Trading Narratives and Order Flow Analysis

Aug 4, 2024

MMC Series Video 5: Understanding Narrative in Trading

Overview

  • Importance of narrative alongside price direction.
  • Focus on how narrative leads to concepts like FLA and LOT.

Revisiting Direction

  • Direction determined in first four videos: Targeting Price Delivery (PD) Rays.
  • Understanding swing points and fair value gaps (FVGs).
  • Direction alone is not enough; need narrative to trade effectively.

What is Narrative?

  • Narrative explains where we are moving from to understand where we are going.
  • Example: If moving higher, where are we starting from?
  • We need to identify a PD Ray to trade from (e.g., a fair value gap).

Order Flow Lag

  • Refers to the direction of price and determines potential continuation.
  • Can identify multiple PD Rays:
    • Swing points
    • Fair value gaps
    • Fair value areas
  • Not all PD Rays have the same probabilities.

Probabilities in Trading

  • Focus on high-probability scenarios.
  • Two fair value gaps can appear similar but have different probabilities of success.
  • Higher probability trades lead to better outcomes.
  • Understanding high vs low probability order flow legs is crucial.

Time Frames and Order Flow Legs

  • Analyze order flow on monthly, weekly, and daily time frames.
  • Higher time frames provide context and are more significant for trading decisions.
  • Example: Monthly bullish candle indicates order flow direction.

Candle Science

  • Focus on a single candle to analyze order flow.
  • Identify order flow legs through analyzing lower time frames without losing context.
  • Example: Fair value gap on lower time frames indicates continuation potential.

FLA, A, and LOT Breakdown

FLA (First Line of Defense)

  • First PD Ray encountered during retracement.
  • Highest probability: Fair value gap.
  • Lower probability if it’s a fair value area.

A (Overlapping Defense)

  • Area where two PD Rays overlap.
  • Best scenario is to have a fair value area as the overlapping defense.
  • Double the probability if both a fair value gap and area are present.

LOT (Last Line of Defense)

  • Always a swing point.
  • Best case: No fair value gap present, swing point acts as both first and last line of defense.
  • If there’s a fair value gap, the last line of defense is not ideal for trading.

Practical Examples

  • GBP/AUD analysis on daily time frame.
  • Identifying high and low probability scenarios based on order flow legs.

Conclusion

  • Importance of understanding and analyzing FLA, A, and LOT.
  • Next videos will dive deeper into specific defenses and their impact on trades.
  • Recommended case study to apply concepts learned.