I've recently emphasized that the psychology of the marketplace is as important as the psychology of the trader. If you review my recent AM market updates, you'll see that the purpose of these is to track the market's psychology: the short-term sentiment of the large traders who account for only about 3% of ES trades, but 40% of its volume.
Two trading tools have very recently come out with new products that I'm working on integrating into my own trading (and also into the blog). The first one, Market Delta, is illustrated in my recent post on tracking volume and in my recent Trading Markets article. I find Market Delta to be most helpful in tracking order flow: the quantities of contracts traded, where they trade in the bid-ask matrix, where they trade relative to support/resistance/value area, and how these volume patterns shift over time. A review of the recent AM updates will illustrate this application.
The second tool is Odds Maker from Trade Ideas. To be honest, I've had a harder time integrating this tool into my trading. I'm not by nature a stock picker; I trade equity indices. I very much like using research into historical patterns to frame trade ideas, but have never gravitated to intraday research. Too much noise. As I've noted in my Trader Performance page, I've lengthened my time frame to focus on moves of several days rather than trade intraday patterns exclusively. That's given me the flexibility to do the market updates daily.
Still, Odds Maker is a powerful tool and not one that I wanted to ignore. What it does is go back three weeks (15 trading sessions) in time and scan for all occurrences of a pattern that you identify in the Trade Ideas program. It will then spit out a performance summary to tell you how many trades would have been made during that 15-session period, how many were winners and losers, the average size of winners and losers, and the net profit/loss trading that pattern. The performance summaries can be for the entire market, a selected basket of stocks, or an individual equity. User-controlled features help traders tweak entry and exit criteria and see how these impact profitability.
Major props to the Odds Maker programmers: the program accomplishes a tremendous amount of number crunching very quickly. Once you find a pattern that is promising, you can then track it in real time in Trade-Ideas to see how it performs. The goal, of course, is to not just curve fit patterns to the past 15 days, but find ones that are robust with respect to upcoming periods. (By running reports each day, you can update performance and see if your setups are stable or degrading).
The question, for me, is how do you integrate the Odds Maker setups with a reading of order flow? What I've done is develop Odds Maker setups that test well for equity index ETFs, providing trades lasting 30 minutes in duration. (My next post on the Trader Performance page will describe the setups more specifically). Once the trade is alerted by Trade Ideas, I then go into "order flow monitoring" mode. If the setup fits with the order flow patterns that I'm seeing with Market Delta, I go with the trade idea. If not, I pass it up. Similarly, if order flow shifts during the 30 minute holding period, I'll bail. If not, I'll use the time stop.
What this accomplishes, hopefully, is a combination of one source of edge with another, independent one. By trading a tested setup and then only following the setup when current market conditions are favorable, it may be possible to raise one's win/loss ratio and overall profitability. This blending of system and discretionary trading is what I pursue with my historical studies. Now, with Odds Maker, we can see if intraday historical studies can inform our reading of order flow.
The setups go live next week; stay tuned!