The Automated Order-Flow Block Trading System is designed to execute based on block orders found in order-flow.
A block trade is a single order that is much larger than the average order size found in the time and sales window. We can consider for this example, 100 contracts to be a block order.
The system is designed to trade in the direction of the large order. If the block order was executed at market, at the ASK as an at market buy order, the system will enter long, the reverse is true for shorts.
Level 2 Technology
The system also incorporates best bid and best ask size analysis. This allows the program to only execute if the block size is greater than the resting orders in the Level 2 order books best ask. The logic behind this involves the fact that price is likely to uptick when the buy order can consume available sell orders at the next price.
For example, in order for price to move up, traders must consume the resting sell limit orders resting on the ask, only then can price uptick; the Automated Order-Flow Block Trader is built upon this sound principle.
Real time processing
To allow the fastest executions the system has been designed to work in real-time, utilizing NinjaTrader7's OnMarketData() method. This method is called and guaranteed to be in the correct sequence for every change in level one market data for the underlying instrument.
This is a real-time data stream and can be CPU intensive.
We recommend renting a VPS to run the strategy.
Stops are deployed based on the markets swing levels.
For longs, the stop would be deployed at the most recently created swing point. As new swing points are created, the system will automatically renew the stop-loss placement. Stop-loss orders are turned into at market orders when it.
If you are not familiar with how swing levels are created, apply the Swing Indicator to your chart. By changing the parameters of the strength you widen, or lessen the stop distance.
Profits are taken based on ticks. You may enter the distance in ticks to take profit.
NOTICE: Due to the OnMarketData() method (real-time data stream) this system cannot be backtested.
As per NinjaTrader: "This method is not called on historical data (backtest)"
The only way to test this system would be to run it in real-time, OR you may test by running it in Market Replay.
Find out more by visiting the link below to learn more.
Results, the system was ran on ES 06-18, NQ 06-18 and YM 06-18. Please note this is hypothetical backtest on Market Replay which replays tick data in sequential order to replicate real time market activity in fast forward. Since market replays are highly time consuming we only have limited replay results available - please do your own research during the 14-day trial.
Required Disclaimer: CFTC RULE 4.41 - HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.
Trades Plotted at Price
A large order is meaningful, there is often a good reason why an institution would enter large sizes into the market at once. An institutional trader may be using a systematic signal, or an automated one based on their strategy. The key here is that we expect traders with large trading abilities to be well informed, in addition the large orders may move the market out of consolidation and into a trend.
1.1 - Order Size Plotted Against Price.
The x-axis contains the order size, while the y-axis shows the price that order was executed at. The majority of orders fall into different percentiles. By visually inspecting we see about the majority of orders fall within 25 contracts at every price level. Larger block sizes above 400 are rare in this case and may cause large price movements to begin which may cause price to move out of one volume based distribution into the next.
Now let's compare the 400+ size orders to the average amount of orders in the Level II order-book.
1.2 - Limit orders waiting to be filled in the Level II order-book.
We can see the amount of orders in the orderbook of the ES Sep 18' contract. The red are orders at the bid (to buy) , while the green are orders at the ask (to sell).
In order for a price to change to happen, the orders on the best bid/ask must be fulfilled first before price can change.
So what happens when a large order for 400 contracts is executed at market, with only 100 contracts on the ask? This causes the market to uptick, other traders pile in and this can cause price to accelerate in the direction of the buyer of 400 contracts.
Next, we will examine a basic block-trade identification indicator developed to plot large block orders above 200 contracts in size. The indicator will be plotted on a ES contract from a random point in history (ES 09-16). See the chart below (figure 1.3).
For this example we will assume block trades (above 200 contracts) executed on the ASK are BUYERS (green), while block trades (above 200 contracts) executed on the BID are SELLERS (red).
The test will be to check to see if price moved 1 point from the time a block trade was executed, as well as the max favorable excursion (MFE) of the subsequent price movement. For risk control we will assume a stop-loss to be placed at the high, or low of each candle after it has closed.
1.3 - Block Trade Indicator plotting contracts at the BID or ASK above 200 contracts.
The test shows that large block orders tend to have a bullish, and bearish affect on imminent price movement. While it cannot be known how far price action will trend, we can use block order identification tools to plan the timing to take advantage of the initial thrust and momentum.
Next, take a look at figure 1.4, it is a plot of executed orders for the 6B 12-17 contract.
1.4 - Executed orders plotted for the 6B 12-17 contract, along with prediction cone.
A prediction cone has been plotted to show the area where price is predicted to trade. If you have studied the volume profile, or market profile, you will notice the P formation. The P formation indicates buying tails being formed on the lows, this is indicating a bullish trend because volume is developing value higher. We can clearly see how the largest trades are indeed being executed at the price level which contains the most amount of trading activity.
A volume development profile like this would indicate to the trader a indication that he/she may want to buy the lows in expectation of a breakout to new highs. In this case we would want to combine knowledge of the block trades with a higher time-frame (30 Minute) triangulated moving average of the volume to get the slope of the market based on volume.
Such information tells us that buyers are indeed accumulating long positions. The order-flow based micro-structure of the market gives the astute trader an objective viewpoint for making trading decisions.
1.5 - Distribution Curve a bell shaped value area.
If you've noticed how executed orders resemble a bell curve, then you are definitely seeing where this is headed. When price trades above, or below the main value area, we expect either mean reversion, or trend distribution activity. It is as these important levels where larger time-frame institutional traders working with statistical analysis software come in with large size to execute trades. By tracking this information we can ride on the waves of the largest professional traders.
1.6 - The 3 types of bell curves
A bell curve can develop into 3 formations. Each formation is indicative of a specific trading behavior. Knowing how to read the order-flow during this time is important to avoid getting chopped up in the B phase. The B phase as show above in figure 1.6 shows a fairly flat areas where price is rangebound. It is during this time where the markets can be slow, and trend traders must sit and wait until trading activity picks up.
Avoid this phase and only trade during periods where the market is likely to breakout and find support/resistance on the retest back to the value area.
In the next video you will see how such a system can be used to automatically look for these high probability scenarios. Remember, trading is a numbers game! Nothing is guaranteed in trading: it is not like certain like math, science or physics! Algorithmic trading is for those interested in applying probabilities and statistics on their side to make decisions. This means you must take multiple trades in order for the probabilities to have enough time to show themselves.
Regardless of how you decide to watch the Block-Trades, plotting them is important for understand and seeing what the largest traders are looking at.
You can view block trades by watching the time & sales, but you wont have a good idea of where on the chart the order was placed relative to other block trades.
We do offer the block trade indicator which is available here.
In addition we also offer the block trade tool as part of an automated order-flow program... See figure 1.8.
CFTC RULE 4.41 – HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.
1.8 - Hypothetical backtest results which include market structure based trailing stops.
Robustness of a strategy is very important for building confidence. This confidence allows the system operator the ability to continue operating the program during those little dips you see in the above graph (figure 1.8).
While these dips may seem small and short-lived, on a day to day basis the trader may be expecting too much, too soon and quit the program right before it's ready to make new equity highs. This is why proper education in operating an automated trading system is vital to your success.
I've developed an automated trader white-glove introductory service to assist you in entering the realm of automated trading. See the performance graph below to see how this system took us to the top in rankings.
1.9 - Results as listed by isystem, the Formula72 Day Trading program was managed by my team using the Block-Trade Order-Flow Strategy.
Order-Flow Data is lighting fast, the human trader cannot process it fast enough.
Each aspect of the order-flow system is tested for robustness. Robustness means the system can function on multiple markets, and multiple time-frames. While most systems are over-fitted and designed to work on one market, during a certain period, on a certain time-frame, the order-flow system is dynamic in that it's based on the fundamentals of price movement; volume.