Order Flow Trading – Using a Trading Filter to Find Reversals

As traders, we are always looking to find  a quantifiable edge for our system.  Many traders look for indicators, systems and pre-built strategies that promise riches and success but are simple enough to just show a buy arrow and sell arrow.

But the truth is, none of these holy grail methods work and deep down you know it. In today’s markets there is one significant way to find a day trading edge statistically, and that is using order flow trading.

In this article I will share one of my favorite order flow trading tools and how to apply it to increase your accuracy and win rate.

Order Flow Trading – What is the trading filter?

Imagine being able to see how many futures contracts have traded at any given moment? That is very easy, just look at the volume.

But what if we wanted to see how many futures contracts have traded only when the order size is 200 contracts or greater per trade? That is where the trading filter comes into play.

This tool only shows a trade when it exceeds a certain size. This is very important because smaller order sizes are retail traders with small positions.  Larger orders are institutional traders with skin in the game.

Using a trading filter can show you when the big money is participating, when they get desperate and even when a trend is about to capitulate and reverse (or continue).

Order Flow Trading – How to use the trading filter.

Knowing a tool and knowing how to use a tool accurately is what separates the amateur trader from the professional.

Let’s do a simple exercise.

Imagine that we are in a very strong daily uptrend, as prices of an asset continue to climb.  Suddenly, we see a rush of large buy orders trading at the exact same moment in time.

Pop quiz – is this a market you want to buy or sell?

The answer is sell.  Why?

Once you get a rush of buyers in a market and the trading filter lights up, you can almost be certain that the capitulation move has happened and the top has formed.  Think of it this way, when everyone that wants to buy has already purchased, who will be the next buyer to drive price higher?

This does not mean short the market right away, but it does mean you should stop buying and start looking for other data to find a good short entry.

Why is that?

Because when everyone has bought something and they own it, they are actually sellers waiting to get out.  Longs are sell stops waiting to be triggered.  These sentences alone have the ability to turn your trading around, so read them over and let them really sink in.

Here is an example of a trend rallying upward until it stalls out as a lot of buyers start showing up.  The filter below is on the ES (SP500 futures) and only shows when a trade is over 189 lots in total. This buying is not resulting in a new high above the VWAP (more on that in our course).  We now start to look for a short trade opportunity.

In the afternoon, the short trade paid off as interest ran out for traders to get long, and since a lot of buying happened on the filter traders knew that buyers were nervous and would start to get anxious and stop out on a slight move lower.  As the market moved lower, traders were stopped out and started running for the exit, fueling even more selling, which caused a low close for the day.  The selling even continued into the GLOBEX open at 6PM EST.

Order Flow Trading – Trading Filter Rules

This is obviously an over simplified guide, but these rules are enough to get you started with the trading filter tool.

If you want to watch the full lesson on using the trading filter you can sign up for our Day Trader Pro package here and watch it as part of our comprehensive futures trading course.  This material is not taught anywhere else, because it is used by professional traders and it actually works.

Here are my trading filter rules for catching day trading reversals and continuations:

1. If a strong uptrend has happened and you notice a rush of large buyers in the filter, stop buying and start looking for a short entry when your qualifiers are met.
2. If a strong uptrend has happened and you do not see a rush or large buyers in the filter, do not short the market, consider a long on a retracement or when your strategy permits.
3. Reverse the above 2 for a strong downtrend with sellers.
4. If a strong uptrend has happened, but you suddenly see big sell orders trading on the filter and the swing high is holding, consider getting short for a sell stop run to shake out weak longs.
5. If a strong downtrend has happened, but you suddenly see  big buy orders trading on the filter and the swing low is holding, consider getting long for a buy stop run to shake out weak shorts.

Order Flow Trading – Using a Trading Filter Conclusion

There are no holy grails, promised returns, sure thing strategies or secret weapons in trading.  The secret is that you are the secret weapon and that success only comes to those that know how to execute in this business.

The strategy is just a bunch of text in a word document.  It is useless on its own. The operator of that strategy is the real difference maker between success and failure.

Using our order flow trading techniques and the trading filter, you will be able to spot very accurate levels where price action is about to reverse. Now it is up to you to train yourself to execute your strategy and convert these levels to profits.

We are here to help you, and so is our community of day traders.  We trade live daily in our member room as part of the Day Trader Pro pacakge.

Sign up and experience the TRADEPRO EDGE.

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.