Learn to trade order flow with Jigsaw Tools – Beginners guide
In this video, I’d like to talk about getting started with Jigsaw Tools.
Part of the focus will be on traders that do not currently use order flow at all. Those that are looking to learn to trade order flow. For traders moving from a product like XTrader, it will probably take just a few hours to get up and running with Jigsaw Depth & Sales.
We will also discuss some of the tools unique to Jigsaw such as the reconstructed tape and power meters.
As usual, change to Full HD, Full screen mode for best results.
For traders with no experience with order flow, there are 2 separate skills you need to acquire
1 – Reading the order flow
2 – Using order flow to make a trading decision
It would be a mistake to attempt to try to do both at the same time.
You need to first focus on reading the order flow. Being able to actually read and absorb the information that is being shown.
You need to set aside specific time to doing this and we will explain how shortly.
What you should not do is to run the tools and immediately use to compliment your trading. You should also not try to scalp the market on SIM.
You need to be focused only on reading the DOM. If you have charts up, or other screens that you currently use, your focus will gravitate towards them. It’s more comfortable to look at the things you currently use than this new set of tools.
If you enter SIM trades, you will suddenly have a bias and you initially need to do this without bias.
Later on, when you get past the “learning to read it” stage, it is a good idea to have a bias and a good idea to SIM trade.
Thick markets and thin markets do move differently.
Thin markets are markets like Crude, DOW, Gold that usually have less than 100 contracts at each level on the market depth.
Thicker markets are those like the E-mini S&P 500 futures, Eurostoxx 50, US Treasuries that have 100’s or 1000’s at each level on the DOM
There is certainly an argument that says for trade confirmation, the Depth and Sales is more useful for thick markets than thin markets. Areas tend to hold to the tick and you aren’t looking at action that occurs over so many prices.
Similarly, you could argue that the Tape tools and power meters are more useful on thinner markets. They have less trades going through overall and the changes in pace and exceptional size is easier to see.
With this in mind, we have Crude traders using just depth & sales and we have e-mini S&P500 traders using just the power meters and the reconstructed Tape.
The fact is that some tools suit some people and that will be a major factor in which you get the most use from.
So, for now, just keep an open mind.
First Steps
The first thing you need to do is relax.
Look at this as something fun you are about to start.
Do not put pressure on yourself by trying to SIM trade or live trade as you go through this process. That will make it a frustrating activity and not a fun activity.
You are going to make progress that can be measured in hours – following this plan you are going to start seeing things in the first few days.
Allocate no more than 60-90 minutes per session to this. Any more and you will lose focus.
One or 2 times per day only.
Focus on one market or spend a few days at the start to select a market – just go through a few, pull up Depth & Sales, see if one seems to make more sense.
Do this at peak times, not when the market is dead but also not during crazy times like news announcements.
Focus.
Initial focus on Depth & Sales should be:
- 2 Columns only – current trades
– Size executing at each level
– Size executing at bid vs offer
– Changes in size
– Changes in the speed it ticks up/down
– How ‘easy’ it ticks up down
– Prices it seems to stick at
– Prices it seems to gravitate back to
– Prices no-one wants to trade
And that is all. Ignore the depth, it is secondary
– Right now, you may have a perception that people that read this are looking at all of the numbers all of the time and so the numbers concern you.
– This is not true – we look at other information sometimes but a lot of reading order flow is just the way price moves up and down and the numbers themselves are secondary.
– Don’t try to do math in your head, trying to tally up total trades either side as it moves. The difference will be obvious or it won’t be important.
– After about 5 or 6 of these 60-90 minute sessions, you will start to see things occurring – price coming to a level and trading a lot of contracts but price gets stuck (and traders to). I don’t want to say too much because you should start this with an open mind.
As this becomes easier, you can start to take note of the total trades that have executed at the levels as well as the large/small quantities on the volume profile.
After that you can start looking at the numbers on the depth. Again, you are looking for OBVIOUS outliers. If average depth is 1500, then someone spoofing the market is not going to put 1590 up there, he’s going to put 2000 – it’s more visible.
After a while you can start to put your levels on there. Now you will be looking specifically at the order flow as it relates to your key levels.
With Recon tape/power meters, a lot of the information on there is the same as on the current trades columns of depth & Sales.
– All trades
– Large Trades
– Power meter – All trades
– Power meter – Filtered Trades
This is similar to current trades in Depth & Sales.
Tape reading
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Order Flow itself is simply information. Just like charts, it can be used in a number of ways, some good and some bad. But let's first break down order flow into it's components so we all agree what we are talking about:
Order Executions/Tape Reading - This aspect is the real flow of orders. It's the information we see in Time & Sales, Footprint Charts, Cumulative Delta. It is looking at market orders, either as they execute or historically. I guess this is the "true order flow". Every trade is a buy and a sell. We look at market orders because we consider them to be more aggressive. When someone trades with a market orders, they are giving up a price to get an instant fill. Limit orders on the other hand just lazily sit there waiting for a market order to hit them. Often these are market makers with no directional conviction. So we see market orders as being more significant.
But we don't use these in isolation.
Volume Profile/Positions - The tape reading part helps us assess various things like momentum, traders getting stuck, balance of trade BUT the volume profile helps us understand where people are positioned and likely to get stopped out. I sometimes call this "Order Flew". It's important to know when trades will be "washed out" - for example - if we have a volume cluster on the S&P500 Futures and the market moves up 100 points and back down to it, it's unlikely short term traders on either side that were positioned there will still be there. But recent, nearby volume helps us assess areas of positions.
Market Depth - The bids and offers, the lazy passive orders waiting to be hit. This is part of the story but in terms of overall importance, I'd put it at around 20% at most. For example - if you return to the high of the day on any market, the offers will be quite large directly above the high. It means nothing at all. It's just a quirk of the market. It does not help you tell if a price will hold. On the other hand, if you see large depth and as we approach it, we see more added to the depth in front of that price, it means others are front running that depth and that is a useful bit of information.
This is the key - it is all just information. Just like price charts are information. When people look at Order Flow, they consider it to be a technique more than a set of information. They look for things like iceberg orders and decide to make a one rule trading system to fade every iceberg, For these people - yes, order flow is overrated because they are trying to ignore everything else going on in the markets and construct a trading system a chimp could execute.
For those looking to improve a decent trading approach, the best thing to focus on in Order Flow is momentum. Once you can read momentum you can:
- Avoid getting into positions when momentum is against you.
- Confirm trades are working after entry when momentum goes your way.
- Exit trades in profit when momentum fades.
That's perhaps the easiest way to use order flow because momentum is easier to read. It's about the market continuing to do what it's already doing. On the other hand, reading a turn in the market with order flow takes a higher level of skill and a little longer to learn.
Order flow can't put lipstick on a pig. It won't help you 'improve' something that doesn't work anyway, which is why whenever someone calls me, the first thing I ask is what they are currently doing and we discuss whether they need a reset or whether it will actually help.
When Jigsaw started back in 2011 - we were one of the first in the space and certainly had the best education. It was always going to attract the underbelly of the trading education/tools world and now we see stuff out there that is so complex but so impressive and futuristic that new traders are drawn to it like moths to a flame.
So here's my advice when looking at Order Flow
- Order Flow can't improve something that doesn't work.
- Order Flow can be used on it's own, without charts to enter and exit the market but you also have to be able to recognize different market states that need different/altered setups. There is nothing magical about this.
- Don't start jumping at shadows and take 50 trades an hour in your first week looking at Order Flow, be selective. It can be exciting to see cause and effect play out in front of you for the first time but don't overtrade.
- Do drills to learn how to read it before you trade it.
- Markets can only go up and down. Don't overcomplicate it. If you have too many Order Flow tools on your screen - you will not be able to make consistent decisions. Less is more.
- Take time to choose a market with a pace you like. Interest rates might send you to sleep, the DAX might give you a heart attack.
It is hard to see how a set of information could be overrated. It is true that some methods of presenting this information are better than others. It is also true that some people simply get on better with different tools (e.g. Footprint vs DOM).
There's a middle ground between complexity and simplicity that will leave you making consistent decisions where you improve over time. For those people, Order Flow will be way underrated because they will be the one's getting the most out of it.
Those that jump in with both feet on day one and those that have 100 different tools up, for those, it's a painful experience.
Keep it simple and manageable. Start with momentum reading and build from there. You will never look back.
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