When it comes to order movement, many inexperienced FX traders prefer to think about volume bars or information about time and sales. It is much more than that, and it also helps to understand how markets promote the movement of orders. If you trade stocks, futures, forex, or bitcoins, one thing affects financial systems like this: people’s expectations about the future. A limitless number of participants take action at any given moment (initiating trades or issuing orders) for an infinite number of reasons.
Order flow trading is a form of trading that parallels price action trading in the sense that they both propose to analyze the market in some way. Price action traders believe in analyzing the stock price to decide the direction the stock will move in, while order flow traders believe they can forecast where the Forex market will go by simply understanding the market’s behavior. Once forex market traders have spent some time studying the market and developing techniques for technical analysis, it can be tempting to conclude that some of the fundamentals have already been addressed and need not be discussed anymore.
This is an attitude that can generate increased problem ability and result in losses that could otherwise have been prevented. No good trader ever feels like he’s mastered all levels of the market and it can always be a good idea to review some of the elements of the market that may seem fundamental in nature. One of these elements can be seen in the order flow phase, and this is a market factor that can affect significantly the trend activity that is likely to be seen in the future.
Forex order flow is driven by the inter-bank market, which comprises approximately half the regular notional value of trades. In the interbank space market participants contain commercial and investment banks. Since most forex market liquidity is soaked through the inter-bank market, it is important to analyze how these players use the order flow tool to guide in making trade decisions. Trade flow in the forex market is powered by trades flowing through major financial institutions ranging from other sell-side players to buy-side customers that include all treasuries, central banks, and fund managers.