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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.
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Full transcript