Best Order Flow Indicators for Futures Day Traders: Analyzing Market Sentiment

Order Flow has large importance in futures trading. Considering that the futures market is centralized in one exchange, it’s easier to follow the orders that enter and exit the market. Giving traders an advantage and opportunity to follow where big money places its trades.

Order Flow in the futures market can help traders read the market sentiment and get a good understanding of where the market is headed. The direction of the market and the potential of the move. Which can really give traders an Edge.

Throughout this post, we’re going to break down some of the best Order Flow indicators that you can come across as a Futures Trader. Putting much more emphasis on one of the indicators as it’s the “ruler” of all order flow.

What is Order Flow and Why does it matter?

Order flow is the real-time information about market buying and selling in the futures market. It allows traders to see incoming orders, their price, the size and if they’re market or limit orders. It gives traders a deep insight into the supply and demand dynamics of the futures market at any given moment.

Each time traders put on bury or sell orders in the futures market it’s a part of order flow. Just like other financial markets, orders are matched.

There is a continuous flow of incoming orders that forms the order book. This shows us buy and sell orders at different prices. More importantly, order flow shows us how these orders are actually filled which moves the market.

Order Flow is beneficial for the following reasons:

1. Market Sentiment Analysis: Watching how orders actually trade at market and interact with one another allows traders to gauge market sentiment. If there is constant market buying holding the price bid up, and the sellers start vanishing. Traders expect to start to see bullish sentiment. The opposite holds true for bearish sentiment.
2. Liquidity Assessment: Analyzing the order flow data allows traders to assess where liquidity is in an asset, allowing traders to gauge sentiment in a different manner. Liquidity also allows traders to identify if there is going to sufficient volume to actually trade the asset on any given day.
3. Finding Institutional Activity: Finding where large orders are entering the market, whether they’re getting stuck or actually holding price in their direction is extremely valuable for Futures Traders. This allows traders to jump in with the institutional order flow and ride their wave.
4. Identify key areas to trade (Support and Resistance): Watching where market orders have come in prior to making large price fluctuations allows traders to identify strong-handed traders who will act as support and resistance points.

Top Order Flow Indicators for Futures Day Traders:

There are several order flow tools, the following two are the ones that we would consider the most important. We would go as far as to consider the first the most important and traders should put the majority of their value in that indicator. For that reason, we’re going to focus on that indicator throughout the remainder of this article.

Indicator 1: Depth of Market (DOM)

This indicator is more of an order flow tool than anything. The depth of the market is where all of the orders flow into the market. Whether their market orders or limit orders. They can all be seen here.

The reason why this is the most important order flow tool is that it shows two key aspects of order flow.

1. How the market orders interact with one another
2. The speed at which the reactions happen

The depth of the market is a complex tool that isn’t easily learned. Through a real understanding of how the tool can be operated, traders can understand how order flow actually works.

Here is a layout of what a “good” depth of market looks like with a breakdown of how to use it.

1. The volume profile
2. The Market Price
3. The bid and ask
4. The last traded quantity
5. The bid/ask profile
6. The delta

1. The volume profile that is used is a volume profile that combines the Extended Hours Trading Session and the Regular Hours Trading Session.

It’s used as a general volume profile. Identify where there are key distributions along with where there might be key ledges to enter into trades or even trail trades.

You can find a longer and better breakdown of the volume profile here: Volume Profile to trade Futures. Overall the volume profile on the Depth of Market isn’t of the highest importance.

2. The Market Price: This is an arbitrary number that shows you where the price is currently trading, the least important aspect of the DOM.

3. The bid and ask prints on the DOM allow traders to place orders on the DOM. This is where you can find limit orders. Generally, traders think that this is the most important aspect of the DOM.

However that is not the case, limit orders don’t move the market. Traders see them as price magnets however the price won’t move unless you have large market buyers or large market sellers come into the market.

So when we see large limits that are resting on the DOM those are simply resting orders. I wouldn’t look at them as magnets unless the price is within 1-2 points of the area. Then you want to take note of how the levels with the large orders trade. That can give you an indication if the market order that came through is a rejection or a continuation.

For example. If we have 400 offers resting on the DOM on the S&P500 futures. This is considered to be a large order. The average is somewhere around 150 contracts sitting on the limit side.

Should the price be 10 handles away it’s not much of a magnet or consideration. If the price is 2 points away, I would want to see how it trades. This turns into a market buy trade.

Should the price be rejected from the area, these longs are stuck, and we expect a market reversal. If the price accepts the above and starts to look to run, then we have the continuation move to the upside. Notice how you won’t know until you see the market reaction.

4. The last traded quantity on the DOM is the most important aspect of the DOM. This is where you can see market order reacting with one another and how they shape up the market movement potential.

The key aspect to these columns is that you want to understand how orders react with one another and the speed at which they react with. The red column is market sell, the blue column is market buy.

The actual size of the orders is important, however the reactivity of those orders weighs more. You can have 200 buyers coming in and a 400 seller and the market may move up. These columns are really important to watch on reversal and continued moves. To learn more about the DOM check this video out, it’s an in depth explanation.

5. The bid and ask profile is the volume profile split into the bid (blue and left) and ask (red and right). This allows us to see how many orders were traded market sell vs market buy at a certain price. Which then allows traders to see the differences in buyers and sellers at key prices.

6. The delta at a key level is simply the bid volume minus the ask volume at a price. Which allows us to see the large differences in prices. On the S&P 500 if the delta is greater than 1000 it’s considered large.

Indicator 2: The Footprint Chart

The Footprint chart is a heavily used order flow trading indicator that allows traders to see the volume within each candle. I’ll be using a footprint chart that is based on a 5-minute candle chart to explain what it is and how to use it.

Above we’ve divided the footprint chart into 3 areas.

1. The green box at the bottom outlines the cumulative day data for each of the candles. Split into 5 sections.

1. The total volume on the candle, each candle has a certain amount of contracts.
2. The Ask volume minus the Bid Volume which gives you the delta on each of the candles.
3. Day Cumulative AskV-BidV gives you cumulative delta on the day.
4. Volume/sec, self explanatory.
5. Cumulative Volume-Day: Total daily cumulative volume.

2. This is an upcandle on the Footprint. There is a blue market on the left side that gives you the body of the candle, and anything outside is a wick.

These are 5-minute candles. Above the candle you can see the point size of the candle. In this case 5.25points. Below the candle you have: candle delta, candle volume and volume/sec respectively.

3. This is a down candle, that has a red body, all the other attributes are the same as the up candle.

Overall these footprint charts allow you to see what kind of volume is within the candle. The darker the colour, blue or red allows us to see large volume traded at certain points.

The main use of these candles and coloring is finding stuck traders and continuation volume traders.

If there are a lot of dark blue volume blocks that appear aat the tops of rotations like you see in the image below. (Yellow block) that represents large buy volume getting trapped at tops, indicating a potential reversal, if there is no continuation on strong buy volume, then expect prices to reverse lower.

Very similarly to the image below where there is a flush of large sell volume that cannot sustain, which is an indication that there are trapped short sellers that are about to get squeezed to the upside. (Yellow box). On the other hand we have a white box that has lighter buy side volume, this is a really goood example of continued buy side that suggests trend is to the long side.

Analyzing Market Sentiment with Order Flow Indicators

When it comes to order flow futures trading, especially day trading, we can read futures market sentiment best on the Depth of Market. So we’re going to use the depth of market for the remainder of this post to break down sentiment and strategy.

Traders can anticipate price movement and momentum of the futures market on a short term or medium term basis by understanding how the DOM works.

Using the DOM to determine market sentiment is not that complex.

Who is winning the battle?

There are market buyers and market sellers, who are responding better and with speed.

That means if we get constant bids that light up market buy, with size (200+) contracts on the S&P500 Futures, all dips getting absorbed by market buyers regardless of the size of the market sellers. All of this done with speed, then the DOM is bullish and we expect an up move.

If the opposite holds true, then we would expect sell side to hold out better.

Take a look at the image above. We’ve split the DOM into two categories to help us determine what the general market sentiment is.

1. Yellow Box. This is where we want to take note of 3 things in total.
2. The middle columns where we have 2015 market sell at 4546.25 and 807 market buyers at 4546.50. This would suggest that shorts are getting stuck at the lows and there is a rebid on the DOM with speed. The move up on the buyers and not down on the sellers suggests a reversal is about to happen.
3. The delta at 4546.50 is nearly +1000. This suggests large buy strength and when price moves above, we expect continued move to the upside with more bids stepping in.
4. The bid & ask columns on the far right, we have a lot of volume in general at these lows and the difference is the large buy volume that starts to show up at the lows that pushes prices higher.

2. White Box. Where we want to compare the market buyers with the market sellers that are on the DOM.

You can see even though it is a still image, you have continuous large market buyers that step into price and continue as price moves up. On each of the rebids and movement higher, we start to see there is large quantities of buy side.

To add to this even when there is large market sell side overall we can see that the bid that comes in is similar size and holds out the strength. Presenting a bullish DOM.

How to Implement Order Flow Indicators in Your Trading Strategy

There are multiple ways to implement order flow and the depth of market in your futures trading strategy. It is harder to explain in still imagery.

Below are videos that can help you understand how order flow can be implemented.

Generally the main two ways I like to implement Depth of Market Order Flow in Futures trading is:

1. Finding stuck traders for larger market reversals
2. Finding strength and sentiment for trend days in the market.

Real-Life Case Studies and Success Stories

There are many cases within our community that have showcased advanced order flow reading, specifically on the Depth of Market in the Futures Market that have allowed for large market moves.

Take this for example. Over 200 points on Nasdaq or $4,000 per contract.
This trade was based on large stuck traders at lows accumulating at 15,755-760 on Nasdaq that were visible ont he delta reading.

This is just one of many examples that we have on a daily basis that order flow helps us locate.

Conclusion

Order Flow indicators are extremely important for futures traders because they can locate where large strong handed traders appear in the market. This can indicate large market reversals as well as general market sentiment or the market direction.

Order flow is a tool used to help you make informed trading decisions that can be a qualifier to get into traders or get out. Based on the market sentiment analysis you can find if the trend has run its course or where it’s starting if you use the depth of market. Even if you use the footprint order flow tool.

You can find more information about using order flow and trading futures in general through our FREE Futures trading course. Available on our website.