In the world of trading, where information is power, understanding market dynamics is the key to success. This article delves into the realm of Footprint Charts, a powerful tool that provides traders with unparalleled insights into market order flow. Let’s begin by defining the Footprint Chart and exploring the significance of visualizing market order flow.
Defining the Footprint Chart
The Footprint Chart, is a sophisticated charting tool designed to represent market order flow. It allows traders to observe how orders are executed, providing a visual representation of the market’s activity at each price level within a specified time frame.
The footprint chart is known as the chart that allows you to see market orders within the candle. Meaning where buyers and sellers actually come in, along with the imbalances that either favor sellers or buyers. This means you can find WHO is in control with enough understanding of the Footprint (FP).
Take a look at the chart below, this is a 12-tick (3-point) range bar chart Footprint of the S&P500 ES E-mini futures. Meaning each candle is 12-ticks, then the next candle forms. They’re not based on time, some traders prefer Renko chats.
Each candle shows you how many contracts traded at each level, the differences in buyers and sellers (delta) and on occasion the imbalance. More on this below.
The Significance of Market Order Flow Visualization
The ability to visualize market order flow is crucial for traders. It offers a unique perspective on the market, helping them identify buying and selling pressure, market sentiment, and more. This visual insight is a game-changer, enabling traders to make informed decisions and enhance their trading strategies.
The main use of the Footprint, that allows traders to visualize actual buyers and sellers coming into the market is finding where traders are getting TRAPPED. Meaning identifying where large stops are hidden for the extended opposite move of the market.
II. The Basics of Footprint Charts
To understand the advantages of the Footprint Chart fully, we need to explore its fundamental components.
Understanding Footprint Chart Components
The Footprint Chart is made up of several essential components, each contributing to the comprehensive view it provides.
Price Bars and Delta bars
Price bars on a Footprint Chart are color-coded to reveal whether trades occurred at the bid (sellers) or ask (buyers) price. The delta profile, displayed alongside the price bars, gives traders an overview of the trading activity at various price levels.
Delta represents the net difference between buying and selling volume within each price bar. It provides insights into the overall market sentiment during a specific time frame.
Look at the image below.
The individual candle that is in the yellow box is a red candle. Suggesting we open at the top of the body and close at the bottom. Within the candle you can see the market sell x market buy. Or the bid-ask at market. At each level you can see how many sellers or buyers traded.
Beside the candle on the right, you have the delta at each level. The delta is the Ask minus the Bid. The difference allows you to see who has more size on the level. Now market buyers overpowering market sellers doesn’t necessarily mean that there is a continuation to the upside. Confused? We’ll break down what this means in the sections below.
Delta is defined by ask market volume minus bid market volume. The colour helps us visualize the severity of the differences. Bright green and bright red suggest that there is a LARGE difference.
Notice in the following candles immediately to the right of the current yellow box candle, we have “large” delta at the highs. Positive large delta, over 600 at that one level. This level happens to be at 4215, the cumulative positive delta at that area is over 1300, while markets pull lower. This suggests that buyers are getting STUCK at that level and they’re late to the trend. Their stops are going to get run and prices are to turn lower.
The “real” buy delta would be used as support on pullbacks to continue the press higher, not see a reversal from it as in the example.
The darker delta colours suggest low difference in volume. It’s not really that important. We want to notice where the large differences are and how prices react from that.
Bid-ask imbalance are within in candle, they are the brightly coloured red or green colours for market sellers or buyers within the candle. The imabalces indicate the difference between the number of buyers and sellers at a given diagonal price level. A significant imbalance can signal potential price movements.
Large sell imbalances like in the image above (the yellow box) suggest there are hungry sellers, mixed with the stuck longs, the next move looks lower.
III. Analyzing Market Order Flow & Interpreting the Footprint
Order Flow comes from the Depth of Market, the Footprint is a visual representation of orders, however one of the lacking attributes is that you can’t see how traders react with one another well on the footprint. However you can see where traders are coming in (sellers, buyers, stuck traders).
One of the most significant advantages of Footprint Charts is the ability to analyze order flow in real-time. Traders can witness transactions as they occur, gaining insights into market dynamics.
Identifying Buying and Selling Pressure, unveiling market sentiment.
By observing whether the majority of trades happen at the bid or ask price, traders can discern which side, buyers or sellers, is exerting more pressure on the market.
One of the best way to do this is following delta prints.
We can identify where there are buyers and sellers by reading how delta reacts on the Footprint.
Buyers: Key structural support, large positive delta needs to show up, otherwise you can’t qualify a strong long. It helps if sellers are getting trapped into lows. Meaning larger sell delta into lows.
Sellers: Key structural resistance, large negative delta to show up, otherwise can’t qualify a strong short. If longs are getting trapped then even better.
Market sentiment is revealed through patterns and price movements, making it easier for traders to anticipate market direction.
As long as there is positive delta (large) holding out price and acting as support, price has a good chance of continuing, this is bullish sentiment. The opposite is true for the bears. You can find market reversals when the large positive delta no longer holds out prices for higher prints.
Take a look at the image below, consistent strong buy delta supporting price for the leg higher, until the buy delta peaks at the top, and no one to push price higher to buy higher, that allows for the turn.
For a defined shift in sentiment you would need to opposite order flow to come in heavy. For example if we would look for sellers to change the bullish move, we need large sellers to come in and reverse price movement, otherwise, there won’t be a turning point.
Utilizing Footprint Charts for Informed Trading Decisions
Armed with a deeper understanding of order flow, traders can make informed decisions. They can enter and exit positions more strategically, reducing the risk of trading blindly.
Absorption & Exhaustion for reversals.
The most common and classic patterns used on a Footprint are reversal patterns that come in the shape and form of absorption or exhaustion.
Absorption occurs when large orders are executed at a specific price level, preventing the price from moving further in that direction. In this case we can use Delta as our visual aid. When exhaustion occurs, large buy delta opens at highs and large sell delta opens at lows. This allows for “stuck” traders and reversal of price. The reversal is that much more powerful if there are real sellers on stuck longs and real buyers on stuck shorts.
Exhaustion patterns indicate that the market is losing momentum, potentially leading to a reversal. This can be seen on a footprint where there is limited buy delta at a high, followed by large sell delta or by limited sell delta at lows followed by strong buy delta.
Case Studies: Real-world Examples
Here is a situation where we have absorption into a low, sellers get trapped time and time again, when the buy side comes in we get the confirmation of a reversal to the upside.
Generally the Footprint is not a stand alone chart, where I would need to use some other tools like Volume Profiles, DOM and delta. However the Footprint is great for illustrating the visual of trapped traders and reversals.
Let’s take a look at a general volume profile chart first. We have the ledge of support from a prior distribution at 4168-72 for the longs to sustain after running back above it. So this is an area where buyers would want to step in to hold and sellers to get stuck.
Take a look at the bleu rectangle on the chart below, you can see from the larger 50-day profile on the right hand side its a ledge that splits up distributions. If we’re above that we could lean on the long side of the price. There are a lot of prior large volume areas from prior sessions.
Meaning when we identify the level, we can qualify it with order flow. We can use the DOM or we can use the Footprint as a visual.
In the image below, we can see that there is large negative delta into lows of the candles, representing sell side. These traders are getting trapped at lows, we want to also note where large buyers are coming in to support price.
If one candle has stuck shorts at the lows, then a strong buyer in the same candle. This is the beginning of the transition point. These are the blue boxes broken down that allow us to see where the traders are not only getting stuck, but the reversal is happening.
The yellow box is large sell side into lows, we would want to see a stern continuation from this, instead the following candle is a turning point bid higher.
V. Strategies for Maximizing the Footprint Chart Advantage
Scalping and Day Trading Techniques
The Footprint Chart is a valuable tool for scalpers and day traders. We’ll explore techniques specifically designed for these trading styles.
Scalping on the footprint is a classic strategy used, because you can find the small order flow shifts easily with smaller risk. When a large traders gets trapped, like in the image above, sellers into lows, the second you see a large buy delta that’s bright green you can look for the small pop. The same holds true for the sell side.
Scalps are generally 3-5 tick take profits on 1-3 ticks stop loss, so you want to be quick, but you’ll get grey hair quick!
Day trading techniques using the footprint as exactly as the example above shows. I look for large moves based on distribution theory so I can have a 5-10 point move of profit expectations on a 3 point stop. These are larger trades that are usually held out for more than a few seconds.
Risk Management with Order Flow Analysis
Effective risk management is essential for every trader. Discover how order flow analysis can enhance risk mitigation strategies.
Risk management using a visual order flow tool allows you to see where to hide your stops!
You can hide stops under key support areas where traders get trapped or start to show real strength.
VI. Tools and Platforms for Footprint Chart Analysis
Software and Data Providers
Selecting the right software and data providers is critical for utilizing Footprint Charts.
The chart that I’ve been using so far is from Sierra Chart. A high customizable platform. Futures trading would be the best asset to use the Footprint tool because of the centralized exchange you can see all of the volume.
As for data providers, you need a data provider that services tick by tick data, just like Denali or CQG that you can get from your broker.
In conclusion, the Footprint Chart offers a unique advantage to traders. Let’s recap the key takeaways and emphasize how this powerful tool can empower your trading journey.
Recap of Key Takeaways
- Understanding the components of Footprint Charts.
- Analyzing order flow in real-time.
- Identifying common order flow patterns.
- Applying strategies for different trading styles.
- Utilizing the right tools and platforms.
Empowering Your Trading Journey with the Footprint Chart
With the knowledge and insights gained from this article, you are better equipped to make informed trading decisions, manage risk effectively, and ultimately enhance your trading success using the Footprint Chart. It’s a powerful ally in your trading arsenal. Remember trading is inherently risky and this article is for educational purposes only, you should do your due diligence and research before entering the markets with risk.