Puke Tool - The Marriage of Order Flow and Market Relationships

Watch This – See Where Other Traders Puke!

Stop going down different paths. As consumers, we use two concepts. First, our ability to compare two or more products and, second, read the supply and demand for that product. Trading is no different. After all, we are trying to value price and then predict where it will go. Using proprietary analysis of Market by Order (MBO) data, the Puke Tool does that all in one.

Market By Order

Market by Order (MBO) was introduced by CME Group in 2016 to improve futures market transparency, specifically: The ability to see every active order in the market; The ability to see every change to active orders in the market; The ability to see the position in order queue for every order at each price level; and The ability to see each order match resulting in a trade.
Using this MBO data, the Puke Tool is able to display: Large aggressor orders; Large resting orders; Resting orders becoming aggressive; Large order delta; Icebergs, including price changes; and Stop-order execution.

Additional information on MBO can be found here: https://www.cmegroup.com/education/market-by-order-mbo.html

Delta

Delta is simply aggressive buyers minus aggressive sellers. When buy market orders are greater than sell market orders the delta will be positive.
Why does this matter?
If aggressive buying comes in, price should go up. Well does it? How about if it’s a big order greater than 100, shown as a purple box. Or a big sell order greater than100, shown as a red box. Watching prices interact with these orders helps determine if price is doing what it should. Because remember — clues are when something that should happen…doesn’t.
On the verticals, we track when large (100+ contracts per order) aggressive buying (green bars) or aggressive selling (red bars) is greater. We do it on a 3-minute, 6-minute, and 8 hour basis.

Story - Punch a Guy in the Face

If buyers can’t get the price to go up there is a chance the buyers are stuck. If you punch a guy in the face and he doesn’t flinch… lookout! You — should be running the other way.

Stop-Loss Orders

If the information gods came down from the heavens and offered you any data that you wanted, what would be your wish? Knowing where all the stop-loss orders are placed should be on the top of that wish list.
On the Puke Tool we follow and track when stop-loss orders get elected.
Why does this matter?
Let’s walk through it step-by-step
For a price to go up, you need one or both of these things
           1) less sellers  – see below;
           2) more buyers – see section on big buyers/sellers.
How do you get there?
What order type do you use to exit a long position for a loser? Most likely a sell stop-loss order. What order type do you use to exit a long for a winner? Most likely a resting sell limit order above where you got long. So, if we identified a sell stop loss order being elected then it’s fair to say someone just exited or puked a long trade…for a loser. But that’s not all. What do you do after that sell stop loss order gets elected or filled? You cancel your resting sell limit order above. With that being said, consider this…

"After you buy it, you're a seller!"

When you’re LONG you’re a seller, so…
Longs = sellers
Longs Puke = less sellers
Less sellers = price has an easier path UP.
How do we get to the less sellers part of this simple equation?
Sell stop loss orders get filled which =
less longs which =
less sellers
less sellers create that easier path UP.
On the Puke Tool, the sell stop orders we identify will show as green bars to indicate that longs just puked. We show it on a 3 minute, 6 minute, and 8 hour basis.

On the flip side we also identify buy stop loss orders. It’s what traders use to exit a short position for a loser. Consider this…

Shorts = buyers
less shorts = less buyers
less buyers = what is needed to easily move price DOWN.
Buy stop-loss orders = shorts puking
less shorts = less buyers below!
On the Puke Tool this is indicated with a red bar on a 3 minute, 6 minute, and 8 hour basis.

Story - The Boat

Stop orders that get elected means the market is shaking out weaker hands. This is a necessary function of a market. Just like if a boat was sinking and a 100 people were on it. What would happen if someone yelled “We have to throw 20 people off the boat and the rest of us will survive!!”

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Limit to Market Orders

When you are offering a sell limit order above the current market price — you are waiting patiently for the market’s price to come up and fill you. Let’s say that this sell limit order is to cover or exit a long position. How many times does price get close to your order, but not quite close enough to fill you. Then the price goes all the way back to your entry. How does that feel? How about when it continues and goes through where you opened the long position? Now
your patience has turned to anxiety. You finally say “screw it!” Maybe even use a more descriptive word. You hit the flatten or trade out button. Essentially, you turn that sell limit order into a sell market order. When that happens it appears on the Puke Tool as a green bar. We are accurately assuming a long position just puked. Not with a sell stop order this time, but a sell limit order changing to a sell market order. Both achieve valuable information about other
people’s positions (OPP).
Why does this matter?
Anytime you could determine that other traders are exiting a position that you are interested in opening, you put yourself in a prime location. Remember the saying — when others are greedy you should be fearful, but when others are fearful you should be greedy.
How many times do you say — “As soon as I get out…it goes!” You need to watch the Puke Tool and hear when others are saying that.
You always would prefer to get long right after other longs just puked.
You would always prefer to get short right after other shorts just puked.
But you don’t have to tell us when you get stopped out…because we already know.

Bigger Buyers/ BiggerSellers

This was covered briefly under the Delta section. On the Puke Tool, you will see aggressive buy market orders(100 or more) with a purple box. Also, aggressive sell market orders (100 or more) with a red box.
Why does this matter?
Following the Delta explanation above, with respect to the Punch a Guy in the Face story, it is imperative that when reading order flow you pay attention to a price’s reaction to larger orders. Example — When a large sell order hits the market’s price it should go down. But does it? The clue becomes when orders that should move a market’s price…don’t. This creates the notion of potentially NEW shorts. Tying into point # 2 above — how do you get to more buyers? If a large sell order signals a new short then
Shorts = buyers
More shorts = more buyers
We don’t know for certain that every large sell order is a new short. However, we can glean that IF a large sell order cannot move price lower or the price creeps above where large selling appeared, then those that are short (now buyers) might begin to chase. When buyers chase it results in upside price action.

Market Relationships

Finally, to the other technique used to predict where prices are going. On the Puke Tool we added two lines. A purple line representing the Russell (RTY) and a yellow line representing the NASDAQ (NQ). However, it’s not their prices the lines are tracking. The lines are representing where the S&P E-mini’s (ES) price would be if it was to match the price action of the other two markets.
Why would this matter?
I don’t know about you, but if I am long the S&P I want to see the NASDAQ and Russell rally. Or, if I am looking to get long, I might use a rally or pop in the Russell and/or NASDAQ to help get me in the trade..

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Story - Car Dealership

When you went to buy your last car, did you just go to one dealership and trust that they had the best price? Of course not. You compared it to other dealerships in order to know if the price you were quoted was cheap or expensive. As consumers we have used this compare and contrast technique our entire lives. However, when people try to become traders and open a trading account, they ignore this life long technique to value and predict price.

Icebergs

Icebergs are order types that hide the total size of the order. They are limit orders that might show 10 but have more than meets the eye “underneath” the 10 shown. The Puke Tool shows several things:

● After the order has been identified as an iceberg and has met our 100 contract minimum, we display the time the order originated and every price change;
● How many total contracts have been filled thus far;
● How many contracts have been filled at each price level thus far;
● How many contracts the order is showing; and
● The price the iceberg is bidding or offering.
● All order price changes; and

It is important to note that we cannot identify an iceberg until some of it trades. Once we determine that the same order ID, showing for example 10, still remains then we can say there is more than meets the eye. The order filled the 10 contracts it showed, but yet is still bidding or offering. Again, through MBO filtering of order IDs, we know what the order shows. If it still remains in the book as an active order after filling the 10 contracts, it is easy to surmise that indeed it is an iceberg and the order has more “underneath” it. We do not know how many contracts the order has in total until the order is completely filled or canceled — but we know there is more left.
Why does this matter?
Any large order in a market creates many dynamics. For one, it creates a real-time pivot. Once filled, we use it to determine whether we are above or below it for a more accurate directional bias. When an iceberg appears as active, and is on the sell side, often times it will have price run away from it with traders selling in front of it. However, this dynamic creates too many shorts and will draw price back to it. Often making the iceberg order a magnet.
With this in mind you can see how big orders, whether an iceberg or not, shows a real time advantage of which prices are important.

Conclusion

To summarize the EDGE provided with the Puke Tool, it is important to understand this process. Take as much of the important information and data (MBO) that is given, filter it to breakdown orders and order types. Combine that breakdown with a proper understanding of price discovery and the governing principle of price movement. This allows you to create the intent of the other traders. Getting as close to the only two advantages that matter: Other People’s Positions (OPP) and where they are entering and exiting (stops).
So often traders risk their own capital trying to predict price movement, yet they do not have the first clue on what governs price movement.
Less sellers and more buyers are not just important for the price to go up — it is mandatory for price to go up!

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