Order Flow Trading

Order flow trading is alike to price action trading

3 min read

Order Flow TradingOrder flow or transaction flow

Order flow trading is more of a mindset. We cannot say it is a trading system or trading method. It is all about how some traders are viewing and imagining the market place.

Say in this way, the orders are moving price.

So, the intent of an order flow trader is to identify patterns on which they are getting triggered.

It is also called a transaction flow

Order flow happens when a trader believes the price of an asset will move and then the trader chooses to execute the order.

Also, order flow trading is an expression that generates a lot of mess.

Some traders believe that such trade is based on very secret information from the banks. That just a small group of people have knowledge about it.

But you can see that some of them believe that it is another kind of price performance.

To determine order flow trading you have to clarify what kind of trading you want to execute.

Many of the retail forex traders are trying to place directional bets.

That is when the trader is going long or short, speculating that prices will go up or falling.

For example,  if a trader believes a currency pair will move up, he/she will set a buy order. But if such a trader prediction is a currency pair will go down, he/she will go short, meaning the trader will sell. This is directional trading.

It is one of the most traditional styles of trading.

If you choose directional trading, you may decide to be a dynamic trader. You want, for example, to execute a market order and pay the spread. That is one possible choice.

The other alternative is to set a limit order or stop order marking the order flow to be executed at a specific price or executed after the market hits a specific price.

This is different sorts of order flow.

Order Flow Trading 1Order flow trading is alike to price action trading

The trader who executes a market order is achieving a more dynamic order. Such doesn’t like to wait for a limit order.

It is questionable if that order will or will not be filled.

But the trader who set a limit order or stop-loss order is creating a more inactive kind of order flow. Even if the orders are not executed, they are helpful in building the order flow.

Order flow trading is alike to price action trading.

They both intend analyzing the market in a specific style.

Price action traders try to conclude which direction the market going to move in. Order flow traders think they can foretell the same thing but based on capturing the actions the other traders done in the market.

Order flow trading, so how does it work?

The basic idea lays behind that if you are able to recognize when and where traders are going to make decisions, you can presume what is the future course of the market. The main purpose is to determine when the prices are moving up or down.

To be more clear, one trade will never cause such movement.

But thousands of orders appearing at the same time can generate the price’s turn.

And we can say that the main intent of order flow traders is to find how other traders trade. On that way, such a trader can recognize when numerous orders will appear to the market, large enough to generate a price movement, either up or down.

All the trader needs to know is what is the basic goal of their trading method. Based on that knowledge, he/she can predict on which position they will make a decision which will place orders into the market.

The basics of order flow trading

Order Flow Trading 2Two types of order flow trading

There are two main types of orders that traders can execute in the market.

Each of them is executed for different reasons. Hence, have different influences on the market price after execution.

The traders can place market orders or limit orders.

One group will place a market order because they want to earn money as quickly as it is possible.

They place a market order to open their trade because they don’t want to miss such a great chance. This is so-called reactive strategies. Meaning, the traders are reacting on what is happening in the market at this moment.

When a trader places a limit order, that means that trader wants to have a trade at a price which he expects will be reached in the market.

Stop losses are also limit orders because they provide trader to buy or sell at a price which has to be reached in the future.  

Both affect the market price but in different ways.

A market order spends some of the liquidity in the market. On the other side, the limit order is placed to add liquidity to the market.

And, here we are!

The keyword for order flow trading is liquidity.

Liquidity explains how accessible is it to buy or sell in the market.

When it is easy to sell or buy, the market is liquid.

For example, the forex market is one of the most liquid financial markets in the world.

Buying or selling on the forex market is so easy because you will always find who is going to sell to you or to buy from you.

Why is this so important for order flow trading?

When low liquidity occurs that means that most of the orders on the market are buy orders. The traders can’t achieve buy trades placed because there are not enough people in the market ready to sell.

There have to be a big amount of sell orders placing the market in order for the market to be liquid.

It is really important to learn that when low liquidity is approaching the end, it means the traders have made the decision in the market.

But which decision?

That depends on which course the low liquidity movement happened. If it was a drop-down then the traders have placed buy trades or carried profits off sell trades which have previously been placed.

If it was an up-move, traders placed sell trades or took profits off buy trades.

Price does not move because of some mysterious technical indicator. Nor moving average will move the price.

For the price to move, traders need to execute enough orders to utilize the liquidity at the best bid/offer.

If there are no orders to be executed, the price will not move.

This is the cruel truth in trading.

The market will never move to your direction if there is no order flow.

The outcome of the trade is managed by the performance of other traders. The real transaction and order flow are produced by other traders.

The bottom line

Order flow trading is not a technical analysis or fundamental analysis. They are not able to move the market.

Order flow and liquidity is the base of the market.

That’s why many traders have gained the losing tradings. Their losses happen because the technical or fundamental analysis cannot produce enough order flow to move price in your favor.  

Order flow trading tries to improve the lacks in technical and fundamental analysis.

When you learn and practice enough, you will find this is the most successful approach to trade.

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