Watch the intro video and learn more about Order Flow and Pricing Patterns
Successful Order Flow Trading Identifying Market Tops and Bottoms
In this video we look at the ZoneTraderPro Order Flow tool identifying market tops and bottoms.
ZoneTraderPro Order Flow Pattern Indicator for NinjaTrader 8
ZoneTraderPro now features a order flow pattern indicator suite which identifies major reversal points in the markets, giving users advantages over other traders. The indicator package features the exclusive ZTP Order Flow Signal, Exhaustion Signal, ZTP Delta Strength, Cumulative Delta, Trapped Traders, Absorption, Stopping and Continuation Ratios, Point of Control, and Extension Zones.
These powerful patterns represent a major upgrade to the ZoneTraderPro indicator package. Use this upgrade in conjunction with ZoneTraderPro price pattern matching indicator. This gives the trader two unique advantages that no other software provides.
The first advantage is a set of rules that determine the risk involved in a trade. You determine if the trade being considered is high or low risk, all based on the ZoneTraderPro pattern. You can determine if a trade should be exited early if a reversal pattern emerges.
The Delta Strength is a completely new and unique indicator that shows the strength of the delta within a bar. It also features another unique ability that other order flow suites do not offer. The ability to reconstruct the tape to show the order size, instead of the fill size. The ability to filter for large lot traders is also incorporated into the Cumulative Delta indicator. It is unique and exclusive to ZoneTraderPro.
Order Flow is Useless Without Paterns
When order flow software was first developed you only saw the numbers of contracts traded. This seamed like amazing information because a trader could see where large volume came in, giving a false impression that price would continue to move in that direction.
Contracts traded is a completely useless number because it does not take into account buyers and sellers that passively are buying and selling contracts with limit orders in large numbers. What does the chart at the left really tell you? The chart does nothing to tell you about where the was past support or resistance. There is no way to determine if there was a stopping or continuation ratio present. It is impossible to determine the ZTP Order Flow Sell signal.
There was nobody to teach a trader what patterns to visually look for. What NinjaTrader did with the Volumetric bars was open up the charts to be able to program patterns that consistently yield results.
POC Absorption and Extension Signal
The ZoneTraderPro order flow indicator features the POC as its most powerful signal. The reason this signal is so powerful is that it normally occurs at market turning points. When combined with other ZoneTraderPro order flow signal it creates a complete and powerful tool set for your trading.
In this picture you have a combination of the 3 most powerful signals. First you have the point of control buy signal which has told us that a large amount of contracts traded the wrong way on the low of the bar. The second most powerful signal is the ZTP Order Flow buy signal, which is also an entry trigger on a smaller time frame chart. The third signal is that a stopping ratio on the low. Lastly ZoneTraderPro identified this as a Tick Divergence pattern.
There are two types of POC signals and they represent a different algorithm. It is possible to have both types of signals occur on the same bar, representing an even stronger trading signal.
ZTP Delta Strength
The ZoneTraderPro suite introduces a completely new concept called Delta Strength. The Delta Strength is not the delta of the bar. The formula is different and proprietary. For the first time you can now see visually how strong a particular move is.
You can also see the relative volume. Relative volume is super important because when it increases, that is the definition of buyers and sellers meeting and trying to reverse price.
In the picture on the left we see strong strength numbers to start the selloff, then the numbers become weaker. At the low, we see higher than normal volume, an Exhaustion signal, and extension zones created. That would be a great time to reverse the short to a long trade. Price is again reversed on high volume, extension zones and an exhaustion signal.
Delta Strength also does something no other software does. Delta Strength uses tape reconstruction filtering to filter for large lot traders. You can not find this in other software.
The Most Valuable Chart on Your Computer
The Delta Strength indicator itself is completely unique. However, ZoneTraderPro has added additional functionality to the indicator, making it the most powerful real time indicator in the order flow toolbox.
The indicator can reconstruct the tape and filter for large orders. No other indicator does this.
Why is this important? Lets say that 200 contracts are sold. This is important information, however NinjaTrader does not report the size of the order, it reports the size of the fill. So if the fill size is just between 1-5 contracts, you would never know this information that a 200 lot was sold. By reconstructing the tape we now know the order size.
Look at the example chart on the right. We are filtering for orders of 100 contracts or more. Where there is a divergence, an up bar with a negative delta or a down bar with a positive delta, the bar is circled.
This is calling the exact turning points in the market. Look at the point values for these trades.
This occurs dozens of times per day.
Combine These Signals with Order Flow Patterns
The Order Flow Patterns are a great tool that no other software program offers. But trading in real time is difficult when you have entered a position and immediately after you enter, you see an opposing order flow pattern. This is common, because the market has two sides and there is an auction taking place between the buyers and the sellers. Just because you took a position in the market the other side is not going to just give up.
That is why trading with the information from both the Delta Strength and Order Flow Patterns are important.
The circles on these Order Flow charts coincide with the circles on the Point and Figure Delta Strength charts.
YOU CAN NOW IDENTIFY EXACT MARKET TURNING POINTS
Combine These Signals with Price Patterns and Eliminate Trades that are High Risk and Low Reward
Now that we have a system that can identify market turning points, we turn to the ZoneTraderPro Price Patterns Chart on the right to determine when we have either a high risk trade or a low reward possibility.
There were 3 trades that had a ZoneTraderPro Price pattern and these 3 trades represented a potential profit of only 26 points.
You may have noticed on the charts that were were two trades that were winners, but not by very much. This is because of the predefined ZoneTraderPro price pattern that we had entered. The location of the high risk trade would have been a great place to exit a short position. But it would not have been a good idea to enter a long, because the market is expected to only retrace to the minor resistance zone. Which is exactly what it did.
The second trade has a low reward possibility because it is very common to just test the low and reverse with an exhaustion pattern. Again, exactly what it did. When you see the reversal from the minor resistance zone, you are prepared in advance for a long trade setup. The same exact pattern occurs at the reversal to the short exhaustion trade.
This is what happens when you have a complete trading system that identifies patterns along with real time information. This is putting it all together into one trading package.
ZTP Order Flow Signal
Use the ZoneTraderPro ZTP Order Flow signal on a smaller time frame chart as a timing trigger. When seen on a larger time frame chart the signal is more significant.
In the chart on the left we see two ZTP Sell signals. the first signal is at a ZoneTraderPro Tick Divergence Exhaustion trade. A stopping ratio is also present. Price tests the high and a second ZTP sell signal is printed. And this results in a significant winning trade.
The ZTP Exhaustion signal is a super powerful entry signal. The signal identifies buyer and seller exhaustion and is an excellent entry trigger to a trade. You need just 3 ticks of price movement to confirm a trade entry, making it an excellent tool for that purpose.
What makes the tool even more powerful is when you see a combination of other order flow signals occurring on the same bar, because that would be indicating a reversal.
The picture on the right is a perfect example. We see a confluence of signals occurring. The Delta Strength indicator is black indicating high volume and the number is high, and a ZTP Extension Zone and Absorption Zone were created. The market traded 3 points higher after the signal was given. Then a sell exhaustion took the market back down another 3 points
With the order flow indicator the chart now identifies when traders are trapped in their trades and price has moved away from there positions. We can now identify several patterns from the useless chart above.
The red boxes indicate areas where sellers passively sold large quantities of contracts on limit orders. The green box is where a large buyer passively bought contracts. That information combined with other information in the bar leads to a Trapped Seller and Trapped Buyer indication.
The chart also features an exclusive pattern called the ZTP Order Flow. This is an exclusive pattern that the indicator suite uses to identify market tops and bottoms. And it is very powerful.
The second way to use this indicator is using in conjunction with a larger timeframe chart. The chart on the right shows a POC sell signals at both of the same locations that we had the ZTP Sell signal was seen on a smaller time frame chart. Additionally there was previous historical resistance at this same price level as seen by the ZoneTraderPro extension resistance zones.
The ZoneTraderPro suite also includes a new concept called Extension Zones. The extension zone is formed when a large imbalance of market orders occurs. The Extension Zone is then drawn into the future and can act as future support or resistance.
In the picture on the left at the high there were many factors at work to signal a reversal. There had been a previous imbalance of market orders at that same price. Then there was a second large market order that came in on the current bar. Additionally at that same price there was a large passive seller also, causing an absorption sell signal. The blue box indicates the Volume Point of Control was also at that same price.
It is an extremely important trading signal that occurs when the VPOC and Absorption occur at bar extremes. These are significant reversal points in a market.
Stopping and Continuation Ratios
The order flow indicator suite also identifies stopping and continuation ratios. A ratio printed as a decimal is a stopping ratio.
In the picture on the right, there are several major indicators leading to a successful long trade. At the low, there is a stopping ratio (.67), along with a ZTP Oder Flow Buy signal, a POC Absorption signal, and a trapped seller.
At the high there is a stopping ratio along with trapped buyers and the next bar followed with a POC Absorption and a ZTP Order Flow sell signal.
The ZoneTraderPro Order Flow Suite identifies these patterns in real time. The bar does not have to close to see the patterns developing in real time.
Combinations of different signals develop several times during a trading day on a daily basis. And these signals also develop on bonds, oil, Nasdaq, and Dow futures charts.
ZTP Cumulative Delta Indicator
The ZoneTraderPro suite is now complete with an enhanced Cumulative Delta indicator. Unlike other cumulative delta indicators, including the one that is packaged with NinjaTrader Volumetric bars, the ZoneTraderPro Cumulative Delta indicator uses a reconstructed tape feature that allows you to filter for large orders.
Any cumulative delta indicator can show divergence, but no other cumulative delta indicator can show you filtered divergence.
As you can see from the chart on the left, the small retail buyers were the buyers as the market traded up, and the large lot traders were the sellers at the same time. Only with ZoneTraderPro would you know not to be a retail buyer, but a seller in this situation.
Also note what the cumulative delta calculation is telling you.the retail crowd was net long by 6000 contracts, but the large lot traders were net short -4000 contracts. Going into the exhaustion pattern, who was right?
ZTP Cumulative Delta Divergence Indicator
The ZoneTraderPro Cumulative Delta Indicator now has divergence built in making it a more powerful trading tool. Have you seen divergence indicators that are based on momentum, RSI, MACD? What good are these? Why put divergence on a 50 year old indicator that is not based on real time information?
The indicator has now been updated to include accumulation and distribution. These are the most powerful signals the indicator picks up because they are pointing to market reversal points.
A separate indicator now tracks Special Divergence. This Special Divergence is also an extremely powerful tool, because it is directly showing market manipulation meant to shake out weak traders and get better prices for the large lot traders. Now you can track when these large lot traders planning their moves.
A divergence indicator is only valuable if it is based on real time information, and not other indicators. The indicator allows you to filter for order size. This way you have the ability to see only what the large lot traders are doing.
The chart on the right illustrates how powerful the indicator is. You can see two things on the chart where the trend short trades occurred. The first is obviously the divergence. The second is what the cumulative delta is telling us also. As the market traded down and large lot traders sold, we can also see lower cumulative deltas from the previous highs. This is represented by the red line I drew on the cumulative delta itself.
Develop a Winning Trading Strategy with ZoneTraderPro
In this video we put it all together. We look at four trading setups to identify patterns and risks. Once this is done we put it all together. We use the Delta Strength and Cumulative Delta tools which are exclusive to ZoneTraderPro. Then the process of creating a trading strategy is demonstrated and examined on for trades that took place over a one hour period on January 3, 2019.