Order Flow and DOM Trading For Beginners
My first introduction to the DOM was back when I worked in technology for one of the big banks. A trader was having some software problems, and they asked me to help them. I was very excited as it was the first opportunity I had to speak to the traders. I told them about my desire to trade, and so they showed me what they did. There were no charts, or any of the things retail traders typically associate with trading. It was kind of funny because I had just finished reading The Technical Analysis of Stock Trends. I was ready to talk about stock patterns, and it turned out that they didn’t use that in their trading at all. I knew more about technical analysis than they did. Instead they had a DOM on their screen, and they told me if you really want to trade you need to learn how to use the DOM.
Now unfortunately becoming an institutional trader didn’t work out for me. There was this whole London Whale fiasco where a tech guy turned trader used what he knew about their systems to bypass their risk controls and put on huge trades. One of the things I worked on was the risk control systems so yeah that wasn’t going to happen. Eventually I left the firm, and set about learning how to trade on my own. I knew where I needed to start, so I learned how to trade the DOM.
The DOM is a useful tool because it is the most comprehensive and efficient way to display everything about the current market conditions. With the DOM you can see all orders, you can easily monitor multiple markets at once, and you can quickly place and modify any type of order you need. It is an essential tool that I could not trade without.
However, it’s also a difficult tool to learn But that’s why you have me. So this will be the first in a series about how to use the DOM and read order flow. In this installment we’ll talk about what the DOM is, and some general pointers about what to look for. In future installments we’ll talk about specific types of situations, and proven order flow tendencies.
Now before I get started there’s a few important things you should keep in mind. First understand that my intention in these videos is not to give you setups. I want you to understand what you are looking at on a deep level so that you can come up with your own setups. I also want you to understand that as powerful of a tool as the DOM can be, it’s not everything you need. Nothing can beat being an informed trader. That means you need to understand what is going on in the financial world and incorporate that into your trading. I also want to acknowledge that there are many other great learning resources on the DOM, and this series is not meant to replace them. I first started DOM trading by reading the NoBSDayTrading beginners course. I still think that’s a great course with a fair price. John Grady, the creator of that course, also has a few free videos that are great to watch. I don’t have any kind of affiliate link with Grady or anything like that. I just think he made a great course. Jigsaw Daytradr also has a lot of good education materials available. Now Jigsaw is the DOM software that I use for my own trading, and that’s what I’ll be showing for examples in my videos. What we talk about will apply to other popular futures trading DOM’s like SierraCharts, TradingTechnologies, or Quantower. I just think Jigsaw is by far the best DOM, and that’s what I use. If you chose to purchase Jigsaw I have an affiliate link. This isn’t a sponsored post, but I do get a commission if you purchase Jigsaw through my affiliate link. Your support helps me produce better content for the YouTube channel so I really appreciate it.
So with all of that out of the way let’s begin. What is the DOM?
Well it’s this.
Now if you’re new this might just look like a ton of random numbers, and that can be a little intimidating. Don’t worry though, it’s really not as difficult to understand as you might think. To explain what’s going on though let’s try to get away from the virtual world.
So imagine that the DOM is a long hall full of traders. In this market they’re trading…cookies. On the right side we have traders that each have a cookie they want to sell. To keep things both fair and competitive they line up in single file lines by what price they want to sell. All of the traders that want to sell their cookie at $10 are in one line. Next to that is a line of traders that want to sell at 11, and so on so forth.
Now there are also traders in the middle. If one of those traders wants to buy at that very instant then they can walk up to the lines and buy a cookie from the first trader in the queue. Such a buyer will want the best price they can get so they’re going to buy from the $10 line right? Now if enough people buy, all of the cookies in the $10 line will be gone. So subsequent buyers will have to buy at $11.
Well what if you don’t want to buy at $11? You still want to buy at $10? That’s why on the left side of the hall we have lines for people that want to buy at a specific price. There’s a line to buy at 9 dollars and 8 dollars and so on. Since there’s nobody in the line yet you start the line to buy at $10 in the hopes that you’ll get customers.
What I’m describing is a lot like how the old trading floors worked, except they used pits And that’s what we’re watching real-time on the depth of market. The lines we talked about are called limit orders. An order to buy or sell at a specific price. On our DOM the orange red column is for limit sell orders, and the blue column is for limit buy orders. The number indicates how many orders are in the queue. My DOM also has two middle columns to show the market orders being submitted and filling the limit orders. When you submit a market order we call it hitting. For instance a market sell order is hitting the bid.
Now that you understand a little about what the information on the DOM is showing you you’ll want to start putting in screen time. On my channel page I have a playlist of every livestream I’ve done in the past 4 years so you have plenty of order flow to look at. Just pick a day that interests you, and just watch the DOM in the video. It’s a lot of work, but getting that screen time is a very important part of learning to use the DOM. When you look at high frequency trading firms they are often plugging this data into a neural network. They’re basically mimicking how our own intuitive learning works, and they have to use such solutions because markets are always changing. That’s why it’s important for us to practice by watching order flow.
Now of course I’m not going to just throw you to the wolves without giving you a few pointers. So here’s some tips on what to look for that will help you get more out of watching the order flow.
Think of what you are seeing as a set of flows. These flows correspond to the different actions that market participants can make. You can submit a market order, you can submit a limit order, and you can cancel a limit order. See we often forget about that last one, but it’s really important. On top of that you can buy, and sell and so that gives us six different forces. At all times we want to be tracking these six flows, and keeping an eye out for potential changes in those flows.
The next thing I would keep in mind is that a lot of activity is just about getting a good spot in the queue. It is common for some systems to place orders at every price, and pull those orders if there’s a risk of them being executed. They’re saving a spot in line just in case they need it. So you’ll always see a certain amount of stacking and pulling when price moves that you’ll need to discount. Which of course also means that if you don’t see that behavior when price moves it might be something you want to pay attention to.
Always keep an eye on correlated instruments. A lot of market making is based on arbitrage strategies where they use correlated instruments to decide if they want to take fills at that price or not. That’s why you might see a certain price defended with lots of limit orders at one point only to see them blow through that price without hardly any resistance at all later. Watching multiple instruments allows you to see if the action is based on a correlation, or if it’s something isolated to one market. This is where having a DOM with a recenter function is essential. When you recenter the DOM you are making a reference point that can help you track the differences between instruments.
Don’t get too excited about large trades. This is one of the most common mistakes I see people make when they’re just starting out. Or maybe it was just the biggest mistake I made? You see tons of volume trade and you think “oh this is it! something is happening”. Unfortunately what it often means is something already happened, and you missed it. Such large transactions can have a negative impact on latent liquidity, and can actually hamper movement. So think more about predicting and making your move before the big order comes, rather than trying to make moves after you see them.
You should also keep track of the context around the order flow. Follow the macro economic environment, breaking news, and key daily technical levels. Note how changes in the context affect the order flow. Form theories about what may be causing the current order flow, and search for new information to support or reject those theories. That’s how you learn how to predict and anticipate future order flow. It will also help you identify information that hasn’t been properly factored into the market. So many retail traders want to ignore this stuff, but it’s the doorway to some of the strongest edges you can have. Remember that the informed trader always has the advantage. Being informed, and knowing how that information will translate to future order flows is a powerful skill. That’s what truly makes learning how to read the DOM worth it.
So with that good luck as you get started reading order flow. That’s your homework by the way, to watch some order flow before the next video. Make sure you’re Subscribed and hit the bell icon so you don’t miss the next videos in this series. I’ll see you guys on the morning livestream, and in the meantime stay profitable friends.