Trading is a game of probabilities, and certainty is never guaranteed. This order flow guide for beginners offers essential insights to help you navigate market dynamics and make more informed decisions, elevating your trading skills to the next level.
You can gain a deeper perspective on price movements by understanding key concepts such as footprint charts, volume analysis, and market imbalances. These tools are invaluable for improving your strategies and identifying opportunities in real-time trading scenarios.
What is Order Flow?
Order Flow (OF) is a form of data showing the contracts sold and bought at a certain price level that moves prices up or down. Reading order flow gives you extra insights into the market movements, which can significantly improve your trading. Looking into the order flow at the key resistance and support levels gives you an edge, as you can make an informed decision based on what is happening in real time.
If you are eager to improve your win rate and profitability and elevate your trading to a professional level, Order Flow just might be the missing piece of the puzzle you’ve been searching for.
To be able to read Order Flow, learning about footprint charts is a must, as they give you a huge advantage over the rest of the market. At first glance, Footprint charts might seem overwhelming, but once you dig into them, your whole perspective changes. They give you an insight into the amount of transacted volume within a candlestick and show you exactly at what price the majority of volume was traded.
The fact that most retail traders lose their money might give you another reason to find out where the money is going and what really happens at levels of interest.
The advantage of using Order Flow
The X-ray vision of charts sure brings many benefits. It is extremely invaluable to see the amount of volume transacted at each price in a candle.
Footprint Charts
Footprint charts can reveal whether acceptance has truly been achieved above or below a key level. They show the total amount of traded volume and at which price point it was traded. Only a footprint chart can do this.
Being able to see horizontally where we have many buyers and sellers can greatly assist us in interpreting supports and resistances.
Depth of Market (DOM)
The depth of market (DOM) is also important when scalping as it gives additional clues. It is a list of buy and sell orders for a specific asset organised by price level. It’s helpful to see where limit buys and sells are being placed and where the liquidity is greater. At the end of the day, you can weigh the probabilities of your limit orders being filled.
When the price moves sideways and the order book is stacked with buys, it means there is more buying pressure. The move is not sustained if the price rises, but open interest (OI) figures are all the same.
Another benefit is checking the order book when the price approaches resistance/support levels and seeing how big the sell/buy walls are.
Difference between Technical Analysis and Order Flow
Regular Technical Analysis (TA) is extremely important because without learning the basics thoroughly, one cannot understand footprint charts. With the knowledge of technical analysis, you can analyse the chart, find levels of interest, and then use the footprint chart to your advantage. So, although regular technical analysis has limitations, it cannot be ignored.
The limitations start to show, for instance, whenever trading a range. Shorting the tops and longing the bottoms work well, but you must know that you will lose a trade at the break in either direction. Being able to read order flow may prevent you from losing it, though, as you can examine volume, open interest, delta, imbalances, etc. and get some clues.
The same goes for whenever the price reaches a level of interest. Footprint charts can reveal whether acceptance has been achieved above or below the level. They show us the total amount of traded volume and the price at which it was traded. In the regular chart, candles can easily be misread as it is impossible to see where most of the volume was transacted.
What to look for on a Footprint Chart?
Let’s dive into the key concepts of order flow:
Delta
The total sum of market orders in any given session.
There are two types of order flow: passive/limit and active/aggressive.
Passive order flow represents limit orders. They do not move the price action and do not always get filled. Institutions and traders with large positions may often choose to sell via limit orders to avoid influencing the price action in the market.
On the other hand, active order flow represents market orders. They are very important as they move the price action.
Active and passive Order Flow go hand in hand, as a limit order requires a market order to fill it.
Cumulative Volume Delta (CVD)
The cumulative volume delta is the running total of the delta.
The CVD expands on Delta by recording and calculating the buy-sell volume difference. It is strongly favoured by day and scalp traders, as it is a leading indicator that provides greater accuracy and confluence on low time frames (divergences).
Imbalances
A significant excess of orders (buys or sells) in any given trading session.
The volume traded at the market’s price level can be balanced or imbalanced. When a level is out of balance, there are proportionally more buyers or sellers at that level. Market imbalances caused by aggressive participants often mark the beginnings and ends of trends.
Open Interest
The total number of contracts includes net longs (buy) and net shorts (sell) positions.
Besides these, one can check liquidations, buying/selling tails, single prints, TPO, etc., to get the whole picture and make an informed decision.
How to read Order Flow?
Order Flow gives you a picture of what is happening in the market at any time of the day. It is specifically useful for scalp and day traders but can also be used by swing traders to find the best possible entry on the lower time frame.
Order flow is specifically useful when the price is breaking out of the range, so below are two examples of what to (ideally) look for.
Example 1: Price breaks to the upside
When the price breaks out of the range, buy volume should support the move on the way up. Positive delta should increase as it shows more active buyers are coming into the market to support the price, so there should be a lot of buying imbalances. If the high is taken on a large delta influx and open interest increases along with the NET longs increasing, it signifies strength.
But if the price breaks a level on high volume but on negative delta, the fake-out sign can be confirmed if the price comes back into the range with an increase in negative delta, volume, NET shorts and OI increase.
Example 2: Price breaks to the downside
The same goes when the price breaks down. The selling volume should support the move on
the way down. The negative delta should increase as it shows more active sellers are coming into the market, and there should be a lot of selling imbalances. If the low is taken on a large delta influx and the open interest increases along with the NET shorts increase, it signifies the strength of the move.
But if the price breaks down on high volume but on positive delta, the fake-out sign can be confirmed if the price comes back into the range with an increase in positive delta, volume, NET longs and OI increase.
The limitations of using Order Flow
On the other hand, the abundance of information can sometimes overwhelm you and lead to so-called analysis paralysis, especially when the signs contradict one another.
Therefore, finding your edge and sticking to what works best for you is important. Order flow does seem like a cheat code and can improve your trading performance immensely, but if it confuses you more than it helps, you might want to reconsider.
Waiting for a ‘picture-perfect reaction’ might make you miss a trade, as there is no such thing in trading. Reading order flow can be quite complex, requiring a lot of experience, deeper understanding, patience, and dedication.
Another issue you might experience is being too caught up with order flow on lower time frames and not seeing the bigger picture. On higher time frames, you should always have a picture of where the price is coming from/heading. So, when in doubt, it is best to zoom out.
Software for reading Order Flow
Order flow information is available on various software, so you might want to check a few out to see which suits your style and is visually most pleasant for your taste. The quality is more or less similar, so it all boils down to your personal preferences. They each have their own specialities and prices so you might have to take a look yourself.
We mostly use Exo Charts, Quantower, and Atas at Chart Champions. Other respected and popular software are Sierra Charts, Ninja Trader, Go Charts, Trading Technologies, etc. Your choice also depends on what assets you wish to trade.
Conclusion
Understanding order flow provides valuable insights and helps you make more informed decisions in trading. It offers many benefits, such as seeing exactly what happens in each candle and how much volume is transacted. Therefore, it gives you greater clarity on price action in general. It helps you gain insights into market liquidity, price movements, and potential trends.
Learning basic technical analysis is crucial, as you can only advance to reading order flow with excellent knowledge of technical analysis. Technical analysis has many components, such as delta, CVD, imbalances, OI, TPO, buying/selling tails, liquidations, etc.
Order flow gives you an edge and pushes you to stay on that edge, as it requires constant learning, persistence, and patience. Be careful not to get caught up in low time frames, either. Always zoom out to see the bigger picture, which may affect your trading.
Remember, there is no ‘best tool’ or the ‘best strategy to apply’ as not everything suits everyone. You should stick to your own trading strategy and use the tools, indicators, and strategies that work best for you.
If order flow gives you the sharpness you’ve been looking for, investigate it, choose the most appealing and comprehensive software, and take your trading to another level.
Leave a Reply