Real Time Divergences, Volume Analysis, and Order Flow

ZoneTraderPro provides 3 different types of robust tools to analyze a trading market and make trading decisions. First there is volume analysis which is created from the cumulative delta. In the picture above, we are looking at a SPY chart as a proxy for the ES. When we analyze the volume we see something very interesting. The number displayed as KP2 is the delta from the high to a low, or low to a high.

The software identified 5 real time divergences as the market tried to make highs. The price rose, but there was net SELLING. Price is RISING, but the smart money (defined as the winners in this battle) is SELLING, and those numbers are strong. Those numbers were 135K, 71K, 6K, 89K, and 26K. Each time that happened, the ES dropped at least 4 points, with the last divergence going over 10 points.

ZoneTraderPro also identified 2 accumulation long trades in real time. This is additional real time information valuable for your trading. If you are in a trade when an opposing signal occurs, you can make the decision to take profits, instead of watching a winning trade turn into a loser. It has happened to every trader. Let us analyze the second accumulation signal.

As price fell, the cumulative delta was indicating a net short of over 128K shares, which buyers were accumulating and temporarily holding the price up with limit orders. But there was also 2 real time divergence signals showed selling as the price rose. That is definitely not good to sustain higher prices. The longs had just gotten trapped. Note the high KP2 values on the lows also. There was also distribution divergence on the ES as shown below.

The Problem with Order Flow?

Numerous software vendors want to claim the order flow is the only thing a trader needs to make a trade. They are wrong.

ZoneTraderPro also has order flow analysis indicators, but there is an inherent issue that those other vendors do not like to address. Order Flow is not a real time indicator. Order flow must occur to be analyzed, and by then, it may be too late to capture a good profit. The other issue with order flow is that price rarely just trades 10 points in a single direction, there is an order flow fight between the longs and the shorts. So how do you pick a side? These trades occurred over a 1 hour period. As illustrated below, the strongest of the ZoneTraderPro Order Flow signals occurred before the 10 point drop, and the black circle indicates extreme volume occurred on that bar. After that signal, which took 2 points off the trade, there was still significant order flow patterns to the buy side.

And here is the point. The real time divergence signals were good for 4, 5 , 6, and 10 points respectively, without having to wait for order flow confirmation. The real time divergences, combined with volume analysis, were the clear and correct answer.

There is still very valuable information in the order flow that ZoneTraderPro accurately identified. First it identified extremely high volume, which is indicative of a turning point. Second it had the proprietary ZTP Order Flow Sell signal which commonly occurs at highs and lows. Next it identified a POC Extension pattern, which occured as the sellers went from passively distributing on limit orders, to aggressive market order sellers. This is all great information, but it should be used as confirmation, instead of trade entry.

Trading With the Trend

Trading with the trend is a real easy thing to say, but very difficult to accomplish in real time because of human emotions. What if we could remove human emotion from that part of the equation? Maybe we should let the market help us with that job.

One way to determine trend is with the $VIX. The $VIX is the market “fear index”. As the VIX is rising, price is normally falling, and vice versa. The VIX is determined by the options market and is reflecting puts and calls being bought and sold. Now here is the interesting part that you may not know. Options dealers are actively trading in the futures markets. When a large order comes in, they must hedge that order with futures. That means when a large option position is taken, an option broker must also trade in that same direction with futures to reduce the risk in that trade.

SharkIndicators BloodHound

SharkIndicators is a NinjaTrader vendor which sells an indicator called BloodHound which can significantly help with this effort. BloodHound is an indicator which can reach out to multiple charts, that do not have to open on your desktop, and create a trading signal. ZoneTraderPro has created BloodHound templates which use the VIX to determine trend. This is the red or green vertical stripes on the charts that you see.

This way when there is SPY divergence, traders can decide whether the VIX trend, is your friend.

The idea here is to only take trades in the direction of the trend. That does not mean that divergence in the opposite direction is to be ignored. It only means you are fighting a powerful signal, but it could be a reason to exit a trade profitably and wait for a re-entry.

The purpose of the BloodHound indicator on these charts is not to call a top or a bottom, it is to determine trend. Other real time tools from ZoneTraderPro can help with the entry. Additionally, we would normally ignore the signals at the open, because a trend has not been established.

If you have not purchased BloodHound, ZoneTraderPro offers a discounted price for the indicator. Contact Chris for those details.

What Does a Trend Day Look Like?

On 12/14/20 there was a 37 point drop starting 60 minutes after the open. There was double divergence at the highs totalling 329K shares (-177K and -152K). There were 5 textbook trades over the next 2 hours.

December 21. 2020

On 12/21/20 there was a 38 point drop starting 7 minutes after the open. There was double divergence at the highs totalling 391K shares (-384K and -7K). 7 minutes after the open, there was green BloodHound background, however this can be caused by a gap in the VIX at the open, which is why there is no trend at the open. 5 short trades over the next 90 minutes.

Then Price Traded over 50 points Higher with 10 Divergence Long Signals

How About a Normal Afternoon? 10 Divergence Signals with Trend, 1 of which went Non-Divergent

ZoneTraderPro recently completed a video which looked at 3 weeks of trades. In those 3 weeks, there were 567 trades, of which 430 were winning trades. Past performance is not necessarily indicative of future results.

The video studied when divergence trades were taken with the current trend. Exits were not studied, but each trade made at least 3 ES points if it was successful.

Using SPY Divergence to Trade ES Futures - MUST WATCH

In this video we look at using divergences in the SPY to trade effectively the ES futures. Also Introduced in this video is a new SharkIndicators BloodHound template that I have created, and its’ use is demonstrated.

Using SPY Divergences to Trade ES Futures - Real Time Example

In this video we look at a real time trading example of a SPY divergence used to trade the ES Futures. We also look at the statistics for this trading idea.

If you would like to see more daily trading examples, feel free to contact me and I will bring you to my live charts, so you can see this live and I can answer any questions about anything in my system.