Basics

The terms

Folks:

Too often I use terms in orderflow assuming everyone knows what it is. Based on my interactions with followers and subscribers, that’s not always the case. So I wanted to explain some common terms. Hope this helps 👍

1. MAE: perhaps most commonly used. MAE is Maximum Adverse Excursion and means the maximum amount the trade goes against you once opened. So, for example, if you buy AAPL at 145, and the lowest it goes to is 144 after you buy it, then your MAE is $1.

2. MFE: literally the exact opposite of MAE; Maximum Favorable Excursion denotes the maximum amount the trade goes in your favor while it remains open. So using the AAPL example again, let’s say you open the trade at 145 and it goes to 150 before you close it at 149, your MFE will be $5.

3. DOM: Depth of market. For no-chart traders, DOM is intuitive and represents the market it self. However for chart traders, DOM may be a complete mystery. Think of a market as people willing to buy at a certain price and then folks willing to sell at a certain price. The Depth of market articulates this by showing price along with sellers and buyers on either side of price and their size (how much and where).

4. Bid: if you are a buyer of AAPL AND you wanna buy AAPL at no more than $146, then that’s your bid. You place a limit order at $146 and join the bid of other traders like your self waiting to buy at 146. This is an instruction to your broker , conveying your intent to buy, your size to buy, the way order should be executed and the time frame the order stays in effect. We will cover more exotic order types in next installation.

5. Ask (offer): Ask is opposite of bid and represents your intent to sell at a specified price and a specified size. For example you join the offer at $151 to sell 100 AAPL . Your order then waits in line to be executed and priority is decided based on your exchanges’ matching algorithm . We will cover various type of matching algorithms in a different post.

6. VAL, VAH, VWAP: these are terms used to denote location of price within context of a market profile. VAH is Value Area High and represents the highest price of the range where 70% of all trading had occurred. VAL (Value Area Low) is the lowest price of the range where 70% of all trading has occurred in the chosen time frame. We will do another post going over the fundamentals of time and volume based profiles which I use in orderflow methodologies.

7. LIS: least but not the last, LIS is my Line in Sand. This is my bottom line and usually the MAX risk I am willing to take in order to find if my trade or my bias will be successful or not.

If this post helped you, share with other like minded traders like your self 👍 let me know on my Twitter what other basics and fundamentals you want me to cover whether it’s technical or fundamentals or anything related to profiling.

Here’s a link to my Twitter : @TicTocTick

Good Luck 🍀 and Trade Well 👍