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TL;DR: We are going to introduce “What is order flow trading”, with its commonly used indicators and strategies.
If you believe that technical analysis and price patterns are the only factors to consider in trading.
Think again.
Order flow, which refers to the buy and sell orders in the financial market, provides the rawest and most valuable information.
By incorporating order flow strategy into your trading approach, you gain a deeper understanding of the market’s “depth.”
It allows you to observe the actions of market participants, such as imbalances in supply and demand, as well as the speed and aggressiveness of orders.
This knowledge gives you an edge in predicting market movements before they are reflected in price charts.
The powerful example of order flow trading
Navinder Sarao, the “flash crash” trader who famously manipulated the trading market and “spoofing” the trading bots on Wall Street, trading with order flow strategy. It earned him over $70 millions in profits. Sarao’s success demonstrates the potential of order flow.
How does order flow trading work?
It involves analyzing two types of orders: executed orders and advertised orders.
Executed orders are actual trades that have taken place between buyers and sellers, while advertised orders are the bids and offers waiting to be filled in the market.
Traders use various tools and indicators to analyze this data.
One popular indicator is the volume profile, which displays the distribution of trading volume at different price levels.
By interpreting volume data and profiles, traders can determine if the market is balanced or imbalanced, identify trends, and even spot potential reversal points.
Another commonly used tool in order flow trading is the Depth of Market (DOM). This tool helps traders analyze areas of high and low liquidity in the market and evaluate the aggression of buyers and sellers at different price levels. It provides real-time insights into the market’s tape.
Footprint charts are also frequently used in order flow trading. These charts display the buy and sell orders at each price level, along with the volume of each order.
In TradingView, traders often utilize the Session Volume Profile (SVP) and Visible Range Volume Profile (VRVP) indicators to understand the volume at each price level. By activating these indicators, traders can identify market imbalances and potential trade setups.
Trading strategy with order flow indicators
There is a significant volume of buy orders at a specific price level, it indicates strong buying interest. This could be a signal that the price is likely to move higher, forming continuation patterns and prompting traders to enter long positions.
However, if the price fails to follow the trend, traders will look for a gap fill of the imbalance, which is now commonly referred to as the “fair value gap.” After the gap is filled, a reversal pattern can be expected.
To more accurately predict and capture market reversal trends, traders can use the TradeDots indicator. This quantitative trading indicator identifies market reversal points through real-time price action analysis.
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Bottom line
While order flow may seem like a crystal ball in trading, it is not a magic bullet. Successful order flow trading requires skill, experience, and careful analysis. There is no guarantee that every trade will be profitable.
Therefore, it is crucial to backtest your strategy extensively on each unique trading market. A robust trading strategy should withstand market fluctuations and consistently generate profits in the long term.
Align your strategy with your trading style for optimal results. Stick to your rules and remain persistent, always seeking opportunities to learn and improve.
About TradeDots
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Disclaimer: The information provided in this article is for educational purposes only and should not be considered as financial advice. Trading involves risk, and it is important to conduct thorough research and seek professional guidance before making any investment decisions. Prospective investors are encouraged to perform their own due diligence or consult a financial advisor before making investment decisions.
