Day Trading Strategies with Order Flow: Step by Step

This strategy single-handedly has made our members’ hundreds of thousands of dollars! We’ve been using this strategy since the inception of TRADEPRO Academy and has been perfect to increase the probability of trades! Limit the bad trade and read about this day trading strategy with Order Flow.

What is day trading?

The first and most important question. Day trading is the act of buying or selling security and closing the position out before the day or session ends. The simplest way to put it is, you start the day with cash and end it with cash. Not a position. In this case trading order flow with futures, you want to enter a long contract and exit it at a higher price point. If you enter a short contract, you want to exit at a lower price point. This is how you make money in day trading. At TRADEPRO Academy we trade the futures market, it is the most liquid market in the world with asset opportunities everywhere. The trading hours are amazing and so are capital requirements. Are you a US resident? You may be subject to the Pattern Day Trading Rule, fear not it doesn’t apply to futures trading.

What is Order Flow?

Order flow is the rawest form of data you can access to day trade. It is a combination of the actual contracts sold and bought at a certain price and time and the interest of buyers or sellers. A Quick tip: buyers and sellers move the market, whoever has the upper hand moves the market in their direction.

What are Order Flow tools?

We use several tools for order flow. The depth of market, or market ladder for a futures asset which indicates the buyer and seller interest across the board at different levels. These are contracts not yet entered into the market. The next is the footprint, this chart indicates the market orders that went through. Bids and Asks are represented on this chart in a numeric way. This shows traders where the buyers and sellers came in to hold their ground.

 

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Why do most day traders lose money?

It’s true, this is one of the most difficult careers, and a lot of traders end up losing money. They are the ones that are quick to give up, look for signals, look for the holy grail. Rather than looking for an education that helps them read the market and order flow tools. When you put the time and effort into learning how to day trade, day trading because of one of the most lucrative and fast-growing careers in the world. The allure is fast cash, which is unfortunately associated with gambling. There is another way, let us make it pain-free and smooth at TRADEPRO Academy. Working just 2-3 hours a day you can make six figures and more annually.

Day trading is a career that is sought after because of the promise of financial freedom and independence. There is a path to this dream, and it all starts with a proven trading strategy and trading plan. The TRADEPRO favorite day trading strategy is the “pullback”. It’s a combination of market structure and order flow.

The TRADEPRO day trading strategy:

Trend trading with order flow is the cornerstone of what proprietary firms use on a daily basis to make those large profits we all here about. Following the trend is a proven way to follow the big money in the market. Realistically we’re all retail traders that trade under 1,000 lots on any given futures asset. By understanding Order Flow, we are able to identify the momentum of a trend and jump on for the ride with the big guys.

The number one question is how can we predict these moves? We can’t predict anything in the market! We can only speculate and identify the move with a high probability. After years of trading, our findings were, you will always get an opportunity to ride the trend if you have a plan beforehand. This is how we came up with the “Next best trade”, based on a rule we call “ if this, then that”. This comes from identifying where the trend will continue and where it will fail and HOW it can continue.

“Next best trade”, a simple yet forgotten concept. The idea behind this is to have 2 or 3 high probability trades in mind before they actually happen. This keeps traders patient and out of the market until their trade appears. Keeping them on-side of the trend.

“If this, then that”, a conditional rule that increases the probability of the trades success. It’s a condition that builds off the 2 or 3 Next best trades “NBT”. For example, if the current trend is to the upside. The conditions would be:

  • If the previous high breaks, I’m waiting for the price to retrace the broken high, hold support for a long opportunity.
  • If price rotates back to the impulse that gave the upside life, I would wait for support confirmation to go long.
  • The lesser-used trend break condition. If the last level for the bulls to hold the trend breaks and retests, then I will switch bias and look for a short.

What assets to trade?

The futures market is very broad, traders can trade anything from pork bellies and orange juice futures to bond futures and US index equity futures. The main assets we trade at TRADEPRO Academy are S&P 500 E-mini futures, Crude Oil futures, and Gold futures. Along with some more niche equity, forex and commodity futures here and there, but not to the consistency of the three that we mentioned. That is because the three above are the most liquid futures, the S&P 500 being the most. With a lot of contracts traded daily, there is a lot of activity and opportunity in these markets. Not to mention these markets are perfect for this day trading strategy with order flow. Order flow is an easy tool to use with highly liquid markets such as these.

Margin requirements for futures.

Depending on the broker, you will have different margin requirements for the futures you trade. Along with the future class, not all futures from one broker have the same margin requirements. This is the amount of capital you need in your account to trade a single contract of the asset.

We use AMP futures, a reliable source that offers competitive commissions rates and extremely fair margin requirements.

Through AMP:

The day trade margin is what’s required to trade 1 contract throughout all hours, excluding 5:00 PM EST to 6:00 PM EST when the futures market is closed. The maintenance margin is the capital required in your account to hold 1 contract through the “overnight” session between 5:00 PM EST & 6:00 PM EST.

 

order flow

 

The CME recently released micro contracts for all equities which is a game-changer for new traders. The micro lots allow new traders to enter the market with 1/10th of the risk of a normal equity contract. They are liquid as well, less than their mini counterparts. You will see the micro margin is 1/10th of the E-mini equity contract.

 

micro e-mimi futures

 

For more information on the micro equity contract, watch the following video:

 

Check Our Best Practices

 

The best time to day trade?

There are certain hours that are better than others to day trade in the US futures market. The best hours are throughout the US session, from the open at 9:30 AM EST to 4:00 PM EST. For more specifics check out this article.

Best Hours to Trade


What kind of charts do we use?

When trading the futures markets, you can use a variety of charts, from time charts, Renko, to range bars. At TRADEPRO Academy, and throughout this whole day trading strategy with order flow, we use range bar charts that show ticks of movement and footprint reversal charts. These are not subject to time, rather a movement. Because the futures market is based on a tick by tick moves in the asset. A 10-tick, 5-tick or 4-tick range bar chart can be used. Likewise for the footprint reversal chart.

Using Market structure to identify the trade opportunity.

The cornerstone of all trading should start with market structure. Some people call it price action. This is how the market moves, the flow. The peaks and troughs. Understanding how to read market structure can help you anticipate moves, changes in bias and more. Before using order flow in this day trading strategy, you must be a market structure wizard!

The price will continue to trend as long as the trend is not broken. Where will the trend break? That depends on the timeframe used and the market. Find out how to read market structure like a PRO. A TRADEPRO.

The purpose of using market structure is to zero in on the trade opportunity and then transfer over to order flow to fully qualify a high probability entry. The market structure identifies the trade direction to take and the level where you should be looking for the entry.

Take the example below, color-coded for easy reading. The chart used is a Crude Oil futures 5-tick chart. Based on the current day structure, higher highs and higher lows print, meaning the bull structure/ trend is continuous. You can identify two things from this, at what level does price have to hold support on the retrace for the bull move to continue and what is your next best trade based on the continuation of the move.

 

Crude Oil futures

 

In the above example, at $58.15 on CL price stalled on the retrace which is now the last chance for the bulls. If price breaks below that level it could continue lower as the microstructure of the market changes. That is because a higher low is no longer printed on the chart. If price rotated back to that level instead of piercing $58.30, the long trend could still be in play. The fact that price broke the $58.30 previous peak presents traders with a pullback opportunity on the structure. The pullback is expected at the previous broken high or $58.30 as noted by the orange lines. Then the identified long area is the blue line, around $58.30-$58.35 based on rotations. Or a fight for the buyers to hold price higher.

Favorite day trading strategy order flow trading patterns

The pullback pattern, a breakout, and retest of a broken level in the direction of the trend as described above. However, in this section, we will dive deep into the trade itself with order flow. We use two main order flow metrics, the depth of the market, where buyer and seller interest is displayed in terms of limits moving on the ladder. And, the footprint where buyer and seller market orders are displayed, holding the trend, support or resistance.

In the example above we identified the level at which we are interested in the price, but how do we solidify that level for the highest possible probability of a good trade? Without being 100% of course because that is not possible in the markets. We’ll look at the above interest in the market on the ladder so see if there is any inventory that is attracting price higher. Or any inventory to the downside that is moving up aggressively trying to buy near the market. The bids that move up push price higher while the offers that stay well above attract price higher. This is what we want to see if the upside trend will continue.

If we zoom into the about image, you’ll see the depth of market interest (filtered for a high level of bids and offers) in red blocks (offers) and blue blocks (bids). Notice the blue circle is where bid blocks have appeared and started moving higher. The red blocks attracting the price circled in red. After having identified the interest of the market, we move onto the entry of the trade for optimization. The entry should be based on where your stop is placed.

 

day trading strategy

 

Stop placement is the most important aspect because it dictates where you should put your limit to enter the trade. Placing a stop that is most likely not going to get hit is optimal, but you can only see that if you use the next order flow tool. The footprint.

 

If you guys want to know how to read the footprint effectively, watch this video:

 

 

Below is the footprint for the same chart above, just after the break of the previous high with a strong bull run (the extended green candle on the left). The footprint gives us so much information all compact in 1 chart.

We’ve highlighted the most important levels. The long extended candle on the left is filled with information based on the buy imbalances that came in. What you want to see is stacks of buy imbalances or several in one candle of such length. The buy imbalances are market orders which indicate offers lifted or market buys. These buyers want to hold their levels as support. In such a case the lowest buy imbalance stacks on an extended candle should hold as support because that is the last chance for those buyers to save price from breaking the upward trend. They will defend their level and more buyers should come in. This is indicated by the green extended box around the buy imbalances.

 

green extended box

 

The buy imbalances that are expressed in the green box is placed at the retrace level of the market structure broken high, that is where strong buyers needed to come in to break a top. Meaning there is potential for a long limit to be placed somewhere in the box should more qualifiers appear. The next two drawings that are of high interest as well, the blue box and the red line.

Notice how price rotates back into the green box and buy an imbalance area and then begins to move sideways. These footprint rotations are pivotal to this day trading strategy. You want to see a fight between the buyers and offers, we look for at least 3-4 candles side by side alternating between red and green. Another important piece to the puzzle is to buy imbalances appearing at the bottom of this structure, no matter the candle color and ideally. Along with little to no sell imbalances coming in at the tops of the rotations.

The best entries are made at the buy imbalances at these rotations, keeping in mind where the stop loss would be. This is the red line if you enter somewhere in the blue box cluster at the bottom where the buy imbalances appear, the red line indicates where your stop loss would be. Notice it’s below the structure, a low chance of getting triggered.

This strategy works just as well to the bear side, take this example, step by step and flip everything to a bearish trend and sell imbalance spotting and you will see the same pullback trade to the downside.

Real Life Day trading with order flow example

The following pullback example is from the S&P 500 E-mini futures market. It is another long pullback trade. The trade was taken with 3 lots and it was based on market structure and order flow.

The first step as we know is identifying the overall trend of the market, we can do this both on the 10-tick and the 4-tick chart.

On the left side, we have a 10-tick chart. Immediately, the market structure is to the upside from the overnight lows and overall throughout the past few sessions. If you look at the 4-tick, a more intricate view of the market and microstructure (on the right side), we can see the uptrend is still strong. Even with the sideways slight range, we see the upside holding strong. The impulse starts are indicated with the purple circles, and the peaks that we are waiting to break are the yellow circles. They’re identified for the continuation of the trend.

 

Purple & Yellow Circles

 

After having identified the trend, we looked for levels where we can get long for the move higher, below is the trade that was taken at the impulse level identified in the first picture. That is the last chance for the buyers to keep market structure afloat. The two next best trades we had in mind based on market structure were the pullbacks into the impulse starts or the break of a high and retest of that high. (Purple & yellow circles). The live trade entries were already exposed, but why there? That is a higher low, to confirm price action. Along with rotations at that level confirming the fight and bulls stepping in. What does Order Flow indicate?

 

The break of the resistance level came with strong buyers

 

The market structure is the first step, in order to increase the probability of the trade we should look at order flow to narrow in on the high probability entry. Below is the footprint chart which deep dives into the trade. Where to get in? The break of the resistance level came with strong buyers. Circled in yellow, the buy imbalances there project a strong potential entry. The buyers in this long green candle should protect their market longs and if the rotations hold there we should see a pop. The rotations held, and even bids came in. Meaning strong buyers trying to buy near the market which helps the upside.

 

the footprint chart

 

The buy imbalance cluster is used for the entry in this day trading strategy with order flow because that is where we expect the strong buyers to protect their long side. We used the stop-loss strategy to place our limit, imagining where our stop would be (under the buy imbalances) allowed us to enter at an optimal level. Getting the lower ticks of the range, if the stop loss got hit, there would be a shift in the microstructure.
A total of 3 contracts were used in this trade, for 8 points net on ES, or $400. With just 1 of these trades a day you can make your profit target if you want to learn more, check out the full TRADEPRO Academy Day trading course.

 

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Risk Management 101

Risk management is the most vital part of trading and investing, this is what separates successful traders from losers. The goal of risk management is to protect trading capital so that it could be used to generate further profit. The risk is the likelihood a loss will occur. However, if you manage the risk, using the following techniques you can limit the capital at risk when trading.

Stop placement

We talked about how important the stop placement is in the trade entry process. This is our favorite risk management trick. Placing your entry based on your stop decreases the likelihood of a loss ensuing. The stop, as described in the above examples should be carefully placed in a location where there is a high probability it will not get hit.

This can be done two different ways, this first using market structure, and the second using order flow. The combination of the two increases the probability of a good trade as explained in the trading strategy.

Identifying the support structure or resistance structure when looking at price action is the first way to find an effective stop loss placement. The stop should be placed below the support structure if you are getting into the long side. And above resistance structure, if you look for the short side. This ensures that the stop is at an area where market structure on the micro-level would transition.

Using order flow for stop placement is pretty similar to that of market structure stop placement. The idea is to place the stop below the structure, and below the imbalances that create that structure.

How much to risk per trade per day

Traders often are caught out and risk more than they should each trade, which exponentially drains their account. A successful trader follows their plan, both technical trading plan and risk management. The main reason why traders risk more than they’re supposed to on a single trade is that they move their stops. This is a cardinal sin in the world of trading, your stop should only be moved to take more risk-off. The stop is in place for a reason to cap the risk the trader is willing to accept. Some traders may have wider stops and wider profit targets, however, the goal is to keep the stop in place without taking more risk.

Another issue that we’ve seen time and time again in this day trading strategy with order flow is that traders take smaller profits and larger losses. This hinders the success rate of the trading strategy and hinders the psychological growth of traders in the process. Which we discuss greatly in our psychology course. (plug it in).

Realistically in the futures market, considering the leverage traders can risk anywhere between 1-3% of their account per trade. If you take 3% risk, it will take you about 12 consecutive losers to burn through 30% of your account. In our day trading strategy, we usually take between $60-$100 of risk per 1 lot per trade.

That means if $60 represents 3% of my account, I would need $2,000 of capital to trade 1 lot on the S&P 500 futures market. If I risked $100 per trade per lot, then I would need about $3350 of capital.

How to lose less with the same stop (scratching)

You don’t have to widen your stop, or even get stopped out each time you lose with one simple trade management trick. Scratching. A scratched trade is one that is taken out for no loss, a slight loss or a slight gain. In the world of futures, where markets move tick by tick, a scratch is a maximum plus or minus 2 ticks, going down to a tick or flat. The idea of scratching a trade is getting out before it goes against you and takes your full stop.

This saves you a lot of bullets and mental capital and is usually done when the trade doesn’t move in the trader’s direction quickly after entry. This is the power of managing your trades and not letting them either hit your stop or take profit after limit entry.

Entry Checklist

  • Market Structure, trend direction
    ○ Macrostructure, microstructure
  • Identify NBT based on trend continuation
  • Watch for rotations at your level
  • Order Flow check
    ○ Does the footprint support the trend, imbalances
    ○ Does the DOM support the trend, order interest
  • Is my stop protected?
  • Entry at an imbalance stack

Exit Checklist

  • What is the target?
  • Is the trend breaking?
  • Is Order Flow indicating a reversal in the trend?
    ○ Opposite imbalances coming in
    ○ A shift in inventory interest on the DOM

How to get better at Day Trading: Analyzing results

You can help yourself become the best trader, a crazy concept, right? It’s actually quite simple when you journal your trades on a daily basis and actually review them diligently. This is a process most forego but it may be one of the drivers as to why traders don’t find success. Journalling is a very important process to help you grow, learn from your mistakes and realize what works and stick to it. A professional trader does most of their work outside of the market. By reviewing their work and learning how to get better.

 

If you want to learn more about journalling watch this video:

 

 

Want to learn more? Do you want full-day trading guidance and strategies? TRADEPRO Academy teaches ALL of our strategies in our course.

 

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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 for your own financial situation. TRADEPRO Academy is not responsible for any liabilities arising as a result of your market involvement or individual trade activities.