A Tale Of Two Divergences
Trading is about making decisions. When to buy, when to sell. I am not the type of trader that just because there is a setup that I will blindly take the trade. I don’t recommend that. You should analyse the market to make a proper trading decision.
There are times I see a basic setup occur. I have to make a decision to enter into the trade. I am not saying the trade needs to be qualified in order for me to take it, but rather I like to see other indications of market activity that help to confirm the trade. If I see a buying setup occur I want to also see buying imbalances in the bar.
In the chart of the ES there were two different buying divergence setups.
The first one, point A, I did not take because it wasn’t convincing enough for me. The only thing it had going for it was a strong delta. I didn’t see any buying imbalances which to me is a sign buyers are taking over and controlling the market. The market might rally but until I am convinced that buyers are firmly in control I am still a little sceptical that the low will hold. Sure enough, the market did rally a bit, before falling over once again.
At the second buying divergence, point b, what happened in the market was substantially different. There were a couple of selling imbalances near the bottom of the candle body and in the wick area. Then there were buying imbalances on the way up. To me this signalled that the traders that sold at 1948.00 and 1947.75 were trapped and the market reversed on them.
You will notice the volume traded on the offer on the way up in bar B was smaller than in bar A. This could be interpreted two ways. The first way is that passive sellers, the ones who work limit sell orders, had gotten rid of their inventory. Another way to look it is that there was a fast aggressive buyer that took the market back up before sellers could come in to keep it down. The volume of bar B is much less than the bars preceding it. The bar that followed bar B had a much higher volume which to me indicated that buyers were willing to buy at these levels because as the market was rallying traders were transacting more on the way up.
Trading with order flow allows the trader to determine if a setup should be taken or not. When trading with conventional indicators such as MACD or RSI they don’t leave much open to interpretation. You just take the setup blindly. As much as traders will disagree with me that is not trading.
Once you learn to understand what the market is showing you, then you will be able to make better trades. Ones that make sense. As opposed to just saying something like the MACD crossed the zero line so I sold.
Orderflows Trader was created to help point out changes in supply and demand so that you can see for yourself what is happening and decide for yourself if you should take the trade. After all you are the trader.