Recently, many YouTube gurus have been buzzing about the word “Order Flow.” They make it look like a hard strategy and difficult for beginners to grasp.
So, in this guide, we’ll clear the noise and explain order flow trading. So, you can know everything about order flow trading even if you hear it for the first time.
What is order flow trading?
Order flow in forex trading is all about watching the flow of market orders waiting to be executed. Through this analysis, traders can forecast future price movements.
Order flow is also called order flow analysis or tape reading.
Believe it or not, order flow trading is one of the oldest trading strategies. In the novel, Whiskey Rebels, David liss presents us with an idea of order flow trading in the 18th-century Philadelphia Stock Exchange.
Many hedge fund managers use order flow as part of their day trading strategies. The popularity has recently increased due to the smart money concept and supply and demand strategies.
How does the order flow trading work in forex?
Before we go deeper into how order flow trading works, you must understand that price moves because of market imbalances.
Suppose there is a strong uptrend, and the price continues to rise. At this point, you have to understand that more buyers are in the market than sellers. However, at some point, the price will reverse. It will not continue in the same direction, and sellers will take over. This market imbalance is the essence of order flow trading.
With order flow analysis, you can anticipate where market order imbalance awaits at the future price level. The imbalance is called the supply and demand levels.
In the chart below, you can see the market imbalances. It is the point where the price rallies or drops after the trend. You can easily spot it on the naked chart.
However, it can be difficult to predict the future price on the naked chart. So, for this, we need an indicator.
How to use order flow in Forex trading?
There are two ways to use order flow analysis. One is looking at the naked chart to find market imbalances and then plotting supply and demand zones. The other is to use the indicator.
The order flow analysis indicator makes things easier. So let’s apply the indicator.
On the chart, you can see the footprint candles. These candles represent the delta, the change in a derivative’s price. The footprint chart displays the individual buy and sell orders made within these candlesticks, providing a more detailed perspective of the price changes.
The chart features all of the pricing and order flow data. It shows the volume traded at each price for each bar and price level.
In the cell, you can see the bid-ask volume. Green numbers show buying, and red numbers show selling. The number will become green as the buyers push the price up. This suggests that buyers outnumber sellers. When sellers get more aggressive, the number on the column will turn red.
The yellow box you can see represents the divergence. Whenever there is a potential reversal, the footprint candles will turn yellow.
There is also the depth of market (DOM). It illustrates price levels being traded at different values.
Through this info, we can get the accumulation of orders awaiting execution at various price levels.
Order flow trading strategy for day trading
A key point to add here is that order flow trading involves short-term strategies. It can be difficult to anticipate where the order will be executed for long-term strategies.
Here we’ll mention two trading strategies. One is through a naked chart, and the other is by using the order flow analysis indicator. It’s important to remember that the indicator will work only on the current timeframe.
Supply and demand strategy
For supply and demand strategy, you have to locate the market imbalances. You just have to find out where there was a significant market drop or rally and then plot these levels on the chart.
- Locate the sudden price rally.
- Plot the demand zone from the recent low to the high of the last bearish candle.
- Wait for the price to continue trending upwards and then enter the trade.
- Place a stop-loss at the low of the demand zone.
- Exit the trade when the trend changes.
- Locate the sudden price drop.
- Plot the supply zone from the recent high to the low of the last bullish candle.
- Wait for the price to continue trending downwards and then enter the trade.
- Place a stop-loss at the high of the supply zone.
- Exit the trade when the trend changes.
👉👉 Get access to Supply and Demand indicator
Order flow indicator strategy
With the indicator, the buy and sell setup is self-explanatory.
- When the buyers start entering the market, the numbers will turn green.
- Here, you can take a buy position.
- Set the stop-loss at the recent low.
- Exit the trade when the numbers start to turn red.
- When the sellers start entering the market, the numbers will turn red.
- Here, you can take a sell position.
- Set the stop-loss at the recent high.
- Exit the trade when the numbers start to turn green.
👉👉 Get access to Order Block indicator
The bottom line
Order flow trading is all about finding market imbalances and then taking positions. It gives you an edge in trading and provides perfect entry points.
Although finding market imbalances can be hard for a beginner, with the help of the indicator, it can make life easier.
Frequently asked questions
Order flow trading works on all markets. Order flow analysis is a useful strategy whether you are a stock, forex, futures, or crypto trader.
You can use various platforms for order flow trading, like the NinjaTrader, Sierra charts, or MotiveWave. These platforms are beginner friendly and provide plenty of trading options.