Order Flow Trading Book Pdf

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Order flow trading is a type of trading strategy and form of analysis used by traders on the markets, other popular forms of market/trading analysis include technical analysis, sentiment analysis and fundamental analysis.[1]

Order flow trading is the process of analysing the flow of trades being placed by other traders on a specific market.[2] This is done by watching the Order Book and also footprint charts.[2] Order flow analysis allows traders to see what type of orders are being placed at a certain time in the market, e.g. the amount of Buy and Sell orders at a given price point.[3] Traders can use Order Flow analysis to see the subsequent impact on the price of the market by these orders and therefore make predictions on the future price and direction of the market. Order flow trading is a type of short term trading strategy as it is used to enter the market accurately based on recent executed buy and sell orders.[2] Order Flow Trading is sometimes referred to as a form of volume trading.[2]

The numbers on the left hand side of a footprint candle show the volume/amount of sell orders executed, the numbers on the right side of a footprint candle show the volume/amount of buy orders executed, footprint candles are read diagonally up, and to the right. E.g. a sell order on the left hand side is compared with a buy order one tick up, diagonally to the right of it.[4]

Order Flow analysis shows the volume of Buyers and Sellers at a specific price point and at a given time, it can also show the accumulation of orders waiting to be executed at different price levels. On candlestick charts this is shown more broadly by individual candlesticks, however, Order Books and footprint charts show the individual buy and sell orders placed within these candlesticks and therefore give a deeper view on the micro price movements. Order Flow traders can see both Limit orders and Market orders being placed, footprint charts show only executed market orders and therefore show the actual volume of buyers and sellers.[5] limit orders are price points where traders have ordered to buy or sell a stock, these orders will not get executed unless the price of the market hits their limit order price point.[6][7] These orders are not shown on candlesticks charts and can only be seen on Order Books, once these orders have been executed they turn to Market orders which are then displayed on the chart.[8]

Order Flow Traders can see levels of support and resistance by the size of buy and sell orders. On a footprint chart these are shown by buy and sell imbalances.[4] A buy imbalance tells us that there are much more buyers than sellers at that price point, indicating potential support levels. A sell imbalance shows that there are a lot more sellers than buyers at that price point and this can indicate a potential resistance point.[9] The volume of buyers and sellers is also used to indicate potential trend reversals and is a strategy that some order flow traders will apply to footprint charts.[4]

Spoof orders or Spoofing are when traders will place orders at certain price points and then cancel these orders just before they are executed, they are used to deceive other trades into analysing false support and resistance levels.[10]

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.

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