Mind Over Market Part 3 of 7
Mark Douglas talks about the patterns in collective human behavior. And when a set of criteria is present in the market, there is a higher probability of one thing happening over another.
That people, that other people will come into the market to bid it higher, or offer it lower form here.
Now if you are a quant or looking to be a quant, then I suppose you would look for mathematical equations. But I don’t using too much math in trading, so I stick with order flow, global macro, news, sentiment, etc.
There are absolutely patterns in the market. The difference is that one trader may want to look for mathematical equations, or break down the data points into mathematical equations, and thus formulate a entry and exit criteria.
While the other flow trader is far more likely to find order flow and liquidity patterns. They use these to formulate a liquidity model and mental model of the market. They use it to get into the heads of the market participants and figure out what they are thinking. They find order flow, liquidity, news, global macro, sentiment, stops, option barrier, sensitivity patterns within the market. Then they break them down into an entry criteria and exit criteria.
And that is the difference. One person chooses to find and look for mathematical equations, while another chooses to look for order flow and liquidity patterns.
I prefer the order flow, liquidity, global macro, news, sentiment, etc patterns. I prefer them because I believe they are closest to what truly generates order flow. When I see a 500 pip move occur, I do not assume that a mathematical equation can describe that. I just look for order flow triggers, global macro triggers, stops, etc. I feel that is closest to what makes the market move. Another person may disagree and believe that the mathematical equations cause people to enter the market to bid it higher, or offer it lower.
Mark Douglas then states that the problem is that the patterns repeat themselves on a random basis. He again talks about the mathematical criteria.
And that is the difference.
I do not look for mathematical criteria. I do not expect such mathematical algorithms and formulas to move the market or generate a lot of order flow. I look for order flow and liquidity reasons for the market to move. And as such, I do not subscribe to the belief that the patterns repeat themselves on a random basis. I believe that you can even achieve consistency in a small series of trades if you pick and choose them carefully. There is very little randomness to a series of consecutive order flow winning trades.
The host then explains that mathematical models cannot predict human beings. They seem to be contradicting their own arguments.
The way I see it: If mathematical models cannot predict human beings, then why use them?
The way I see it, if they do not predict human beings, then throw them out, and go figure out what tools, techniques, mindset, and strategies actually can predict human beings. Then you know what will cause people to enter the market to move it.
Douglas:We are obliged to other traders to come in to buy something at a worse price than what we thought was low to make us winners. (for a long trade)
Host: Most of us out there are dependent on someone else to move the market for us. We are trying to identify that pattern.
And that is what order flow trading is about. When you place a trade, even when the big players place trades, they require some other traders to come in to enter the market and move it further in your desired direction if you want the trade to be a winner. Small traders, even big traders are dependent on someone else to move the market for them. Now the big players have the ability to move the market to hit some stops, but they still need stops to get triggered to make a profit.
This is where the video gets interesting. Douglas says the trades are a random event. They state that they have reduced the market down to the terms that it takes someone else to make you a winner.
The part about requiring that someone else make you a winner is true.
Douglas: When you put on a trade do you think about who might come into the market to make you a winner?
Host: No, of course not.
Douglas: If it turns out to be a winning trade do you know who that trader was or who those traders were that made you a winner?
Douglas: Is there any way to know?
Then they joke around about how you can’t figure out who the other traders were that were providing liquidity to you to make you a winner.
Then they state that when a pattern presents itself, they don’t have any idea who will move the market for them.
Difference Between Order Flow Mindset and Mediocre Mindset
This is where the glaring differences between order flow traders and the other traders show themselves. Some traders would just joke around about how you cannot figure out who was providing liquidity to you to make you a winner.
The order flow traders does not treat it like a joke. They prefer to know, as many times as possible. Now technically they cannot truly know in the sense that they are not 100% sure who was on the other side of the transaction. But they can certainly break down the market into various participants, such as breakout traders, macro traders, chartists, retracement buyers, etc.
The order flow traders never wants to place a trade unless they have a strong idea who will move the market for them. Every single time I place a trade I always want to know what will cause prices to move. I want to know what scenario or trigger I am betting on. Otherwise I do not place a trade. There is no reason to place a trade unless you have some expectation or edge of knowing what stands a higher probability of happening.
Mediocre traders believe that there is no point in analyzing who may or may not come into the market to move it. They consider it a fruitless exercise.
Order flow traders on the other hand believe it is one of the most critical aspects of any trading edge.
Douglas: The trading errors come from believing that when the pattern is present that it is going to give me a winning trade on this one. This trade is going to be a winner.
Host: You can’t think that way.
Douglas: That is how the typical trader thinks. The typical trader thinks I am not going to put this trade unless I think it is going to be a winner. It skews our expectations.
The typical traders does think that every trade is going to be a winner. The reason why that skews traders expectations is because the typical trader does not have a good enough reason rooted in order flow and liquidity for their trade to be a winner. The typical trader believes their moving averages, stochastics, and chart patterns are going to move the market. Thus the typical trader thinking. The typical trader thinks they have an edge, when in reality they do not.
As an order flow trader, I always think every trade is going to be a winner. Otherwise I would not place them. Do I have 100% winners? Of course not. When I take a loss and I mad or angry? Of course not.
But I still always expect every trade to be a winner. You may assume that if I take a loss that my expectations were unfulfilled and that can cause disastrous consequences.
Here is the difference between the typical trader and the order flow trader. The order flow trader can believe that many trades can be a winners because they actually have a system rooted in order flow and liquidity that has an edge. The typical trader cannot believe that every trade will be a winner because they do not have such a system.
The order flow trader wants to place really good trades each and every time. That is what they strive for. They always want to either have higher win rates or better reward risk, or a combination of both over the typical trader.
That edge in knowing what particular scenario, order flow trigger, or market participant you are betting on is what will enable you to place better trades. You will know when to cut losses better and you will know when you are able to go for the jugular. Thus, enabling you to reach the higher points in the trading profit ladder.