Trading With Order Flow

Posted by on Feb 13, 2016 in Blog

A commodity’s price is determined by the market, and the volume represents interest. Price is not directly determined by fundamentals, the market simply reflects what the consensus is, exactly as it is. At the end of the analysis, the market’s price and volume present a sensitive balance between greed and fear.

You may have seen a lot of technical methods of trading analysis, but how order flow differs from those is because it puts more reliance on volume. The thing about volume is that it is an important factor, yet most methods ignore it. Without volume, you may not be able to figure out how much conviction is in your every move. It’s comparable to buying a car without checking the hood. We can look at volume as the marketplace’s motor.

Using an order flow volume footprint chart implies how aware you are of the importance of volume. It is important to find out whether the volume is heavy or light as a market moves through old levels of resistance and support.

Since volume is often regarded to as a secondary priority, and sometimes completely ignored, it is important that there is an analysis method that makes volume a top partner to price so as to better understand the dynamics of how price moves.

With order flow, no matter what time frame you use, the analysis theories remain the same because the volume relationships should be similar. Although longer term charts could be more muted and shorter term charts can be erratic at times, the general rules are the same. You are still looking for the same signs of market turns or continuation in long term charts and short term charts.

So what are you looking for?

One of the things I look for is when a market gets to a top and volume becomes heavy and prices seem to stop moving. Imagine hitting a brick wall. This is usually a sign of a top and a signal that prices may start to move lower. There are exceptions though, but this is true in many cases.

This is just one of the things I look for with order flow. I explain everything in my book since explaining everything can fill a book – that is why I wrote one.

But do keep in mind that it is also possible that topping action won’t be very obvious. The market often acts differently from what is expected.

When it comes to finding lows, I think in opposite terms to what I look for at highs. One of the things to note about lows is that one of the differences with lows is that they are more emotional. Fearful selling usually leads to extended pushes lower as traders capitulate and bail out of positions.

It is important that before you enter the trade, you should already decide where you plan to get out. You should decide to whether sell to get profit, or sell to correct something. You may adjust your decision after re-evaluation as time passes and as the market moves. You should monitor your position as the market moves to ensure that the situation remains the same; that the reason for getting into the trade is still there.

Keep in mind that although inevitable, remaining at a bad position is a bad idea, so as soon as the trade looks like it won’t go as planned or the setup is invalidated, the position must be closed out.

Traders should always use all accessible information to make proper and unemotional decisions. Order flow does not give you any new information per se, but what it does do is it allows you to look at the same information you may already have to easily interpret the market. Also, this method isn’t perfect. No method of trading is. Order flow trading does allow you view the market from a technically fundamental view where you can see the actual struggle of supply and demand.

Although one should always aim for profits, losses will never be out of the picture. There’ll be good trades, and there’ll be bad trades. We just have the goal of having more good trades than bad trades. This calls for improved discipline and additional objectivity which is something order flow can give you. Nonetheless, keep in mind that successful trading should never rely on luck. It should be based on ability and knowledge. Once you understand what is happening in the market you can make better trading decisions.