Order Flow Trading Strategy: This order flow trading strategy guide will teach you how to get into the mindset of a professional trader. If you are interested in learning how to trade using one of the oldest trading techniques used especially by day traders, you have come to the right place. We will teach you how to trade market imbalances using one of the best order flow trading setups.
Order flow trading is a type of trading strategy and form of analysis used by traders in the markets, other popular forms of market/trading analysis include technical analysis, sentiment analysis and fundamental analysis. Order Flow Trading Strategy
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Order flow trading is the process of analyzing the flow of deals that are placed by other traders in a particular market. This is done by viewing the order book and also the footprint charts.
Order flow analysis allows traders to see what type of orders are being placed at a given time in the market, for example the amount of buy and sell orders at a certain price point.
Traders can use order flow analysis to see the subsequent impact on the market price with these orders and thus make predictions about the future price and market direction. Order flow trading is a type of short term trading strategy where it is used to enter the market precisely based on the recently executed buy and sell orders. Order flow trading is sometimes referred to as a form of volume trading. Order Flow Trading Strategy
Order Flow Trading Strategy
Order flow analysis helps you recognize the final details of the buying and selling volume. It’s a microscopic look into candlestick studies. Inside each candlestick, there is a lot of information that can be analyzed through order flow.
An order flow chart will show you exactly how many buy and sell market orders were executed at each price level
Depth of Market (DOM) will show you the intent of buyers and sellers. However, when these buy and sell orders are converted into market orders and have been filled, they will be transferred to the price chart (or footprint chart).
How to Trade Order Flow
In technical analysis, we look for areas or price levels in which we are trading. However, in order flow analysis, we look for clues as to when to trade and what price to trade.
Trading using order flow can give us information about:
- Big buy and sell orders (can drive the market price).
- Buying and selling momentum.
- Liquidity flow (what is the size of buy and sell orders: small, medium or large).
- Momentum exhaustion (when the demand flow is depleted, this could signal a price reversal).
- Stop hunting.
- Trapped buyers and trapped sellers.
What Order Flow Trading Tools We Use
As far as the order flow trading tools go, we use the footprint charts.
Note* The best order flow trading platform to draw the footprint charts is Siera Charts.
See Siera Chart footprint chart below:
The footprint chart shows us how aggressive are the buyers and sellers. We can use this information to see where the big inventory of orders is sitting and compare it with what the market is doing.
The current state of the market is demonstrated by the trail of transactions that have actually happened, not those transactions that are advertised (aka the limit orders) as potentially happening if we reach a certain price.
The essence of order flow trading is to react based on the action of the markets which is displayed by the daily volume traded.
Basically what you see on the footprint chart is the market orders (all filled orders). This can help us compare the bid volume to the ask volume and gauge which one is in control of the market.
Before we go into full depth on how to use the order flow trading strategy, we’re going to stop and show you how the footprint chart works.
By now, you are likely wondering how to use the Footprint Charts. Using these charts can help you develop a more comprehensive view of the market.
The footprint charts contain all the data relating to price and order flow (volume).
For each bar and price level, the footprint chart displays the volume traded at each price.
Let’s get into the footprint charts and cover some of the key concepts of how to trade order flow.
Each footprint chart has three pieces of data:
- Each row on the footprint chart develops at a specific price.
- The bid-ask volume indicator displayed in the cell.
- Order flow (green numbers show aggressive buying and red numbers show aggressive selling).
Note* the point of control is the price at which was the most traded volume on each footprint occurred.
If we break down the footprint chart, we have two things:
- Bids on the left side
- Offers on the right side
You can start to build a picture of the relationship between the bid and the ask volume.
If you’re an aggressive seller and you want to enter the market you’re going to have to hit a bid. Alternatively, if you’re an aggressive buyer and you don’t want to wait for a limit order to be filled you’re going to hit the market order and you’re going to lift the offer. This whole process will be reflected in the footprint chart. Order Flow Trading Strategy
Let’s look at how footprints compare the relationship between the bids and the ask prices
When the buyers turn more aggressively the number will turn green. This means that there are more buyers than sellers. Conversely, when sellers turn more aggressively the number on the footprint will turn red. Check out this forex buyers and sellers indicator.
When you see stacks of these imbalances one after another, that’s a good indication that buyers (sellers) are getting more aggressive. Depending on the location of where these imbalances occur, we can look to qualify trades based on them.
For example, if the footprint shows an imbalance of buying activity in the lower end of the range that usually represents a potential level of support. Order Flow Trading Strategy
However, if you see a whole stack of buying imbalances print at the top of the candle that can indicate trapped longs and a possible reversal.
Note* the same is true in reverse of selling imbalances.
Order Flow Trading Strategy – Footprint Patterns
Additionally, to the aggregated orders, we’re going to add the horizontal volume profile that will give us a visual representation of the total number of buy and sell orders traded at a given price.
The volume profile will be displayed in the form of rectangles of different lengths.
Now, the footprint chart shows us a 3D map of the buyers and sellers in the market. This way we can track what is going on behind the cryptocurrency candlestick charts and see where the buyers and sellers are in control.
The first footprint pattern that you can trade using order flow trading is the P pattern.
You might be wondering:
What is an order flow P pattern?
Simply put, the P pattern can be described by a narrow volume profile in the lower half and a wide volume profile in the upper half of the candlestick.
Note* ideally, the P pattern has small shadows and the candlestick is bullish.
See the order flow chart below:
The meaning behind this order flow trading setups is that sellers are liquidating their positions. This type of footprint pattern works best if the prevailing trend is bearish.
Note* It’s not indicated to trade this order flow trading pattern if it develops in a bullish trend or ranging market.
The second types of order flow trading setups we want you to learn are the B pattern. This is the inverse shape of the P pattern.
The B pattern has a narrow volume profile in the upper half and a wider volume profile in the lower half of the candlestick. The meaning behind this order flow pattern is that buyers are exiting their positions. This type of footprint pattern works best if the prevailing trend is bearish.
See the order flow chart below:
Both the B pattern and the P pattern are reversal trading setups using order flow analysis.
Next, let’s examine how to trade order flow imbalances using footprint chart trading.
Order Flow Trading Imbalances
Order flow imbalances happen when the market shows a very aggressive initiative.
The aggressive initiative is when we see too much buy-side aggressiveness or too much sell-side aggressiveness. When this happens, after an aggressive move the market will often top out (bottom).
The real key to an order flow imbalance is to have a big surge in volume.
There are three trading rules you need to follow:
- We use the order flow imbalance to trade in the direction of the imbalance looking for continuation patterns.
- If it fails to go with the trend, then we look for fill out of the imbalance.
- If we can then move through the imbalance we then look for a reversal.
See the order flow trading setup below:
Note* If we throw into the mix the context of the market, we can then add more confluence and can better position ourselves.
Remember, you only have a trade signal when you can effectively access that trade at the right location and in the right time frame. And, that’s where the footprint is so useful.