tradytics review: Understanding Market Net Flow: A Powerful Tool for Market Sentiment and Price Movement

tradytics review: Learn how to use Market Net Flow to gain insights into market sentiment and price movement, and improve your trading decisions with this powerful tool.

October 22, 2024 at 11:32

Market Net Flow: Understanding the Power of Net Calls and Net Puts

The Market Net Flow is a powerful tool that provides insights into market sentiment and price movement. It is essential to understand the basics of net calls and net puts, as well as how to interpret the Market Net Flow chart.

Basic Terminology

Before diving into the Market Net Flow, it is crucial to understand the following terminology:

  • Long: Buying calls or buying puts, which is a bullish strategy.
  • Short: Selling calls or selling puts, which is a bearish strategy.
  • Net Calls: The difference between long calls and short calls, represented by the green line on the Market Net Flow chart.
  • Net Puts: The difference between long puts and short puts, represented by the red line on the Market Net Flow chart.
  • S&P 500 ETF (Spy): The price of the S&P 500 index, represented by the white line on the Market Net Flow chart.

Market Net Flow Chart

The Market Net Flow chart displays the net calls, net puts, and the Spy's price. The green line represents the net calls, the red line represents the net puts, and the white line represents the Spy's price. This chart provides a visual representation of market sentiment and can be used to identify trends and patterns.

Algo Flow

Algo Flow is the sum of net calls and net puts across the entire market. It is shown in the background of the Market Net Flow chart and can be accessed through the ticker dashboard and options. Algo Flow provides an overview of market sentiment by combining net calls and net puts into one line.

Historical Analysis

The Market Net Flow allows for historical analysis of net calls, net puts, and the Spy's price. The history can be set to two days cumulative, three days cumulative, or other time frames. This provides a bird's eye view of how the market has been moving and can help identify trends and patterns.

Option Expiration

The Market Net Flow allows for filtering of options by expiration date, such as seven days, 15 days, or 30 days. The default view shows all options across all expirations. It is essential to consider multiple expiration dates and not focus on one singular view.

Strategy

The Market Net Flow can be used as a leading indicator for market sentiment and price movement. By analyzing net calls, net puts, and the Spy's price, traders can gain insights into the market's bias and potential direction. The Market Net Flow can be used in conjunction with other tools and strategies to improve trading decisions.

Market Netflow Overview

Market Netflow combines several elements to provide a comprehensive view of market dynamics:

  • Cumulative net flow: shows the total flow of assets into or out of the market over a specific time period
  • Momentum: calculates the current net flow minus the average of 60 minutes in net flow, providing insight into market trends
  • Options dashboard: provides additional information on market maker hedging, gamma exposure, and other factors affecting market movement

Momentum Shift

The Momentum Shift calculates momentum using the current net flow minus the average of 60 minutes in net flow. This can be adjusted to use different time frames, such as 45 minutes or 15 minutes, for more or fewer signals. The Momentum Shift can be used for scalping, with technical analysis providing confirmation for trade entries and exits.

Support and Resistance

Algorithmic support and resistance lines can be plotted on the chart using the "hamburger icon." These lines show areas of potential resistance and support, allowing traders to identify levels to buy or sell. Resistance levels can act as magnets, drawing prices back down to them after a breakout, while support levels can act as a springboard for further price increases.

Gamma Exposure

Gamma exposure shows areas with high levels of market maker hedging and gamma exposure. These areas can act as magnets or reversal points, and traders can use these levels as a guide for trade entries and exits. Gamma exposure levels are plotted on the chart and can be viewed on the options dashboard.

Additional Features

  • Moving averages: can be plotted on the chart to provide dynamic support and resistance levels or entry and exit points. These moving averages can be adjusted to different time periods and can be used in conjunction with other technical analysis tools.

Using Market Netflow for Trading

Technical Analysis Features

  • 100-period moving average: after 20 data points, the 20 moving average acts as dynamic support and resistance
  • Plotting the 50 and 100 moving averages: can be used to identify potential trading opportunities
  • Crossing of moving averages: can be a signal for buying or selling

Market Netflow Cross

  • Net calls crossing above net puts: a very bullish indication
  • Net puts crossing above net calls: a very bearish indication
  • Timing long entries: important to wait for the cross to create some distance before entering a trade

Momentum

  • Already discussed in previous sections

Divergence

  • When price and net flow are diverging, it can be a sign to adjust a trade or take a new position
  • Example: spy's price falling, but calls rising and puts flat
  • Start looking for a reversal and a new entry point

Market Trend

  • Envisioning a trend line on the chart
  • Drawing a trend line on calls and spy's price
  • Taking entries based on the trend line
  • Trend line crosses on the net flow lines: can be an indication to take calls or puts

Additional Strategies

  • Looking at the default view in Market Netflow for references on these strategies
  • Using the buttons for moving averages, support and resistance, and gamma exposure
  • Incorporating these strategies into your trading routine

Why We Shouldn't Use NetFlow for Main ETFs

  • The main ETFs (SPY, QQQ, IWM) are not traded like individual stocks and are heavily used for hedging purposes
  • When big money (smart money) takes positions, they often hedge those positions by buying puts on these ETFs instead of buying puts on the underlying holdings
  • This means that large amounts of puts can be bought on these ETFs without impacting their price
  • As a result, watching direct net flow for these ETFs can be misleading and lead to losing trades

Why We Should Use Market NetFlow Instead

  • Watch the underlying holdings that drive the price of these ETFs instead of the ETFs themselves
  • Market Netflow shows the combined sum of net puts across all underlying holdings, giving a more accurate picture of market sentiment
  • Market Netflow can be used to identify trends and patterns in the market, which can be combined with technical analysis for better trading decisions

Additional Tips and Takeaways

  • Always combine market net flow with your favorite technical analysis strategy for the best results
  • Practice using market net flow by going back in time to specific dates and seeing how market net flow reacted
  • The Discord chat can be used to run commands and get the same results as the website, including algo flow and market net flow data
  • Be mindful of the timeframe and expiration dates when using market net flow, as it can take time to crunch historic data

Key Takeaways

  • Main ETFs are heavily used for hedging purposes, making direct net flow misleading
  • Market Netflow provides a more accurate picture of market sentiment by showing the combined sum of net puts across underlying holdings
  • Combine Market Netflow with technical analysis for better trading decisions
  • Practice using Market Netflow by going back in time to specific dates and seeing how Market Netflow reacted
  • Use the Discord chat to run commands and get the same results as the website