- Order Flow Trading
- Why you should use Order Flow Trading:
- HOW TO LEARN ORDER FLOW TRADING - Island Echo - 24hr news, 7 days a week across the Isle of Wight
- TOP-5 advice for beginner traders: how to read the order flow.
If you are a retail client you will not be able to evaluate this order flow process but can find a different mechanism for gauging flow. Currency market volume is hard to measure, but you can measure the volume seen in futures and ETFs as well as the options on these products. Volume in the futures markets describes the total trading activity in a specific contract.
Futures contracts on currency pairs can be very liquid and arbitraged by dealers to make sure their values are identical to the value in the OTC market. If the volume is increasing at a specific level and time, it can be used just as the dealer uses the deal flow. The difference is you cannot see it in advance, you must determine if the volume pushed a currency pair higher or halted its progress once the volume is transacted.
You can also use volume in tandem with open interest to measure sentiment. Open interest describes the total number of contracts that are open. This number is updated at the end of a trading session while volume is generally updated during a trading session. If volume is greater than open interest, you know the trade is new.
Order Flow Trading
If it is less than open interest it is hard to determine if the trade is new or an unwind of a position. Generally rising volume and rising open interest is a confirmation of a new position where rising volume and falling open interest is the liquidation of a prior position. When there is unusual activity in the options market, this could be the case.
If this occurs as the market pushes through support or resistance, there is likely a chance that there was substantial order flow at a specific level. The capital markets are an auction market and the forex market is the largest auction market in the world. Daily buyers and seller come to the market to exchange at the best bid and best offer available. Each transaction that occurs, requires a buyer for every seller. When buyers lower their bid price and sellers lower their offering price for a transaction to take place, the price of the security in question must move lower.
The opposite can be said when buyers raise their bid and sellers raise their offering price.
Why you should use Order Flow Trading:
A market that is not an auction market is a negotiated market. In a negotiated market a broker would contact buyers and sellers and discuss with them buying and selling prices. You see this all the time in real-estate where you would typically need to have a broker find a seller to negotiate a sale. In negotiated markets, which many times are opaque, it can be difficult to determine fair value.
Order flow is less important in the short run to negotiated markets. Futures trading on the other hand, will provide traders with sufficient volume to determine a fair price. The auction itself can relay a world of information to you if you know how to interpret the information the auction is providing.
Consider this about a verbal auction; if the action is slow the auctioneer will be speaking slowly and his voice might be monotone. When the action heats up, the auctioneer will be speaking quickly and trying to generate additional interest. Futures markets are similar and when volume picks up, the market is telling you something. There are a few technical volume indicators that can be used to help evaluate buying and selling pressure. The on-Balance Volume indicator is one of the best. The indicator is geared to using volume to find divergence patterns.
For example, if prices are moving higher on weak volume, you will know that the move is not confirmed. The on-balance indicator is a running total of a periods volume. Traders can also use volume as a momentum indicator to determine if the trend in volume is increasing or declining.
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For example, you can use a momentum volume indicator such as the percent volume oscillator which is like the moving average convergence divergence indicator but for volume. This technical indicator is perfect for evaluating order flow when the market breaks out.
HOW TO LEARN ORDER FLOW TRADING - Island Echo - 24hr news, 7 days a week across the Isle of Wight
A break out on strong volume is a confirmation of the breach of either support or resistance. Volume as a statistic is an important measure of how a security is performing. Changes in the direction of a security when accompanied by volume reflects a strong indication that the consensus believes in the change in price. When volume fails to accompany price changes, the movement is generally suspect. Volume indicators can help a trader with strategies as well as entering a trade at the most efficient price.
Order flow is a very important mechanism to use for both dealers and individual traders. While dealers have a forex order book of their orders and can see when a market is likely to move or stall, the market eventually reveals everything and can be captured by individual traders by evaluating volume. Sell side dealers can use large orders to piggy back trades and therefore order flow is extremely valuable to a financial institution. A deal flow will also describe the size of a trade and the type of customer that entered the trade. Dealers are fully cognizant of the difference between orders from a hedge fund and orders from a treasurer.
While a hedge fund is purely focused on generating revenue, the treasurer is more focused on a hedge. Download the short printable PDF version summarizing the key points of this lesson…. Click Here to Download. Order flow defines the amount of orders waiting to be executed at a certain price level. While the price is rising upward in a very strong rally, we know for certain that it will eventually stop somewhere. The rally up happens because there are simply more traders willing to buy than traders that are willing to sell.
This creates an imbalance between buyers and sellers, whereas there are more buyers demanding the supply, therefore price shifts upwards. Eventually, the buyer momentum will end and the price will be driven up to a level where there are more sellers than buyers. This new imbalance created by more sellers than buyers will push price downwards. This simple scenario is what happens in the markets on the macro and micro levels.
This is the essence of what makes price move range or reverse.
TOP-5 advice for beginner traders: how to read the order flow.
When you look at a chart of a moving price and interpret this to the forces balance placed on different price levels. But what if you could forecast the upcoming price level with a relatively decent accuracy? What if you could know before where the opposite order flow will be waiting at a future time and price?
If you could be certain that you would know exactly where to place your entry and precisely where to exit your trade. Order flow analysis is a unique trading analysis concept that can help you predict with a good amount of certainty where orders imbalance awaits at a future price level. This can allow you to enter the market with precision and more confidence.
In most financial markets, order flow is the accumulation of orders awaiting at a specific price level. It is a combination of how many orders count and their size.
- What traders use the order flow for?.
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The situation in Forex is different. There is no reliable volume data that traders can rely on. The forex market is a decentralized market that has no exchange responsible to govern this market. Other markets like the stock exchanges, futures market, and commodities market, have a centralized exchange that governs the respective market.
These other markets can, therefore, provide the tape of the volume of the order flow. This is also known as a level two data feed.