This is a condition where the market tests the prior day’s high or low or the current IB high or low by 1 tick before finding the opposing force pushing it the other way. This is generally considered a failed test of a significant area.
Price Absorption occurs when aggressive market participants Hit the Bid or Lift the Offer on high volume, and are met with participants who “absorb” all of the orders. The effect of this price Absorption is that price moves very little or not at all.
Price Absorption can often lead to short-term reversals when the original aggressive participants give up and close their positions. See Absorption Reversal.
An Absorption Reversal Long occurs where aggressive sellers attempt to move the market down through a key level by hitting the bid with heavy volume, but are met with buyers who “absorb” all of the selling.
This price Absorption by the buyers prevents price from continuing in its previous direction and once sellers give up and cover their positions, a move in the opposite direction can take place.
An Absorption Reversal Short is the opposite, with buyers attempting to push the price upwards at a key area, who are met with sellers absorbing the volume, therefore causing a reversal short.
Absorption generally occurs in key areas and is best observed during live market action, video or replay of market price action.
Aggressive Participants are those traders who are willing to trade at the best available market price at that time. They are not willing to wait for a price to be filled at a specific level and end up Crossing the Market and “Lifting the Offer“ when buying and “Hitting The Bid” when selling.
The level of ‘aggressiveness’ of these participants can be measured by Volume Delta. The actions of Aggressive Participants can often provide clues to traders as to what might be likely to happen next over the short term.
See also Passive Participants, Volume Delta, Reloading.
I say this when I notice that there is an automated, algorithmic computer system executing trades at an important area. Generally, I observe this by watching the DOM (Depth of Market – see below) and how a certain level trades. Algo’s usually have a big order that they seek to fill but they don’t want to show how much is actually out there to prevent adverse movement by the market when it is recognized. For example, if a fund wants to buy 100,000 contracts, it will not just bid that quantity at a given price. It will generally break that order down into small increments and assign a range for the algo to execute. I cannot describe in words how I detect it, but I can do so through the use of a video.
In order for you to understand what I’m looking at, you must understand auction market theory. If you see the market as simply a bunch of flashing lights, spaghetti lines on your charts and numbers, then you are likely someone who is approaching the market with similar odds as a gamer and it will be hard to attain consistency. Your broker loves you though. Put simply, the market is an auction. Price is set through a process called “price discovery”. This is where the buyers and sellers will continue to move the market in one direction or another until the opposite force is motivated enough to step in and stop the advance. The market will auction as high as it needs to in order to find sellers or as low as it needs to in order to motivate buyers to see it as “relatively cheap”. The tool most commonly used to “gauge” the auction is Market Profile (MP). I can probably give a 6-hour lecture about MP, but you can research it on your own.
A Bid is an order to buy from Passive Participants. These are orders that are waiting to be filled. They could be withdrawn at any time.
This represents the maximum number of points where profits were taken on a given trade.
Same as HVN/LVN described below, but it is derived from the composite profile rather than an intraday profile.
A composite profile is a volume profile that includes data of more than one session. I only have interest in profiles of data occurring during regular trading hours. Sometimes, the big picture requires me to see what is happening over several sessions to determine high volume areas, low volume areas and significant multi-session VPOC’s.
I do not base my composites on a fixed time frame or number of days. The composites I use are based on the high or low of a rotation I’m trying to get volume information on. Please understand and distinguish the difference. The market doesn’t care that I have found out what the 10-day or 30-day VPOC is. Constraining my research to a given time interval or period is illogical and is not my style even if it might work for others.
In order for the market to move either up or down in price, participants must “Cross the Market”.
For price to move up, buyers must be willing to “Cross the Market” and trade at the next available Best Offer price, rather than waiting for a Limit Order at the Best Bid price to be filled. This is also known as Lifting The Offer.
Alternatively for price to move down, sellers must be willing to “Cross the Market” and trade at the next available Best Bid price, rather than waiting for a Limit Order to be filled at the current Best Offer price. This is also known as Hitting The Bid.
Participants who are willing to “Cross the Market” and trade at the current market Bid or Ask price, are known as Aggressive Participants, because they are willing to accept a worse price than they would receive by waiting for a Limit Order to be filled at a price other than market.
This describes the LEVEL 2 data screen representing the bids and offers in the market. For the ES, there are usually 10 bid levels and 10 ask levels in most traditional trading execution platforms while others have full depth. We like the Rithmic feed best, because it is one of the few providing full depth and not limited to only 10 levels. You can get a demo of a DOM from a variety of vendors for free.
Expectancy provides the expected outcome of a trading system over a given series of trades. Expectancy can be measured in ticks, dollars, pips etc.
The formula for expectancy is (Average Win * Winning Percentage) – (Average Loss * Losing Percentage).
Expectancy is used to:
- Measure the performance of a system, setup or trader over time.
- Assist in setting performance goals.
- Help to determine what part of the system (from the expectancy equation) might need improvement.
This is similar to 1-Tick Test described above. It is when the market moves to a significant low or high, 1-ticks it and then we see a forceful move the other way usually on strong volume. The market has tested a significant low or high and was unable to trigger continuation. This leaves many trapped and a push the other way flushes them out.
A Flush generally refers to when weaker hands in the market exit their trades, often creating a swift reversal of a move that happened earlier in a session. Generally the term refers to where a market moves lower, reversing or at least partially reversing, an earlier move up.
A Gap Zone is considered to be ‘closed’ when the market trades back through the unauctioned area and trades the high (for a gap up) or low (for a gap down) of the day prior to the session that first created the gap. A Gap Zone can be closed during the same session in which it was created, the next day, many days later or not at all.
A Gap Zone Fill may be perceived as significant as the market has successfully negated the Gap Zone and potentially invalidated the reasons for such a move in the first place. This may be a trigger to force further covering or re-positioning by certain market participants.
This describes a range of prices where there is a particularly high amount of volume or bulge in the profile.
Why is it significant? Think of why it would have so many contracts…why did so many trades execute at these prices?
When trading through HVN’s or VPOC’s, the market tends to be “stuck in the mud” or my favorite example:
Prices trade much like a golf ball bouncing in the rough. (see above) are high volume nodes.
But there are times when you have a bulging portion of the profile that does not have
enough contracts traded there to make it a VPOC. This is described as an HVN.
See also LVN – Low Volume Node
Hitting the Bid is when sellers are willing to trade at the next best available Bid price, rather than waiting for a Limit Order to be filled at the current Best Offer price. By being willing to “Cross the Market“, and Hit the Bid, the participant is considered an Aggressive Participant.
Traders/institutions often have large orders to be executed in the market, and placing a large order all at once in the order book could be disadvantageous, as it may reveal their intentions. To assist them with this, the trader/institution can use a hidden, algorithmic type of order known as an Iceberg or as I often say Ice.
An Iceberg order works by placing a small portion of the entire order in the order book, and once this small portion is executed, quickly adding another small portion. This process is repeated and small amounts of the original order are continuously ‘fed’ out until either the entirety of the original order has been exhausted, or price moves away from the location. This technique is algorithmic and can be very fast. The process of adding more contracts to the order book is known as Reloading.
Traders can often detect an Iceberg order by observing:
- price not moving
- a higher volume of contracts being executed at a specific level than it would usually take to move the Best Bid/Offer to the next price
- contracts available at a specific price continually being ‘reloaded’ as orders are being executed
Iceberg levels can often be potential support/resistance areas due to the large volume that was traded.
The Initial Balance (IB) is a measurement of the extent the auction has gone one way or another during the first hour since the open. It is defined as the high and low of the first hour of trading. This is the traditional definition that you will find. Just like with everything else, my view on this is not really “traditional”. I pay attention to not only the high and low of the first hour of business (this is usually when the main order flow happens), but I also pay attention to how it is happening. Is it a straight shot down like what occurred on this day?
Generally, if the price discovery process is fast like it was on the link above, then ES will go into a wide rotation up and will provide more scalping opportunities. If it grinds down the range in the same time period, it will likely have very little rotational action and will have a steady seller pushing it through the IB-low in a choppy fashion.
Lifting the Offer is when buyers are willing to trade at the next best available Offer price, rather than waiting for a Limit Order to be filled at the current Best Bid price. By being willing to “Cross the Market“, and Lift the Offer, the participant is considered an Aggressive Participant.
A limit order is an order to buy or sell the market, up to a maximum or down to a minimum price specified.
When a trader places a limit order, the order is placed in the ‘Limit Order Book‘ where generally, there will be other limit orders already queuing. The position in the order queue can have an impact on the ability of traders to have their limit orders filled at the price they have designated.
Limit orders can only be filled when:
• The market price is equal to or better than the specified limit order price
• All of the other orders that are ahead of the trader in the order queue have been successfully executed
• Additional market orders are able to be executed against the limit order
While limit orders are often used for trade entries and targets, how limit orders are used greatly depends on the trader, their motivation and their trading strategy.
See also Order Book and Queue (Order Queue).
This describes a range of prices where there is a particularly low amount of volume or dip in the profile. LVNs represent areas where not much facilitation took place between buyers and sellers. This is generally an area that gets quickly rejected by participants. In the golfing example, the market behaviour is similar to a “golf ball bouncing on concrete”. It is relatively fast and aggressive.
Market on Open Orders (MOO) are orders that are submitted by longer timeframe participants prior to the opening of the RTH session. The orders are filled at the market price as soon as the RTH session opens.
MOO orders can push the market in one direction after the open and help to create the initial leg of the Opening Swing.
Market on Close Orders (MOC) are orders to be executed at the close or just after the close of the RTH session at the market price. These types of orders are generally used by longer time frame participants who want to ensure that their order is executed for that day, and that their execution price is as close to the closing price as possible.
MOC orders can contribute to elevated trading activity during the closing period of a session.
A Naked or Virgin VPOC is the same as VPOC described below, except that it has not been touched in the ensuing sessions and, therefore, remains “naked” or “virgin”. Significance of a Naked or Virgin VPOC is that this is the price that saw the most acceptance by both buyers and sellers, but the market has not gone back to see if this still represents value. Naked or Virgin VPOC act just like price gaps in many ways.
This describes the overnight Globex session which takes place after 3:15 PM CT of the previous day up until 8:29:59 AM CT of the current day. I include the last 15 minutes after cash closes as part of the Regular Trading Hours (RTH) session simply because OTC transactions on equities and futures continue to come in at that time, so it provides valid price and volume data.
The high of the overnight session is abbreviated to ONHI and the low of the overnight session is abbreviated to ONLO.
An Offer is an order to sell from Passive Participants. These are orders that are waiting to be filled. They could be withdrawn at anytime.
The Order Book or Limit Order Book is the list of limit orders that have been submitted to the exchange to be executed at the various price levels.
The Order Book can be represented as volume bars in a DOM or as bands of color in the heat map in BookFlow.
Traders sometimes use the Order Book to help them make trading decisions by observing where the other traders add or remove liquidity, and noting how the market interacts with the liquidity when it reaches those price levels.
See also Queue, Spoofing, DOM – Depth of Market.
One Time Framing is a way to describe how the auction is performing over 2 or more bars. One Time Framing can help to provide an indication of which side is in control.
One Time Framing Up indicates that the low of each bar is higher than the low of the bar directly preceding it (higher lows). There doesn’t have to be a higher high for this to be valid. One Time Framing Down indicates that the high each bar is lower than the high of the bar directly preceding it (lower highs). There doesn’t have to be a lower low for this to be valid.
Once the pattern of higher lows or lower highs has been broken, One Time Framing is considered to have ceased. The concept of One Time Framing can be applied to bars of any type of periodicity, but is traditionally used when referring to Weekly, Daily or 30 Minute bars.
This describes all participants with a time frame that is greater than the one you are in. Major trending or vertical moves are completed by larger participants who are using a greater time frame than the one you are looking at. When the OTF-participates, it generally takes many prices and a lot of volume transacted to complete an order. Funds, swing investors, governments and financial institutions in general are operating at the OTF level. They are recognized when we move from “horizontal development” to “vertical development”. They are also recognized using the opening swing, initial balance and other indications.
Passive Participants are traders who have placed a Bid or Offer Limit Order in the market, and are content to wait for these orders to be filled at the price they have pre-selected. Passive Participants can withdraw these orders at anytime prior to being filled.
See also Aggressive Participants
See Weak/Poor High or Low below.
Stock index futures, stock options, stock index options and single stock futures (SSF’s) all expire on the 3rd Friday of March, June, September and December. This day is referred to as Quad or Quadruple Witching Friday.
Derivative traders will be more active during this time due to the combined effects of exercise, delivery, hedging, arbitrage as well as speculative options trading and futures trading activity during quad-witching. Generally, there is a 50-70% increase in volume leading up to this day. Although the overall action doesn’t look like other days, underneath the surface, there is a lot of trading occurring to hedge delta and to attempt to pin prices in order to generate or hedge returns.
When a trader places a Limit Order on the exchange, the order is placed into the Limit Order Book in the sequence that they are received by the exchange. The position in the order book, is known as the ‘order in the queue‘ or ‘Time Rank’.
The Limit Order may be filled in a different sequence than its place in the queue. The sequence that an order is filled is dependent on the exchange, the instrument being traded and the matching algorithm that is used to fill the orders.
A contract such as the S&P 500 e-mini (ES) or Light Sweet Crude Oil WTI (CL) is filled in a ‘First In – First Out’ algorithm meaning that the orders are executed in the order that they are received. Consult the contract specifications for your futures contract on the exchange on which your instrument is being traded.
A general description of the different order algorithms can be found at the following links:
While it varies between futures contracts, it is important to remember that changes to the original order, most often results in the order being placed at the back of the queue.
Reloading is the adding of orders to the order book and may be in the context of an Iceberg. Reloading is generally referred to when a market is moving directionally and an Aggressive Participant is Crossing the Market. As they execute, additional Limit Orders “reload” at the same price.
This describes the session which starts at 8:30:00 AM CT and continues until 3:15 PM CT. This is when the underlying equities of the index I’m trading are open and trading regular volume. I include the last 15 minutes after cash closes as part of the Regular Trading Hours (RTH) session simply because OTC transactions on equities and futures continue to come in at that time, so it provides valid price and volume data.
The price zone from which a news-based impulsive move was initiated. Due to the nature of the move, the area between the Scene of the Crime (SOC) and where it is before it retraces remains un-auctioned and is therefore susceptible to a retest. Just like a criminal might return to the scene of the crime out of curiosity, the market often does the same.
A Spike is a swift market move that quickly traverses several price levels.
Spikes are caused by Aggressive Participants who are eager to have their orders quickly executed at the best available market price. Spikes occur when Market Order(s), often as stop orders, overwhelm the available liquidity in the Order Book. Price moves quickly through several levels before the Market Orders are exhausted and the opposing participant aggressively seizes upon the opportunity to execute at what they perceive to be advantageous prices, bringing the market back to where the move began.
Spikes may be a sign of elevated probability for some kind of reversal in price. They can be observed in all markets and time frames, but their size and impact will vary depending on instrument, liquidity, participants involved, etc
A Spoof order is one that is placed in the market, where the trader has no intention of having the order filled.
Spoof orders are placed in an attempt to manipulate other market participants into believing that there is more liquidity at a specific price or prices, than what is really available. The Spoofer will allow price to get close to their orders, but prior to the market reaching this level, the Spoofer will quickly withdraw the orders and the liquidity will disappear from the Order Book.
Spoofing was made illegal in 2010 as part of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, but evidence of the practice can still be seen in order flow tools such as Bookmap (order flow heatmap) or in a DOM. Traders still might be able to spot behavior that may related to Spoofing, by looking for high levels of liquidity that quickly disappear once price approaches them.
Because the Spoofed orders that have been submitted are real, Spoofers risk having their orders filled if they are unable to withdraw the orders fast enough as the market approaches.
Delta normally is used as an options Greek that describes the rate of change of the underlying instrument to the rate of change of the derivative tracking it. It is also called the “hedge ratio” in that context. For me however, Delta describes the quantity of contracts bought at the offer minus sold at the bid. It simply measures the “aggressiveness” of buyers versus sellers.
How does this work? If I was not a motivated seller, then I would put a limit offer out and wait for the market to come to me. I am not aggressive. If I were motivated, however, I would reach down to the bid and hit to enter the market without delay. The delta on AMS is called VolumeBreakDown.
The Volume Point of Control (VPOC) in Market Profile terms stands for the most commonly traded price closest to the center of the range. Since I am not interested in old-school market profile letter-based measurement of trading activity, I only focus on volume-based profile. Significance of VPOC is that this is the price that saw the most acceptance by both buyers and sellers (for every buyer, there is a seller). The market has priced in all known variables and finds this price to be the most favorable to get in and out of the instrument traded.
It is easiest to illustrate what a Weak or Poor Low by discussing what a Strong or Excess Low is. When the market moves lower and finds that prices are just too low to be fair, the traders generally immediately drive price higher as buyers grab up as many contracts as possible at the perceived low prices. This generally leaves a buying tail on the chart and little in the way of volume on the profile.
A Weak or Poor Low is the opposite. This occurs when the market tests a low and can’t move away from it readily. A lot of volume trades a tick or so from the low print and buyers don’t seem to be interested in lifting prices higher. This is a weak or poor low and there is a generally tendency to revisit that low within that session or immediately after that session.
Below, you’ll find a list of Order Flow Trading Abbreviations.
This includes all the abbreviations that we might use for charting and trading.
For a more detailed explanation of some of these terms,
please visit the Order Flow Trading Glossary.
|HOD||High of Day|
|IBHI||Initial Balance High|
|IBLO||Initial Balance Low|
|LAST||Last Traded Price|
|LOD||Low of Day|
|MID||Middle of Daily Range|
|Open||Open of Daily Range|
|OSH||Opening Swing High|
|OSL||Opening Swing Low|
|VolaSig||Close to Close Range Volatility Band|
|VPOC||Volume Point of Control|
|VWAP||Volume Weighted Average Price|
Longer Term Levels
|ATH||All Time High|
|DDLVN||Double Distribution Day Low Volume Node|
|MCHVN||Micro Composite High Volume Node|
|MCLVN||Micro Composite Low Volume Node|
|MCVPOC||Micro Composite Volume Point of Control|
|NVPOC||Naked or Virgin VPOC|
|pWkClose||Previous Weekly Close|
|pWkHi||Previous Weekly Hi|
|pWkLo||Previous Weekly Low|
|SoC||Scene of the Crime|
|ONMID||Middle of the Overnight Range|
|ONVAH||Overnight Value High|
|ONVAL||Overnight Value Low|
|ONVPOC||Overnight Volume Point of Control|
Previous Day’s Levels
|pClose||Previous Day’s Close|
|pHOD||Previous High of Day|
|pIBH||Previous Initial Balance High|
|pIBL||Previous Initial Balance Low|
|pLOD||Previous Low of Day|
Price / Pattern
|1TFing||One Time Framing|
|DBL BTM||Double Bottom|
|DBL TOP||Double Top|
|DSTL||Downward Sloping Trend Line|
|LIS||Line in the Sand|
|USTL||Upward Sloping Trend Line|
|ACH||Anything Can Happen|
|OTF||Other Time Frame|