Getting on the right side of the order flow

Charts are a pictorial representation of the price of a financial security over a period of time. That's it.

They don't predict future, they are a tool.

We will use charts to help us find attractive risk/reward opportunities.

We will use charts to help us get on the right side of the order flow.

Order flow is simply the net buying or selling pressure on a particular security. In other words, who has control, the buyer or seller, on the time frame you are trading on.

Our goal is to get on the right side of the order flow. That may sound obvious but is different than most people think.

Getting on the right side of the order flow has nothing to do with how well you analyze a business.

Two examples:

Apple weekly chart

In the above example, buyers could not maintain control above $130, despite great news for the company. They were hitting it out of the park, they could do no wrong.

Over the next year, the stock fell more than 30%.

However,

the sellers could not maintain control below $92, despite the bad news.

During this time many analysts "thought" Apple's best days were behind them...

Let's look at another example:

 

Tesla weekly chart

Tesla went public in 2010 and traded in a narrow $20-$40 range for three years until one day, the buyers took control from the sellers above $40.

Once above $40, price exploded. The stock rallied almost 650% in a little over a year, perplexing most people along the way.

How did this happen?

If you would have traded this stock based on fundamentals, or what you "thought" the fundamentals were, you would either have been short or not bought.

You would be hard-pressed to find the bull case for Tesla back in 2013 from analysts or hedge funds. Most were short or not believers.

The arguments against Tesla were-nobody will buy electric cars, they are too expensive, etc, etc...

In hindsight, some arguments were right and some were wrong. Does it matter? Nope, because if you were short back then, you lost.

This is why order flow matters.

The short interest in 2013 was around 45%, meaning, of the stock available to trade, 45% had been borrowed and sold.

Once the stock broke-out above $40, shorts started to cover(buy back shares).

In addition,

other investors decided to short, adding further fuel for the rally, because they "thought" the rally wasn't justified by the fundamentals.

Are you saying fundamentals don't matter?

No, they can be important. In private a business, you eat what your business produces. They matter a lot there.

Public markets are different.

They are ruled by people with emotions who don't always act rationally.

In addition,

you get paid in the public markets by taking risk others aren't willing to take

and,

you have to be right.

Final thoughts...

Our focus is getting on the right side of the order flow, regardless of the fundamentals.

Remember, markets don't top on bad news and they don't bottom on good news.