Does Order Flow Trading Work
Maricel Fergason
Order Flow itself is simply information. Just like charts, it can be used in a number of ways, some good and some bad. But let's first break down order flow into it's components so we all agree what we are talking about:
Order Executions/Tape Reading - This aspect is the real flow of orders. It's the information we see in Time & Sales, Footprint Charts, Cumulative Delta. It is looking at market orders, either as they execute or historically. I guess this is the "true order flow". Every trade is a buy and a sell. We look at market orders because we consider them to be more aggressive. When someone trades with a market orders, they are giving up a price to get an instant fill. Limit orders on the other hand just lazily sit there waiting for a market order to hit them. Often these are market makers with no directional conviction. So we see market orders as being more significant.
Volume Profile/Positions - The tape reading part helps us assess various things like momentum, traders getting stuck, balance of trade BUT the volume profile helps us understand where people are positioned and likely to get stopped out. I sometimes call this "Order Flew". It's important to know when trades will be "washed out" - for example - if we have a volume cluster on the S&P500 Futures and the market moves up 100 points and back down to it, it's unlikely short term traders on either side that were positioned there will still be there. But recent, nearby volume helps us assess areas of positions.
Market Depth - The bids and offers, the lazy passive orders waiting to be hit. This is part of the story but in terms of overall importance, I'd put it at around 20% at most. For example - if you return to the high of the day on any market, the offers will be quite large directly above the high. It means nothing at all. It's just a quirk of the market. It does not help you tell if a price will hold. On the other hand, if you see large depth and as we approach it, we see more added to the depth in front of that price, it means others are front running that depth and that is a useful bit of information.
This is the key - it is all just information. Just like price charts are information. When people look at Order Flow, they consider it to be a technique more than a set of information. They look for things like iceberg orders and decide to make a one rule trading system to fade every iceberg, For these people - yes, order flow is overrated because they are trying to ignore everything else going on in the markets and construct a trading system a chimp could execute.
That's perhaps the easiest way to use order flow because momentum is easier to read. It's about the market continuing to do what it's already doing. On the other hand, reading a turn in the market with order flow takes a higher level of skill and a little longer to learn.
Order flow can't put lipstick on a pig. It won't help you 'improve' something that doesn't work anyway, which is why whenever someone calls me, the first thing I ask is what they are currently doing and we discuss whether they need a reset or whether it will actually help.
When Jigsaw started back in 2011 - we were one of the first in the space and certainly had the best education. It was always going to attract the underbelly of the trading education/tools world and now we see stuff out there that is so complex but so impressive and futuristic that new traders are drawn to it like moths to a flame.
It is hard to see how a set of information could be overrated. It is true that some methods of presenting this information are better than others. It is also true that some people simply get on better with different tools (e.g. Footprint vs DOM).
There's a middle ground between complexity and simplicity that will leave you making consistent decisions where you improve over time. For those people, Order Flow will be way underrated because they will be the one's getting the most out of it.
HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN; IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK OF ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL WHICH CAN ADVERSELY AFFECT TRADING RESULTS.
The many different types of financial data play a vital role in attempting to predict market trends. But just as there are many types of information in the form of market data, there are also many different ways of analysing them.
Definition of Technical Analysis (TA): Technical analysis is a technique that utilizes historical market data to identify and predict trends. Using simple price and volume traded data to analyse historical prices movements, TA attempts to find recurring patterns that will repeat in the future.
Definition of Order Flow: Order flow Analysis is a technique used to anticipate changes in price in the market by observing the flow of constantly changing orders of various sizes (liquidity) and the aggressive trades (transactions) to view their impact on the market price. This analysis allows the trader to observe the balance between different market players as they bull and sell, and is the fundamental building block of market mechanics.
Pros of TA: Technical Analysis provides traders with a way to digest price information in a way that makes making a trade more defined. It allows them to look at historical and current trends in a more analytical way.
Timing plays a crucial role in trading, and having a predefined way to exit or enter the market makes trading easier. Technical analysis can anticipate when a trend may reverse, which helps traders make market decisions.
Cons of TA: Technical Analysis does not take into consideration other financial data such as the economic and financial factors that can influence the market. However, some traders consider this to be a positive, since they believe that all forms of fundamental news should be baked into the price.
But technical analysis can also be overly complicated, making many traders confused by mixed buy and sell signals. Therefore a detailed plan and a deep understanding of TA signals is vital before taking a trade.
Order flow also often uses historical data to anticipate prices, just like technical analysis. However, it is much more immediate as good order flow analysis will track the finer details of price, such as volume, as well as the quantity and size of both the purchase side and the sell-side of the market.
Trading in financial markets involves risks and is a game of probabilities. The purpose of any form of analysis is to provide the trader with accurate information based on historical trends in the market and hopefully a better chance of making a profit. However, this does not guarantee results, since there are still some elements of the markets that are random.
Looking beyond price and understanding liquidity and its behaviours can help you dive deeper into the market and make informed decisions. Success or failure ultimately depends on the individual trader, the quality of their analysis, how efficiently they carry out the execution of their analysis.
Bookmap was developed for, and by, order flow traders. The array of tools and indicators available, as well as the quality of education available, can make you a better trader just as long as you have the right mind-set! You can try it out today for free. Click here to get started.
Trading chart patterns formed by the historical movement of prices and put repeating price behaviours into a visual pattern. These patterns act as the basis of technical analysis and allow the trader to find entry and exit points, as well as better manage their risk.
RISK DISCLOSURE: Trading contains substantial risk and is not for every investor. An investor could potentially lose all or more than the initial investment. Risk capital is money that can be lost without jeopardizing one's financial security or lifestyle. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. Past Performance is not necessarily indicative of future results. Full Disclaimer Privacy Policy
Order flow trading is not the Holy Grail of stock trading strategy, but many professional traders that work at a prop trading firm or a big hedge fund swear by it. Trading using order flow can help you have a better read of what is going on behind the trading candlestick price chart.Price moves when there is an imbalance in supply and demand. As a trader, it remains up to you to recognize these imbalances.
Basically, you can view order flow trading like a volume-based trading system.An order flow chart will show you exactly how many buy and sell market orders were executed at each price level.See the order flow chart below:
Next, we are going to outline the order flow trading tools we use as part of our simple day trading strategy.What Order Flow Trading Tools We UseAs far as the order flow trading tools go, we use footprint charts.Note* The best order flow trading platform to draw the footprint charts is Siera Charts.
c80f0f1006