Trade Execution based on Footprint Order Flow Charts
Footprint charting or Volume Ladder charting is gaining popularity among the traders and most of them are looking out for reading material and videos to understand the basic concept of the footprint chart and how the numbers on the right and left keep building up as the auction progresses. For a novice trader, when he looks at the chart for first few days it is about the buyers and sellers coming at various prices throughout the day. The strong Ask volume being printed green and the strong Bid Volume being printed Red. The color does not necessarily be Green or Red. Various softwares allow different settings for choosing the colours for Strong Ask, Strong Bid, Weak Volume and the highest volume of the bar and the GOM Volume ladder even has a secondary highest volume of the bar marker and so on. After getting used to those settings one moves on to other variables like a Diagonal percentage difference between the Ask and Bid volume and play around with the percentage change and the Tick size change for aggregation of prices. All of that looks so easy at first instance but as we all know that for every buyer there is a seller so when someone is buying a contract means someone is selling that contract as it is a future contract and that is how Open Interest is created. We will not go into the Open Interest part as that is again a completely different logic of analysing whether higher or lower prices are attracting new business or its just a shuffling within the old business. Once done with those settings and watching it each day one finds that it is not a NORM that when the footprint turns green the prices will move up and when it turns red the prices will come down. Confusion ?? Like any other technical analysis stream this also requires a lot of practice and an eagle’s eye to logically interpret what those prints mean. One can easily then find out that when a bigger number buyer / seller shows up then many times the price moves up / down and never comes back again in the same direction for a considerable time during the day or may be even more than a day. Now let us have a look at an example of Trade execution based on footprint charts. I do it based on my 3 minute chart or the 60 tick / 80 tick renko chart for Nifty futures based on the range of the rotations. When average rotations are smaller need to shift to 40 tick and when rotations are large then shift to a 80 tick.
A Buyer or Seller does not become aggressive or weak just by the colour or intensity or the size of the footprint. The buyer or Seller has to move the price in his direction and preferably give a counter reaction at a important reference level to be termed as aggressive.
The above chart is a 3 minute Footprint Order flow chart of 4th March 2016. Mentioning the date was not important as the rules stay the same for trade execution but the point to make here is to realise that the primary trend ( Short term and Intermediate term ) on that day was up and the trades on the side of the trend will be more fruitful than contra trend trades. There is no harm in trading contra trend but being a contrarian requires more experience, better and faster execution skills and is much more stressful than to trade on the side of the trend. Trend followers also keep carrying positional bets overnight so it is easier to add on to those existing positions then to create contra positions. So, coming back to the above chart we had an open outside range and outside value on the higher side with O=H and the auction drifted down in an open drive down and kept rotating within the IB range with Value overlapping but no interest below the previous day VWAP as well as no interest above the yVAH. There seemed to be lack of demand at higher prices but at the same time no supply at lower prices as the volume dropped off post the initial fall. The participants were not fearful of higher prices and were building consensus higher which was obvious from the fairest price of today is higher than the fairest price of previous day.
As we can see in the yellow rectangle above, the range got contracted and there was price congestion with not much volume. When auction gets compressed it tends to burst like a balloon filled with too much air. The price tried to move out of the range on the lower side with selling prints but ended up in a stopping volume bar. The next bar saw buyers stepping in and the bar closed within the developing value, pointing to no interest in lower prices. the next down bar could not fetch any supply. Better entry at this point is if the auction can probe near the lows of the stopping volume bar and confirm the lack of supply. But do the OTF – Other Time Frame players care for a test ?? They just buy when they find the price cheap. Auction was able to counter all selling with buyers just lifting the offers without looking back and the break of the bar high above VWAP was a confirmation of a long entry with Stops just below the DVAL or PDVWAP or the low of the no supply bar or the higher low bar or the day low depending upon the risk appetite. While trading the market generated information we cannot have fixed targets as it will become pointless to predict a target while we are watching the auction in real time. We just need to react to the OTF behaviour as and when our risk management allows us. As it is every trade has a equal probability of winning as well as losing. As the auction probed above the IBH with a thrust in volume the sellers started creeping in but just the sellers creeping in is not enough confirmation of reversing the trade as the price was not willing to budge. We can observe a similar range contraction happening near the IBH and as we saw that if auction could not find anything lower it probed up and now it may act opposite when it cannot find anything on upper side. We got no demand bar below IBH which is a caution for longs but the delta of that bar was still positive. All efforts to break on the upside were inviting more sellers and the buyers up there can be taken as the ones who felt left out or the ones from the lows who wanted to cover their shorts at those prices. The break of the congestion / microbalance or the pullback to the low of the no supply bar or the POC of the WRB down bar post the break of the balance is a confirmation for shorts and the same process continues when the auction continues lower. We again look for any counter effect and react to it with either covering the shorts or by flipping positions again. Few traders may not enter shorts at those micro levels and look for adding longs again on a confirmation when the auction drifted down.
Now the question which arises here is why 3 minutes and why not 5 or 10 or 15 or 30 minutes time frame chart ? Well, the reason is I would prefer even 1 minute or lesser as what I am looking for is the buyer or seller at a particular price just on that particular time and when the time frame increases we would be looking at the aggregated buyers and sellers at a particular price for the n number of times the auction revisits a particular price during that bar. Visually looks appealing due to the higher number in volume and the higher intensity of the greens or reds, but practically it is not of much use for trade execution. Let us see how a 15 minute and a Daily chart would have looked like at the same price with the same imbalance percentage and the tick aggregation settings.
Looking at the above two charts I don’t think I have much to write as the charts are self explanatory. Higher time frame gives the signal much later and unlike the conventional analysis we are not sure of the lasting effect of that confirmation at its based on the information that the market itself is generating. Mind it, we are talking just about Footprint and Order flow so mixing up fractals or value area or other stuff will obviously make us go long almost near the point in the 3 minute chart and will make us hold those longs as the HL is not broken yet on 15 mins. Coming to the Daily charts, there is not much information we can use for trade execution if we keep the same settings as the 3 minute chart. What I do for daily is to keep a higher tick aggregation density and a higher imbalance percentage and use it as a reference to see where did the buyers or sellers come in on the previous day at a particular price and with how much volume at that price and how much net delta at that price and moist of the times that will be near a reference level based on Market Profile and I post those Footprint Charts for the ease of reference at a later date.
That’s all i have to share time being and hope it helps in making informed trade decisions and gives an insight into Orderflow trading.
Would like to end here before it gets too boring.
Happy Trading !!
All our brokerage clients of Angel Broking can now access ProAMT club Live trading room for free*. You can fill in the contact form at Justfintech.com/contact to get in touch to open an Equity/Futures & Options trading cum demat account and avail this unique add on to empower yourself with the power to look at the Market Profile and the Footprint charts where we keep a watch on the buyers and sellers trading the auction in realtime. Well, we know that zero/low brokerage does make a difference to the slippage but we thought of this innovative concept to provide a live trading room access to our brokerage clients so that they get an edge in their trading just at the cost of brokerage. This concept which is widely popular in other countries is now introduced for the first time in India, hence creating a difference in how brokerage is done in India.