Mark Douglas 2/7 Order Flow

[Music] okay uh what I want to get we kind of want to get into now is uh is to start building a foundation or understanding that not only do we not know what's gonna happen next there's no way to know literally there's no way to know it doesn't see it the industry is a set up that way the industry is not set up that way to allow you to think that there's no way to know but I'm gonna prove to you that there isn't there is no way to know and a problem and the thing is when you when you really grasp why you can't know then you won't think that there's some way to eliminate or reduce the risk because yeah if I go into a trade if I for example if my if I do my analysis I'm going to step into this analytical process and I come to a conclusion like my analysis makes a prediction I put on a trade the trade works is it not going to be natural for me to think that the market is moving in my favor for the same reason I put on the trade for the for the basic screen-based trader like we are okay yes now that's all professionals I'm not saw one managers or whatever with the typical screen-based trader that has almost never the case there's almost never a relationship between the reason why you put on the train the mile marker went in your favor and even if there was a relationship or correlation there isn't any way for you to find out a prove it Cheryl that means that you don't never know if your analysis is ever right it'll be right in terms of you'll know if it's right if it made the right prediction you won't know if you had the right reasons for making the prediction and if you don't know that you had the right reasons then there's really nothing to be right along about there's a lot of primary fears of training as I'm afraid of being wrong hello there's nothing to be wrong about because you don't ever know if you ever light see when you start understanding the nature of this business the way it really works you'll start shifting your perspective and say you know what there's nothing to be afraid of here I can't prove if the reason why the market moved in my favor was the same reason life but on the trade you see the problem is as soon as I think that as soon as I think that I know the reasons why the market moved in my favor I will just naturally assume I can duplicate the process it'll seem as if I'm in this winning trade I know why I put the trade on I'm assuming that the markets moving in my favorite for that same reason allowing me to think that I knew what was going to happen and I knew what was going to happen then guess what I've eliminated the rest that is the most dangerous thought you can think as a trader it's thinking you've eliminated the risk the worst-case scenario in thinking that we've eliminated the risk here's a condition called mine freeze does everything know what I mean by mine freeze yeah I think you know what's gonna happen you know you've got three or four winning trades in a row you know and it's like hey I get an I get the next signal I got this yeah I got the mark my Bold okay I'm VL I'm gonna load up on this one so instead of being you know uh you know a hundred share trader you've moved to a thousand shares or 5,000 shares or 10,000 shares or whatever so so as you make this money management error in other words you're now stepping into the realm of trading far more than what your account size would say is prudent all the market has to do is go against you just a little bit just a little bit and because we're so in other words our level of commitment they our trade size would be would be corresponding or correlated to how convinced we are that the markets gonna go in our favor so that just a little bit against us and we go into a state of mind freeze in other words our expectations of what's going to happen are so far away from the reality of the situation that our minds cannot process the experience appropriately it shuts down and as a result we sit there and watch the money market take our money away as a block moves against our position until like an innate sense of self-preservation kicks in and but that level is different for everybody that level of self-preservation where our minds chicken and self-preservation will work extends gonna be different for everybody and we just like snap out of it and get out of the Train or or like to say we're losing one more dollar losing one more dollar is one degree more painful than admitting that we're wrong okay in other words in other words everyone has life experiences memories that fall into a general category of what it means to be wrong like this is like like these are the negatively charged beliefs all of all the ways that we can be wrong in our lives that if we have experiences that tap us into this pain we will experience it all the beliefs and all the experiences that we have that go into our memories just in a general category of what it means to lose this is all negatively charged painful emotional energy well in the market when the market is when the market takes away when it's more well in other words it is more painful to lose one more dollar than it is to admit that we're wrong is what we'll get out of that train this is not a good way to treat people this is not gonna listen I can assure you a success I get like I said a little early we have to we have to trust ourselves we cannot be most people never recover the traitors I work with I would say that for the most part most people never recover from it they can if they really want to work at it I'm not saying they can't recover from it I'm saying that they don't want to do the work they don't want to process they don't want to go step in the process of what it requires to do the work and recover from the mine fees experience now let's say there's no spin I'll keep on training but they're so damaged that you know because because mostly when people experience a live experience on understanding the underlying dynamics of what caused it and what caused that pain what is that what do you think they think their way out of it is what do you think how do you think they're gonna compensate for more analysis and of course the more analysis the more possibility of analysis paralysis and the next thing you know people spend years you know read it learning how to read the market they become absolutely excellent analysts they really do they can't put on training because there's just too many variables to consider and one of those variables that I might think I might not have might have overlooked but the one who's gonna cause me to be loose cause me loose and so therefore I can't I can't I can't get past appearance right so okay so so what we're gonna do is I want to do is basically give you give you some it was a sort of a little bit of a evolution of how I came to the point where I recognized that you know we don't know what's gonna happen next and the risk always exists and these are some of the things like you know these experiences that that initially happened in my life that I really kind of just you know that I took for granted that you know I don't you know that I really don't need to know not only that there's no way to know but you understand all the flow there's no way to know well maybe I should give you order for first we'll see let's just try this okay how do prices move places move is function of simply when imbalance between a buy and sell orders flowing into the pit or for you in the exchange it's that simple when there's an imbalance between the number of buy orders flowing into the exchange and not worth so long as the flow into exchange then do the exchange so for example if we have a tense well 9:07 and the last price is nine what we have is we have people we have traders and offering a 10 now now you have to you really have to have there's a couple of things taking consideration one there is a speculators interesting how we we know that we're speculating on price movement and yet do not think of ourselves as gambling and yet we will define ourselves as speculators well respected leaders who don't gamble okay we're speculating but we all gap okay anyway yeah what we have is a situation where we need price movement to make money the price has to move for us to make money it's that simple whereas for example there are there are several market participants who don't want the price to move these are people who use the markets for legitimate commercial purposes these are your hedgers these are people who are naturally long or naturally short whatever it is that they do for a living so for example if I'm a farmer and I'm planting my corn in the spring anticipating harvesting it in the fall I am the moment to think about this the moment that I decide the moment I decide to plant my corn and how many acres I'm going to plant and what might and what I anticipate my my yield to be for those acres I am long corn I am long the corn market I didn't all I did was decide to plant the corn I become long the corn market why because what if the price fluctuation occurs between the moment I decided in the moment I harvest my crop is going to determine how much money I get so I get a million bushels or hundred thousand bushels whatever the whatever the price of corn is when I harvest it is what my is what my income is gonna be so as a farmer I'm thinking okay my cost of production is X number of dollars per bushel the price of corn let's say the price of corn is at seven dollars a bushel right now in April I don't know what its gonna be in October or November and the slightest idea that's gonna be I'd like it to be ten dollars a bushel or nine dollars a bushel but I don't know and and what I say eight dollars a bushel start out with a seven let's say they and eight dollars a bushel you know what and my cost of production is uh let's say five dollars a bushel well I be satisfied with a three dollar bushel profit yeah I think I would so what am i what am I gonna do I'm gonna go into the futures market and sell the equivalent amount of futures contracts I'm selling my crop in advance so if I'm anticipating let's say a hundred thousand bushels and one futures contract is five thousand bushels what am I gonna do I'm gonna sell twenty contracts if I think I'm gonna get a million bushels what am I gonna do I'm gonna sell 200 contracts and what I have done is I've locked in my price and eight dollars a bushel if my price is $8 a bushel I've locked it in at eight bucks my cost of production is three or my cost of production is five that means I've locked in my profit at three dollars a bushel no matter what the price is in October but in essence it doesn't matter what the price is in October because I've got my price already so a price can change as much as it wants but what a lot of people a lot of speculators people who don't understand the markets don't realize is that when hedgers enter a market knows what I'm going to show you that it's an imbalance between the number of buy orders and sellers that flow into the pit that determine whether the price moves up without and because because we might only be trading you know five or 10 min ESPs or even as big traders we might get into you know in terms of shares of stock might get it's pretty spritzee never get about a pretty significant amount of shares people don't realize is that there are commercial and institutional entities that can that can put on orders massive orders that can affect the price spec the imbalance between the buyers and the number of cells coming into the pit and think that they're taking risk that they can't nobody would do that because it's too risky to do it wrong it's not risky they're eliminating the risk they're putting in orders that can have a huge impact on the price and they're eliminating the risk because they're already naturally long or short you guys you sorted with me on this so for example if I got a I got an electric motor manufacturer and my sales manager comes back on it with a huge order that you know you sold these huge generators that are you know you know five hundred thousand dollars a piece or whatever and he went oh some foreign country and sold ten or something the moment he signed the contract the moment you got the purchase order but now the amount of cones and it takes to make these Jen of copper that it takes to make these orders they are short copper unless they already have it in their inventory chances are they don't have it in their inventory because let's say they're running at high capacity and what they have in their inventory is just enough to make the orders that they already have and because they're not even to start making the motors for six months from now or whatever it's like they don't want to acquire the actual physical inventory of all that copper what are they gonna do they're gonna go into the futures market and buy the equivalent number of copper contracts that they need to lock in the price of copper when they need it to use it so that they can so that they can guarantee their profit margin that might be a huge order now if I just happen to be training off a moving average my technical indicator off a moving average on you know in the copper at the time that that order hits the pit look it's the exchange you know if I if if I'm on the long side if my moving average just shows me you know about two or three minutes before their order huge order hits the exchange I'm gonna find myself in a winning trade my reason for putting on that trade has anything to do with why the market went up nothing absolutely nothing it's just when I call like a positive synchronicity a plan synchronicity with the order flow well let's get into the order flow okay so for example what does it take if the last place so so here I just wanted to make this distinction between speculators and hedgers hedger is when they put an order in the market they don't want to make the price move in other words if I'm this this this generator this manufacturer of generators and I and I need to lock in the price of copper to lock in my profit margin when I put my hundreds of capital owners in the market I don't want to force I don't want them to create such an imbalance in the order flow to cause the price of copper to go up because because I'm increasing my average price what I want to do is do it in a way that doesn't create price movement so that I maintain you know my maintain I am rich but I maintain a good average price because what happens is this is that what you have is that for us as speculators to make money there's only one there's only two ways to make money that's it everyone's trying to do the same thing everyone has to buy low and sell high or sell high and buy low there's no other way to do it there's absolutely no other way to do it and the speculators screen-based typical screen-based speculators we don't have the let's say in many cases or in any case really not many well we don't have the financial or the psychological resources to actually move the price ourselves whereas you have to understand that there are plenty of traders out there who do there are a lot of hedge fund managers and Vick traders who can under under a lot of different circumstances actually create price movement purposefully they purposefully look for situations but what I call like the herd masters okay where they're looking for they're looking for patterns you're looking for chart patterns where they know that a lot of what they call weak weak long you've heard these words we've long as the weak sorts and gone into the market and what they want to do is they want to force the weak Long's outs and they can think and think and buy they can buy they can buy get into the position at a lower price when they want to force the weak weak shorts out so they can they can sell at a higher price and they look at chart patterns where they know that expect it did the typical speculator has gone into the market hit the mark with huge orders or if the price lower or higher cause the typical speculator the panic because don't cause on the panic which which creates further movement in the direction against the speculator but what they need is inventory I'll explain how this works okay so for example buy low sell high sell high buy low if the last price was nine how does it get to ten yeah well Buy in other words no words look at it this way if you look at it from the exchange perspective of other electronic change there's electron exchanges exchanges you have executable orders and for every buy order there has to be a seller or they can't execute a trade an electronic exchange is the same way there has to be somebody on the other side of your trade whether it's a computer program that was you know that was designed by a major brokerage firm like Goldman Sachs or whatever or an actual individual it doesn't make any difference there is somebody on the other side of your trade in every circumstance in every single circumstance which means that if you you buy at nine and the price goes to ten or eleven who's ever on the other side of your trade is losing money the money that you're gaining is the money that's coming directly under they'll account for the clearing firm into your help and when Larkin goes against us the money that's flowing on an account going into the clearing firm and going directly into the columns let me let me on side of the trade so what this means is that if the last price was nine Kyle gets the ten is that there were no executable in other words I have a certain number of buy orders flowing into the pit at ten there has to be there has to be an executable sell order to match up with every buy order if you're not getting this let me know there has to be an executable sell order to match up with every buy order for the price to go anywhere if there is an even amount of buys flowing into the exchange at any particular moment with with the number of cells as there are buys the price will don't know where you with me on this if there's an even number of buys and an even number of cells executable by the cells at this price the price goes nowhere it doesn't go up to ten until there aren't enough sell orders at nine to fill the number of buy orders where the people who want to buy the number number of contracts or chairs or whatever available on the buy side and then the electronic exchange what it'll do is it'll move the price up to ten to find it sell orders to find executable sellers if there aren't enough executable sell orders to match the buy inventory flowing into the pit then it'll move it up to eleven when we're dealing with physical exchanges people actually did this in other words what you had are actual traders in the floor in the exchange in the pits or whatever who actually bid the price up now if they couldn't find any of the traders in the pit they could execute a trade at 9:00 at they've been it up to ten or bid it up to eleven to find someone would someone who would sell because the whole idea is sell hide buy a little buy low sell high so the higher the price goes the theory would be the more attractive it would be was someone to come into the pit and take the other side of my trade guys with me on this so what it all boils down to if that price movement is simply an imbalance between the number of buys and number cells flowing in this change that's it that is it it has major implications for example when I you know I started trading us in nineteen seventy eight and I was working in the cursor casually of business of managing a commercial casualty agency just before I mean just looked pretty much just before I moved to Chicago I signed a three-year contract with this agency for $360,000 a hundred thousand the first year one 20 in the second one hundred and one hundred million third so I mean I was kind of financially I was I was you know I was doing good specialist in my early thirties and but shortly thereafter and something happened well also I also did like managing Iberia like being in the insurance business and I certainly didn't I thought I'd like management I did not like management at all I was a horrible manager yeah yeah anyway just it's not something does not sound like my brain was into but ever any case something happened to me where where I felt compelled to move to Chicago because I was I got a call from like Ashurst invoker in the building we were in and I opened up a commodities account and started trading gold and silver right off the mat and lost you know my first couple of steaks you know whatever the I think I you started on the $10,000 account lost that you know did another five or six thousand dollars lost that changed my brother went to a different broker in sheriff's and thinking that he would do a better job and know ideally this is in 1978 1979 what we understand about the markets and what's available to us or virtually today were non-existent back then we didn't even have computers maybe didn't even have personal computers the only way to even know what was going on was to call your broker 10 times a day or whatever and also we didn't have instant execution you know what you had is a situation where you want to execute a trade you got to call your Booker you got a dial phone he has to answer the phone if he's on the other line with another customer you had wait and then once it once he answer the phone of course he had to have a ticket the ticket had to be wired down to the exchange once I got through the exchange I got the phone clerk at the exchange the phone clerk on another ticket and gave it to a runner the runner then gave it to the appropriate broker executing trades for that particular firm in the pit and then and then both would based on supposedly open outcry actually you know say hey I've got I've got five to buy a five to sell at this price and then if someone else whatever another baby another voltage firm or just a local some guy trading their zone work house standing in the pit get the order hit the bit of the offer whatever the price was and then the member of the floor broker would you know record the trade and I'd get it give it back to the runner the water would then go back to the home clerk the phone clerk would go and call up or wire it back to the back to the Beaufort's house and then the broker had to get back to you with the film okay and all this cost an average with the big firms like Merrill Lynch and hunting the cheerson on like 100 between 130 140 thousand a round turn one contract one contract trade between 130 hundred forty bucks now I can't tell you how many times I put in an order later on how many dozen but just just giving example if I put in an order you know to buy silver at you know nine bucks an ounce or whatever okay then you know I'm buying at nine dollars an ounce and and the market comes down and hits my price but I'm not guaranteed a fill unless it goes one tick through my price so if it hits my place and goes back up I don't even know if I'm in a trade my baker doesn't even know if in my trade if the floor broker hasn't gotten back to him yet yes the floor broker is busy it might take twenty minutes half an hour yeah if it's what the exchange classified as a fast market he was even I would even to get back to me until maybe an hour I remember what it was so I could be in a winning trade and not know it I could be wanting to take my profits and not even know if I'm in a winning trade if I go ahead and just assume that I got billed and you know and and and swappable I could end up being that short you know the markets going up and not even know it is though maybe I didn't anything not that sort not know it the old timers with the Tony you know what I'm talking about was a rough way to trade people yeah yeah yeah this was a rough way to drain it because not only that even checkout was no we didn't have we'd have place available with any prices available we had to call our broker you know 20 times a day worth now wasn't that wasn't now basically what you did was trade off a daily bar chart from The Wall Street Journal no as you get the Wall Street Journal morning and you do your bill hit Tony yes their commodity perspective light yes it gave you like three or four months of bars daily bars and they gave you some room on the right there that the add your own bars in yes so yeah it was it's like you know there's things that you learned that you know you sort of take for granted about the way you develop as a result of it but anyway this is this was really a tough way to trade and so so what happened what happened with me so you do understand the concept that is simply an imbalance an order fall right there ready already working on this if there's more buy other stuff so why did the market why did the market go up today more buyers and sellers why do the market go down today more sellers and buy orders now the reason why there were more buy orders and sell out at all how do we know why in other words every one of us in a room in a room has a read everybody contributes to everyone contributes to the order flow which means that everyone contributes to the up-and-down takes everyone every order contributes to the up and the down ticks so why did the market tick up well you basically the reasons exist in the minds of everyone who put on a trade that contributed to the imbalance between the buys in the cells in that moment and since the exchange does one when we put out a buy or sell order in that you are not required to attach your reason of putting you are not required to attach your reason for doing it one other one oh yeah I make every give the reason yeah right yeah that's it since we are not required to attach our reasons and neither is anybody else then we don't know why other people are doing it and what's interesting is that as typical screen-based traders we are strictly dependent on what other traders do after we get into a trade since we are not we don't have the financial or emotional resources to be able to move the market ourselves I'll talk more about that a little bit since we do not have these resources then we are strictly dependent on what other traders decide to do after we get into a trade and the reality is we don't have the slightest idea why what they're going to do or why they're gonna do it in other words orders are going to flow into the exchange after we get into a position we don't know what the volume between we don't know what the imbalance is gonna be in other words there could be a huge order that hits the market in our favor but there happens to be enough Oh huge buy order we just got in there's a huge buy orders that hits the market a few minutes after we get into a trade but there's enough sell order inventory in that moment in that moment to absorb all that all that by volume price goes nowhere five minutes later that buy order could create a panic and the market could shoot right outs like this why did it happen because for whatever reason whoever put the mortar in however many traders did it if for whatever reason they do it we'll never know unless we have a way unless the exchange the reality is the exchange if the exchange gave us it gave us the names and you know the accounts and the names of all the people who contributed to the order flow in any given moment so we could go ask these people why they put the orders in the market then we would know why the price went up or why the price went down then we would know the real reasons everything else that you hear or read is basically that people are making up and I'm not kidding and I'm really serious about that it's people's stuff now if people are making up because they don't know people don't get on TV or write articles and do it in a way when they don't sound like they know what they're doing or not gonna or not gonna do it in a way where they don't sound intelligent or that they know what they're talking about so even that they don't come right out and say directly this is why or that's why they're implying that they know which gives us the idea that somehow another it can be known and there aren't there are exceptions because if you do know large fund managers and and traders who can move the market and put in and they do put in huge orders and you happen to know that this didn't use huge orders get hit the exchange and there wasn't enough inventory on the other side to to absorb those orders and that's the reason why the market went up if you don't that directly then you know why it happened and certainly the guys know the people then put those orders in they know why it happened because they're the ones who get it for the typical screen-based trader this information is all for all intents and purposes unknowable so the implications are that regardless of how sophisticated your analysis is regardless of how good you think it is it isn't telling you the reasons why even if for an example let's say we're trading a support resistance pattern okay we're trading you know we're training a retracement okay so what we have here and I put it and I put a buy order in right here and the market shoots up is it possible that the reason why other traders came into the market and created an imbalance in the order flow is because they happen to put orders right in there - yeah it's very possible it may even be likely is there any way that I know that no I don't know if you lie it's unknowable to me you think that what I'm saying isn't correct all you've got to do is challenge somebody every time you hear somebody say but my price would not because of this other than an imbalance and buy and sell orders every time you hear somebody give you a reason say prove it come on you know that where's the information that you have access to that tells you that that's the actual reason why tweet the people on CNBC they prove it I guarantee it'll shut up because I can't

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Views: 46,055

Rating: 4.9345694 out of 5

Keywords: Mark Douglas, trading, order flow, seminar

Id: gPwe-UMIq2E

Length: 28min 10sec (1690 seconds)

Published: Fri Apr 06 2018