How does order flow trading work?
Orderflow trading is a method used by traders to understand market activity by analyzing the buying and selling orders that move prices. It focuses on what is happening right now in the market rather than using historical price patterns or indicators.
How does order flow trading work?
Here’s how it works in simple steps:
- Orders in the Market: When traders buy or sell, they place orders in the market. These orders are either market orders (executed immediately at the best available price) or limit orders (placed at a specific price, waiting to be filled). Order flow trading examines these orders to find out where the market might move next.
- Order Book: The order book shows all active limit orders waiting to be filled. It reveals how much interest there is to buy (bids) or sell (asks) at different price levels. Traders look for areas where large orders are placed, as these levels can act as support or resistance.
- Footprint Charts: These special charts break down the action inside each price bar. They show how many contracts were bought and sold at each price level. Traders use this to identify imbalances, where buying or selling pressure is stronger.
- Delta: Delta is the difference between the number of contracts bought and sold using market orders. Positive delta shows more buying pressure, while negative delta shows more selling pressure. This helps traders understand who is in control.
- Decision-Making: By reading order flow, traders can predict short-term price movements. For example, if they see heavy buying and the price is rising, they might decide to go long (buy). If they notice large selling and the price dropping, they might go short (sell).
In summary, order flow trading helps traders see behind the price action, giving them a real-time advantage by analyzing who is buying or selling and in what volume.
