How Order Flow Can Help Your Trading

Posted by on Feb 6, 2016 in Blog

Complex trading techniques may be the way to go for most retail traders, however, being proficient in reading order flow is also a very efficient solution if you want to succeed in trading. Traders like to complicate things by adding this indicator with that indicator on this time frame with that chart type. In the end it gets so messy you being to wonder if you are even trading the market or trading an indicator.

Order Flow is a vague term which can have different meanings to different people. But as a general definition, order flow refers to the orders that are filled during a trading day. Some traders, especially those who trade off a DOM, will argue that is not order flow trading because they put more emphasis on the orders that are being shown in the market and not necessarily being filled and printed. They are guessing the intentions of traders based on what the other trader is showing, not what the trader is doing.

What’s the difference? It’s like watching the TV show American Pickers. They buy an old sign for $150 and say “its worth $500” and all of a sudden they made $350. That is sort of the way DOM traders think. They see a large order at a price in the order book and react as if that large order was transacted at that price because maybe the market reacted to it. The guys on American Pickers only make $350 on that old sign if someone pays it. What if they only manage to sell it for $300? You can put a price tag on anything, but if the market doesn’t trade there, then obviously that is not what it is worth. Watching the order flow in regards to what actually traded is much more important because it shows the commitment of market participants as opposed to their intentions.

Everyone wants to buy at a lower price and sell at a higher price so spending your time watching people wanting to do that doesn’t make sense in my opinion. It makes more sense, at least to me, to see where and what and how much traded at various prices.

Order flow analysis is actually an elegant approach in trading. Although it is usually done with a modicum of discretion and is exposed to the criticisms of systematic technical traders, this method of trading also has a lot of things going for it. For starters, order flow analysis does not require you to spend a lot on indicators, and it also allows you to simply focus on mastering the trading process. Meaning, you do not need to consume yourself with looking at many different indicators on your screen at once. Who wants to look at a trading screen that looks like a page from your high school trigonometry textbook? Order flow trading keeps things simple.

Many successful order flow traders focus on just one market, and one chart type. There are also traders who also succeed in actively trading multiple markets in different time frames, but for most traders, going for the minimalist approach is still the best option.

Two of the reasons why focusing on a single approach is a clever step is logistics and risk tolerance. Trading revolves around transferring money from the accounts of other people to yours. You do not need twenty trades per day to achieve this. A few well thought out trades can earn you enough profits a day. Also, it is worth noting that committing an entire account balance to a single trade isn’t recommended as well. With $5000 available account equity, you can do a trade of 10 contracts of 10 Year Futures to achieve the ‘one trade per day’ activity that would give you four ticks of profit. This should provide around $575 after commissions. Some may believe that this market and time frame may be both boring and unworkable, but there are also some who would agree that this is logistically reasonable. They usually blow up after a bad trade and then say the markets are rigged or order flows doesn’t work or something along those lines, but the reality is they are over margined. The key here is deciding on this early and working things from there.

I have found that real success is more likely achieved in increasing position size and not in changing the trading frequency. However a trader needs to be able to handle the increased psychological baggage that comes from a bigger position size, but that is something else. Big money is made in trading by scaling up, but I think every trader has a size limit that they can trade without being affected emotionally. There is a difference between a retail trader trading their own money and an institutional trader trading other people’s money where they are reward for taking risk. A retail trader generally is going to be more conservative.

Here’s an example. If you find a setup that you like on a 5 range E-mini chart and it is consistent in generating one point profit while putting at risk only one point for your stop, what you need to do is to place one or two entries a day. This will provide a $45 net per trade per contract after the commission, which may appear small, but with a 25 contract position, this ultimately equates to $250,000 a year. This size is already reasonable. Emini SPs are a market that can absorb 25 lots easily without moving the market.

There are two major advantages the E-mini S&P 500 futures has: liquidity and movement. Volatility always opens opportunity and traders are almost always able to get their price in the electronically traded market. Generally, on a 10 range ES chart, there are typically between 5-10 trades that present themselves even on a normal trading day. It’s true that one minute charts or 5 range charts present more trading opportunities, but it is also worth noting that shorter term intraday charts usually produce countertrend setups that usually end in losses.

Furthermore, each combination of market and time frame has a stop size and profit target that are more effective than others. A 5 point profit target and a 3 point stop combo usually works well with the 10 range E mini chart. On a 5 range ES chart I tend to have a 2 to 3 point profit target in mind with about a 1.5 point stop. Of course, when I am in a trade and the order flow tells me that this might be the beginning of a bigger move I am willing to back off my initial profit target and go for more on the trade.

When traders are starting out with order flow trading, I suggest start trading just one contract, with two to three trades per day. During the early part of your trading education of trading with order flow, stress and over trading can take place. This can derail the learning process and it can also result in big losses. As a simple advice, do not let your emotions interfere with your analytical tasks and implementations. That is why I suggest starting with just 1 contract. If you can’t make money trading 1 contract, you sure as heck won’t make money trading 5 or 10 contracts at a time. Capital preservation is key when you are just starting out trading if you want to last for a long time.

During most days, the market will not be trending. It will encounter 4 – 6 swings up and down. When the market reaches a new high or low, look for signs to sell the high or buy the low. Also, the market usually makes a second attempt at highs or low that failed at its first attempt. The second attempt is most of the time a good entry in the opposite direction when that attempt fails as well.

In studying order flow, do not limit your concentration on its highs and lows. On a 10 range E mini chart, each part of the bar has something important to tell you. Note that being a good order flow trader does not happen overnight. But if you spend enough time on the proper market and time frame, and you find reliable setups and gradually applying them on a large scale, you can definitely earn money.


  1. Spoken from a real pro! All truthful words of wisdom!
    Thanks Mike

  2. Very valuable Guidane Mike as always! Thank you

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