend information that retail investors should consider, but it should never be ignored. Coupled with other indicators, it becomes a powerful trend confirmation tool.
How Do You Avoid Crashes When the Market Turns?
The last thing a race driver drafting a few inches off another car at 200 mph wants to see is a sudden turn. It can send them crashing into that car, or the wall, in a heartbeat.
Retail traders drafting on the institutional price momentum feel the same way. The difference is, you don’t have a bunch of corporate sponsors to rebuild your trading account. One major crash can take you out of the trading race permanently.
The COT gives you strong suggestions for good points at which to exit your trades. It will also display opportunities to open new positions in the opposite direction as a new trend takes hold.
Let the COT Start Pulling Your Trades to Better Profits Today.
For small racing teams or retail traders, competing against the institutional teams can be very tough. It is crucial to take advantage of any assistance we can get.
The COT moving average is a powerful trading tool. However, it is not the Holy Grail of trading. This is a tool that delivers its highest value when used in conjunction with other indicators. Using multiple indicators is always advisable when the objective is maximizing the potential and minimizing the risk.
Drafting behind a more powerful car works great at the racetrack. Drafting on the COT can really rev up your trading account as well. It can fill your trading tank with profits.
Start drafting the COT today and let the institutional traders help pull your profits to the bank tomorrow.
Author: Troy Epperson, Head FuturesTrainer
Company: NOFT Traders
Services Offered: Training, Funded Trading
Markets Covered: Futures, Stocks, ETFs
The NOFT team is made up of highly respected institutional trading figures in the professional trading world. With decades of experience, they’ve been top performers in premier Prop firms in the U.S. and Europe.