Order Flow: The professional traders secret.

Have you been looking endlessly for a special indicator or system to help you trade? Are you skeptical that trading profitably is at all possible? Well, unfortunately there is no indicator or specialized system that is 100% profitable, or even close to that.

The reality of it all, a lot of professionals base their trading success on one tool alone, order flow. Order flow is the most raw form of data a trader can get their hands on.

Markets are driven by supply and demand, buyers and sellers. If one side outweighs the other, then that side holds the edge in the markets. Order flow explains who has the edge, buyers vs sellers.

Order Flow: Explained-Briefly

Traders can think of order flow as a “chess game” between traders. It is very important to be able to read the information to stay one step ahead. If you know what your opponent is doing, then you can react accordingly.

That is what order flow is based on, being able to read the data of volume that comes into your screen. The market is human vs human, even with algos. Someone has to program them.

Order flow trading is a constant battle to press towards buy stops or sell stops. This can be seen through the footprint, the DOM (Depth of Market) and heat map, we will be using Sierra Chart throughout this article to give you a better visual representation. We will focus on Futures order flow trading throughout this article.

Click here for an Order flow article that guides through spotting reversals in the market!

Order Flow: How can you get an edge?

Before we get into the nitty gritty, we should identify some order types and how they contribute to overall order flow trading.

Limit Orders-Order flow

First and foremost, we’ve got limit orders. This is where the heat map and the DOM come into play. Limit orders can be seen on the DOM as inventory. Depending on your broker, you could even see where the full book is. Meaning the whole depth of market. This is a powerful tool, if you can see where the large orders are sitting you will know where the large interest is in terms of limit orders.

On Sierra Chart, there is a study which allows you to overlay the DOM onto a chart, take a look at the footprint screen shot below.

Limit order example.

The chart below represents many things. What you see is the ES futures on a 5 tick reversal footprint chart. The footprint chart represents the volume traded within each candle. You see how many bids and offers were traded at each tick.

The focus of the image is the blue and red rectangles present at the bottom and top of the screen respectively. The red rectangles represent offer limits, while the blue bid limits. They are filtered so only a certain amount show on the chart from the DOM. For example 399 contracts or more on a price level.

These limits will only be triggered if price gets to them, larger limits will be levels of attraction for price. There is also no guarantee that price will go out and take the limit. In this case they will act as support and resistance. This is where the numbers within the footprint come into play. Which will be discussed later on.

Footprint of ES futures.

The importance of the movement of the limits higher or lower is that buying or selling is getting aggressive which will move price is the aggressors direction.

Take the following as an example. There is a clutter of offers sitting a top of the 2744-45 area on the ES (red rectangles). As the equities move, the sellers start to drop lower more aggressively. In addition to this the bid limits (blue rectangles) are getting taken out. These limits have traded and are now reflected in the footprint.

This indicates sellers are getting aggressive about the downside and they want to sell large positions as price drops to generate profits.

Market Order- Order flow.

Next are market orders. They are can be divided into two main categories, limits that just got traded, or entries that were intended to get in at a market price (no limit). These orders drive price and are represented in the footprint. Seen within the candles.

Each candle has a certain number of trades, some more than others. Larger candles will have more volume than smaller candles and should be considered important.

Whats even more important than the size of the candle is what is within the candle.

An important aspect is high volume traded at a single tick, level. This is outlined by a white box. Another thing to note is the highlighted red or green numbers. They represent sell and buy imbalances respectively.

Market order example.

Take the image below as an example. Right in the center of the image we have got a combination of the limit and market order flow in action.

At the top of structure we have the aggressive offers coming into the market pressing price lower. (Limits).

While at that same instance, aggressive buying is being suffocated by sellers. This can be seen right after the large green candle at the left side of the image. A small green candle forms with a high volume node (white box) and a sell imbalance at that box. Along with a large number of offers at that tick level. In the next candle, buyers (buy imbalances) try to prompt price up on the high tick but they are stopped by the aggressive sellers (sell imbalance) in the succeeding candle.

The selling is reflected in two fold. One the sell imbalances which indicates a lot of offers are getting traded at that level, at market. Along with the mix of sell imbalances forming in high volume nodes.

Final thoughts.

Order flow trading can done several ways. This article is meant to present traders with but one way to use order flow to trade the futures market. When trading with order flow one must learn to take in the information as quickly as it comes to the market in order to read the markets movement.

The information contained in this post is solely for educational purposes, and does not constitute investment advice. The risk of trading in securities markets can be substantial. You should carefully consider if engaging in such activity is suitable to your own financial situation. TRADEPRO Academy is not responsible for any liabilities arising as a result of your market involvement or individual trade activities.