Part 3A: Reversing the Order Flow Bias

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In Part 1, we emphasized identifying a reliable long term trend-in-progress using a primary trend indicator (PTI). In Part 2, we isolated three types of ideal price zones for initiating changes in long or short inventory.
 
Here in Part 3, we drill further down to refine the analysis using lower timeframe (daily & weekly) price action to validate where we want to take various actions to enter and exit markets.
 
DEFINING ORDER FLOW BIAS
We call the daily price action the local price action. The local price action is dominated by an intermediate bias or trend which we call the weekly order flow bias. It’s less random than local price action, but usually trumped by the dominant primary trend.  
 
When the order flow bias is up, shallow multi-day declines are usually quickly bid back up; and an up bias tends to expand weekly and monthly ranges to new highs.
 
We call this tendency to push or extend price ranges in a given direction buying pressure or selling pressure which is driven by an order flow bias. For a more extensive discussion of buying and selling pressure refer to Joseph Hart’s Trend Dynamics.
 
THE PROCESS OF REVERSING THE ORDER FLOW
What investors and traders desire is that every market they are stalking provides a digital on-off switch where long or short positions can be initiated with little or no adverse moves against the position.
 
What markets actually deliver is quite different: A messy process of reversal in an emotion-heavy context where the order flow bias changes over a sequence of irregular events. Each of those events provides new and incremental information about the changes in the conditional probability of an actual order flow reversal taking root in a specific market.  
 
FORCES IN CONCERT: NEW HIGHS & NEW LOWS
Think of a particular market as animated by two forces either working in concert or opposition. The primary force is dominant—and in this case we define that force as the primary trend indicator (PTI) which is fueled by a sequence of rising or declining Quarterly Equilibrium price levels.

The second force (the current weekly order flow bias) is like an intermediate trend. When the primary trend and the order flow bias are BOTH up, a market will tend to make new highs. This is also called a Mark-Up phase.
 
Likewise, when the primary trend and the order flow bias are BOTH down, a market will tend to make new lows. This is also called a Mark-Down phase.

CORRECTIVE PHASES
Corrective phases are simply those periods when the primary trend and the order flow bias are in opposition. When the primary trend is UP and the order flow bias is DOWN—moving in opposition—a market will tend to recede back toward rising quarterly equilibrium in the form of a tactical or strategic correction.
 
Likewise, when the primary trend is DOWN and the order flow bias is UP—moving in opposition—a market will tend to rise back toward declining quarterly equilibrium in the form of a tactical or strategic correction. 
 
COMPONENTS OF A REVERSAL
If markets were linear and orderly in high frequency timeframes (daily and intraday) trading would require a lot less effort. Applying normal human thinking processes (which naturally gravitates to linear) or trading curve-fitted trading systems (based on a encoded form of the same sort of sequential logic) leads to frustration, losses or unbearable drawdowns.  
 
The process of reversing an order flow bias is not linear either, but it is still readable in certain contexts.  Only for the sake of communicating that process here, we’ll break it down into four component parts—as if it were linear.
 
A. Price Too (Low or High) & Price Rejection
B. Stopping Action
C. Controlling Bids or Offers Break
D. Price Separation

 A. PRICE TOO HIGH OR LOW & PRICE REJECTION
When primary trends and order flow imbalances work in concert they drive prices to a point high enough to satisfy a demand (or supply) imbalances.
 
In the case where buying is dominant, the price level where buying dries up is called a price too high. Likewise, in the case where selling is dominant, the price level where selling dries up is called a price too low.

A price too high or price too low is only observable after the fact. The first indication of a price too high is often a rapid price rejection which manifests in various kinds of reversal-like patterns we call vectors. Price rejection helps us isolate a price as a price too high or a price too low—so we also refer to that extreme price as a isolated low or high. Price rejection demands using patterns that are more revealing than simple or conventional “key reversal” patterns.


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