Order Flow Analysis – The Secret Weapon of The Professional Traders

By | August 16, 2022

A Close Look at Order Flow in Forex Trading

When seeking an understanding of financial markets, little technical knowledge exists. analysis types available. Popular methods include momentum analysis, which uses mathematical indicators applied to a price to look at current market forces, and fundamental bias analysis, which is based on fiscal economic data releases. Mathematical analysis based on standard deviation; analysis of key levels using daily pivots, fibonacci levels, daily maximums and minimums, etc.

However, neither of these commonly used types of analysis addresses the central question of why the price it behaves at a specific price level.

when the price approaches a key level, different scenarios can be expected to happen; At a key level, the price may reverse, it may retrace briefly and break the level, it may break the level, or it may false-break (also known as a Fake-out).

Order flow analysis provides a trustworthy definition of key levels, but also one more aspect that is very unique; that’s how strong the resistance can be at that level.

Before we continue, we need to understand what is the concept behind price changes. Prices move due to an imbalance between the quantity demanded by buyers and the supply by sellers. This is how exchanges determine what the next tick will be. This works on all markets, from stocks, futures, options, commodities, bonds and foreign exchange.

What is order flow?

Order flow defines the number of orders waiting to be filled at a certain price level.

Although the price is going higher in a very strong rally, we know for a fact that it will eventually stop somewhere. The rally occurs because there are simply more traders willing to buy than traders willing to sell. This creates an imbalance between buyers and sellers. While there are more buyers demanding the offer, therefore the price moves up. Eventually, the buyer’s momentum will end and the price will rise to a level where there will be more sellers than buyers. This new imbalance created by more sellers than buyers will push prices down.

This simple scenario is what happens in markets at the macro and micro level. This is the essence of what causes the price to range or reverse.

When you look at a chart of a moving price and interpret this as the balance of forces placed at different price levels.

It’s as straightforward as it looks on the charts after the events. But what if you could forecast the next price level with relatively decent accuracy? What if you could know earlier where the opposite order flow will be waiting at a future time and price?

If only you could be sure you would know exactly where to put your input and exactly where exit your trade

Order flow analysis is a unique trading analysis concept that can help you predict with some certainty where order imbalance awaits you at a future price level. This can allow you to enter the market with precision and more confidence.

Order flow defines the number of orders waiting to be filled at a certain price level.

What a volume bar represents on your Forex platform

In most financial markets, order flow is the accumulation of orders waiting at a specific price level. It’s a combination of how many orders count and their size.

The situation in Forex is different. there is no reliable volume data merchants can trust.

The forex market is a decentralized market that does not have an exchange responsible for governing this market. Other markets such as stock exchanges, futures market, and commodity market have a centralized exchange that governs the respective market. These other markets can therefore provide the tape of order flow volume. This is also known as a level two data feed. Level two data sources are where future orders are waiting, and order quantities are waiting for a future price above and below the current market price.

If you trade futures, stocksor commodities, then the level two data could be a very useful chart to analyze.

But as we mentioned, in forex currency trading, there is no tier 2 trusted source because each broker is connected to a limited number aggregation feed This information is distributed among a large number of banks, each dealing with the others. If you find a level 2 feed for forex, be aware that any other feed can be extremely different to get.

Data volume in Forex

Forex brokers provide an indicator known as volume. In forex trading, volume is not capable of providing actual order amounts. You can only present the tick count, which is the number of transactions transmitted on a specific broker. On most Forex platforms, volume is the cumulative tick count and does not provide orders on the price axis above and below the market, as you might find on Level 2 for stocks.

So in forex you would have to analyze and figure out where the order flow is by looking at the patterns on the charts.

Data volume in Forex

What is Order Flow in Forex Trading?

If you’ve read this far, we hope you’re not intimidated by now. And you shouldn’t because order flow analytics is actually a very simple concept to adopt.

Order flow analysis is actually a very simple way of reading charts.

To make it easier to understand, it is also known as supply and demand analysis. This analysis is based on the assumption of where you might find a future order flow imbalance.

Trade order flow is basically looking at where, in the nearest past, there was a major decision in the market to fall or rally significantly. That means looking at where a strong price movement occurred.

Simply looking for big moves on the charts is the easiest to spot with the naked eye.

This is the core concept for understanding order flow, and of course, there is much more to it than this. Simplified, it is reading chart history to understand the history of where buyers and sellers are.

Trade order flow does not involve any indicators at all. It is a clean and bare chart with horizontal levels drawn. It is the cleanest and easiest way to analyze price action.

Having said all of that, the flow can also be complementary to any trading technique you might combine it with. It can be combined with any style of analysis because it will provide you with a layer of price reasoning that you can combine with something like momentum or standard deviation of fundamental reasoning.

If we’ve whetted your appetite for more information on Order Flow trading and you find it easier to understand through a video, we invite you to check out this four-part educational webinar we posted a while back:

Know your input by order flow

When you base your analysis on historical levels and know what level you are expecting, you have a huge edge advantage for your trade. This advantage will practically give you the advantage of buying at a very cheap price and selling at the highest and most expensive price. It will also allow you the convenience of knowing your trade ahead of time so that you can set future orders to fill at a future time whenever the price hits the mark. This reduces screen time and will make your trading routine very easy and relaxed, leaving you plenty of time to be an analyst and well prepared for trading.

Order Flow Long Entry

Order Flow Long Entry

Short Order Flow Entry

short order flow entry

Since order flow is the core essence of price movement, this trading technique is applicable for any time period. From monthly charts to minute or tick charts: plays with all of them

know your way out by order flow

Similarly, just as the input is determined by the order flow, so is the output. We can always assume that the price will change when it reaches a place of significant change in the past. With this knowledge, we can create the other end of the business cycle as our safe exit. We can create a complete trade, set it to a pending limit order, wait for it to fill, and hit the target as long as it is recent by historical price.

Know your output by order flow

Trading with limit orders

In short, a limit order is an order to buy below market value or sell above market value. The order is triggered once the market reaches its predetermined limit price.

Order Flow Buy Limit

order flow buy limit

Order Flow Sell Limit

order flow sell limit

Limit orders are preferred by traders who want to decide the maximum price at which they want to open or close their position. This control is favorable, and although glide happens, the price will improve.

However, a major disadvantage of limit orders is that some trades can never be executed, since it is possible that the price does not reach the desired levels. However, being strict with the entry price can often put you off the market. but at the same time, will turn out in a privileged risk-reward ratio when your trade is activated.

One thing to keep in mind is when trading in tumultuous market conditions. In highly liquidated market conditions, such as in economic events launches or big surprising events, order flow levels can disappear and not give the expected reaction. This is why using stop losses for your risk management is crucial.

closed order flow

All trading methods, analysis, and the plans depend on the merchant using them to get the job done. The right analysis, coupled with the right mindset, can lead to a successful negotiation. However, trade order flow gives you a significant advantage in executing your trades. Order flow gives you more benefits:

  • A simple concept to learn and understand the market conduct
  • High risk-reward ratio
  • Good precision input and output signals.
  • Works in all stores asset with height Liquidity: Forex, Stocks, Commodities, Indices and Futures.
  • It works the same with any time period.
  • A complementary method to almost any other trading technique
  • Perfect for the Set & Forget negotiation approach, for predefined price levels using limit orders

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