Order Flow Trading: the secret of professional traders

The order flow trading refers to the record of all the buy and sell orders of a financial asset, such as stocks, currencies, or futures, that are made in a particular market. The record includes information about the amount of assets traded, the purchase or sale price, and the time when the transaction was made.

Order flow trading is an important tool for traders and investors, as it provides a detailed view of the market activity and helps to understand the supply and demand of a particular financial asset.

order flow trading platform

Depth of Market (DOM):

The depth of market (DOM), also known as “market depth level” or “market depth”, is a tool used in trading to show the available liquidity in a particular market. The DOM shows a list of buy and sell orders along with their respective volumes at different price levels.

what is order flow trading

The DOM provides real-time information about the supply and demand in a market, allowing traders to see the available liquidity and make informed decisions when executing their trades. Some key features of the DOM include:

  • Price levels: The DOM shows the different price levels at which market participants are willing to buy or sell a particular financial asset.
  • Volume: Along with price levels, the DOM shows the available volume at each level. This allows traders to evaluate how many contracts or shares are available to buy or sell at each price level.
  • Market Depth: The DOM shows the “depth” of the market, i.e. the total amount of contracts or shares available on both sides (buy and sell) of the market. This allows traders to evaluate the overall liquidity of the market.
  • Limit Orders: In addition to showing available liquidity, the DOM also shows limit orders that have not yet been executed. These orders represent traders' intention to buy or sell at a specific price.

The DOM is particularly useful for traders who practice high-frequency trading or scalping, as it allows them to see liquidity in real-time and make quick decisions based on that information.

Tape or Tape Reading:

Tape reading is a technique used in trading that is based on the observation and analysis of the transaction tape (also known as “tape” or “time and sales”) to make trading decisions. The transaction tape is a sequence of prices and transaction volumes that is updated in real-time.

order flow trading strategy

Tape reading involves analyzing price movements and transaction volumes to obtain information about supply and demand in the market.

Order Book:

The order book or “order book” is a tool used in financial markets to show and record all pending buy and sell orders for a particular financial asset. It is a visual representation of the demand and supply in the market at a given moment.

forex order flow

In other words, the order book shows a list of buy and sell orders along with their respective prices and volumes. Buy orders are shown on one side of the book, while sell orders are shown on the other side. Each price level shows the total volume of orders at that specific price.

Some key aspects of the order book include:

  • Bid and ask prices: The order book shows the prices at which buyers are willing to buy (bid) and sellers are willing to sell (ask).
  • Volume: Along with prices, the order book shows the volume of buy and sell orders at each price level. This allows traders to assess the available liquidity and the intensity of the demand and supply.
  • Market depth: The order book also shows the “depth” of the market, i.e. the total amount of buy and sell orders at different price levels. Traders can see how close or far away price levels are from current prices and assess the balance between supply and demand.
  • Limit orders and market orders: The order book shows both limit orders (orders with a specific price) and market orders (orders to buy or sell at the best available price).

The order book is an essential tool for traders who want to evaluate market liquidity and dynamics. It can provide information about support and resistance levels, as well as possible areas of interest for traders. In addition, the order book can help traders make informed trading decisions and understand supply and demand in real-time.

What is Order Flow Trading?

The order flow trading refers to the record of all buy and sell orders of a financial asset, such as stocks, currencies, or futures, that are made in a particular market. The record includes information about the amount of assets traded, the buy or sell price, and the time the transaction was made.

Order flow trading is an important tool for traders and investors, as it provides a detailed view of market activity and helps to understand the supply and demand of a particular financial asset. Traders use order flow to identify potential trading opportunities and to make informed decisions about buying or selling an asset.

Seen graphically, if we have ever seen professional traders, it allows us to visualize how to buy and sell orders cross inside the candles.

order flow indicators

What information do we get from order flow trading charts?

  • Price: The price at which the order has been executed, or the last transaction made in a stock or futures contract.
  • Volume/Size: The total number of shares bought or sold at that price during the trading session expressed as the exchange's “lot size”.
  • Bid Size/Bid Totals: Represent the buy orders waiting on the bid side of the order book before being executed.
  • Ask Size/Ask Totals: Represent the sell orders waiting on the ask side of the order book before being executed.
  • Demand Size/Demand Totals: Represent the sell orders waiting on the demand side of the order book before being executed.
  • Supply Size/Supply Totals: Represent the buy orders waiting on the supply side of the order book before being executed.
  • Time: It is important to keep in mind that whatever order is placed by an operator, it has to be seen as part of the entire flow of past and future orders.

    All in all, this means that if we want to use order flow analysis, we have to know what price levels were traded in the past (and how far back), with at least a high probability.

We cannot guarantee that this order flow trading analysis is correct, but most of the time it will show strong indications about the potential areas where possible pullbacks could occur.

Tools for Order Flow Trading Analysis.

Some tools used for order flow analysis include:

  • Time and Sales (Tape Reading): The tape shows a sequence of prices and transaction volumes in real-time. Traders can observe the speed of transactions, order sizes, and the direction of the order flow to get clues about market behavior.
  • Order Book: The order book shows all pending buy and sell orders at different price levels. Traders can analyze market depth, bid and ask prices, and order volumes to assess liquidity and order flow intensity.
  • Heat Maps: Heat maps are visual representations of order flow in a market. They use colors and graphics to highlight areas with higher buy or sell order activity. This allows traders to quickly identify areas of high demand or selling pressure.
trading order flow
Example of a trading heat map in Order flow trading
  • Cumulative Delta: Cumulative delta analysis shows the difference between the volume of buy orders and the volume of sell orders over time. Traders can use this tool to assess the balance between supply and demand and detect changes in the order flow.
  • Volume Profile: The volume profile shows the trading volume according to price levels. It helps to identify areas of high volume and areas of low volume in the market. Traders can use this information to identify key support and resistance zones.
  • Footprint Charts: Footprint charts show detailed information about order flow at each price and volume level. They provide a clear visualization of orders entering and exiting the market, which helps traders better understand order flow and market dynamics.

These are the main tools used in order flow analysis. It is important to remember that order flow analysis requires experience and practice to correctly interpret the information and make informed trading decisions.

👉 Our complete guide with the best trading strategies is here!

Platforms Where You Can Apply the Order Flow Strategy

Next, let's look at some of the most important platforms to start applying Order Flow Strategies:

ProRealTime

ProRealTime is a popular and advanced trading platform that offers a wide range of tools and features to trade in financial markets. This platform provides traders with the ability to apply Order Flow trading strategies to analyze and make informed decisions about the order flow in the market.

So, in the real-time trading account type of ProRealTime, traders can use different tools and charts to visualize and analyze the order flow. Some of the highlighted features and functions include:

  1. Viewing the order book.
  2. Volume analysis.
  3. Customizable indicators and tools.
  4. Simulation and backtesting.

Main features of ProRealTime

  • 💼 Financial products: 600,000
  • 📈 Analysis tools: +100
  • 🖥️ Account type: 3, but Order Flow is done from its real-time trading account.
  • 💲 Monthly cost: From 29.66€/month
  • 🏦 Brokers that integrate it: IG Markets, Interactive Brokers, or Saxobank.
  • 💶Minimum deposit: 3,000.00 €
  • 📝Regulation: Financial Conduct Authority (FCA) of UK, Comiaión Nacional del Mercado de Valores (CMNV) of Spain and L'Autorité de contrôle prudentiel et de résolution (ACPR) of France.
  • ⭐️Score: 8.75/10

Best Platform to Invest Awards Rankia 2021

Metatrader 5

On the other hand, MetaTrader 5 is another trading platform widely used by traders due to its versatility when trading in financial markets. This platform gives traders the ability to apply order flow strategies to analyze and make informed decisions based on the interaction between buy and sell orders in the market.

Consequently in MetaTrader 5, traders can use different tools and functions to apply order flow trading strategies. Some of these tools are the ones we have already seen:

  1. Order book
  2. Heat maps
  3. Cumulative delta

Let's quickly see its main features:

  • 💼 Financial products: +1M
  • 📈 Analysis tools: +100
  • 🖥️ Account type: Real account and demo account.
  • 💲 Monthly cost: 0€, linked to your broker.
  • 🏦 Brokers that integrate it: IG Markets, Admirals, Oanda or ActivTrades

Ninja Trader

And in third place, I also leave you with NinjaTrader, a trading platform used by most professional traders. In fact, with this broker/platform, you will have access to more than 100 futures contracts from the main markets in the world, such as the CME Group or Eurex, among others.

In the NinjaTrader platform, traders can take advantage of different tools and functions to apply order flow strategies, since some of the functionalities it allows are:

  1. DOM visualization:
  2. Perform ATM strategies
  3. Development of your own indicators, strategies, and third-party applications.
  4. Order execution and management

Strategies with Order Flow Trading.

Let's see 3 order flow strategies quite popular:

1. Responsive buyers

Search for inefficiencies between the injection of a stimulus or unusually large selling volume that does not exercise the expected result, that is, make the price go down.

We identify on the tape orders of sale to the market very large that inexplicably do not make the price go down, that is, behind there are limited purchase orders in the Order Book that “block” the fall completely, a classic pattern of Wyckoff absorption.

We will call this process buyer response (“responsive buyers”), and the same would be true for the inverse case with a seller response (“responsive Sellers”).

2. Drying

Once the absorption processes are finished, the institution cannot start the opposite trend without first making sure that the last misinformed trader who wanted to sell already sold, that is why they usually revisit the area to make a latent offer surface, but in this case without any conviction.

In our case, we will look to identify in the Order Flow a new attack on the area where the candle no longer contains volume inside, that is, that the number of contracts is exiguous, and therefore, shows the tape dyed with pastel colors.

3. Initiative buyers

In trading, an uptrend begins with a significant volume of buying, known as a “buy initiation”, which penalises traders who trade against the trend.

This “buy initiation” signals entry into the market and usually hurts sellers. The situation is similar in a bear market, where there is a “sell initiation”. The resulting snowball effect, fuelled by short covering, reinforces the trend. Recognising large and unusual buy orders, often in the form of delta-divergent candles, is crucial, with the same concept applying to bearish scenarios.

Pros and Cons of Order Flow

Let's see the list of pros and cons of using order flow as a trading strategy:

Benefits

✅ It allows us to see with x-rays inside the candles.
✅ It allows us to identify institutional movements
✅ It allows us to cross supply with demand, therefore, see 100% of the market.
✅ It allows us to confirm our entries to the market with data, and therefore, increase our probability of success.

Downsides

❌ Very oriented to scalping or day trading, less relevant for medium and long-term investors.
❌ Very fast, therefore, very emotional.
❌ It is a complex practice to understand and learn and therefore requires a lot of study, learning, and practice.
❌ Requires a reliable data provider.

Strategies to boost up your investments:

FAQs

How can tape reading help traders understand market behavior?

Tape reading helps traders understand market behavior by analyzing real-time price movements and transaction volumes. It shows if buyers or sellers are more active, giving insights into supply and demand dynamics and helping make informed trading decisions.

What are the key features of the order book that traders should pay attention to?

Traders should focus on the bid and ask prices in the order book, which indicates buyers' and sellers' price levels. They should also consider the volume of orders at each price level, as higher volumes suggest more market interest and liquidity.

How do heat maps assist in visualizing order flow in the market?

Heat maps provide a visual representation of order flow in the market. They use colors and graphics to highlight areas with higher buy or sell order activity, making it easier to identify areas of high demand or selling pressure.

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