A quick guide to: Order Flow Trader

What is Order Flow? What does the LFX Order Flow Trader do? When should you use it? All of your questions answered about our Order Flow Trader

Ok, so Order Flow. What’s all the fuss?
It’s difficult to give just one definition, as there are a wide range of different techniques associated with Order Flow. Generally speaking, though, Order Flow strategies are based on the idea that the study of orders in bid and ask gives traders buy/sell signals by anticipating movements in price.

Order Flow can give an insight into what is happening in the market at any given moment. Then, if they are exploited in the right way, they can provide a deeper understanding of market dynamics that cannot be gained by studying price action alone.

Tell me more about the market dynamics…
In order to understand the importance of the analysis provided by the Order Flow approach, it is necessary for us to consider how the market works. A market can be divided into buyers and sellers, both of whom want to close their deals. A trade happens when a buyer and a seller agree on a specific price considered “fair” by both parties. Thus, price is determined by the agreement of two parties, one who wants to sell something, and one who wants to buy something.

In economics, there is a well-known theory called the Efficient Market Hypothesis, which asserts that financial markets are “informationally efficient”, because there is no room to achieve return in excess of average returns on a risk adjusted basis. Different versions of this theory exist, known as weak, semi-strong and strong.

It is arguable that markets are not perfectly efficient, since there is an important knowledge asymmetry between market participants. Because of this, Order Flow techniques provide traders with the opportunity to gain a better understanding of what will succeed in the markets.

Sounds good. How does the Order Flow Trader look in action?
Well, let’s take a look. Then lets look at a trading example where we can implement the Order Flow Trader and extract profits from the markets.

$EURUSD (Daily) 29_01_2014 - 01_12_2014

In the chart example above we can see how the Order Flow Trader indicator is represented on our price charts, the indicator creates a pictorial representation of the order flow positioning of the larger market participants It does this in two ways primarily it creates an arrow alert that alerts us to a change in flow green represents buying pressure and red represents selling pressure.

The second aspect of the indicator which serves as a continuous confirmation or filter is the shading and dot representation on the charts. Once a green/buying pressure arrow appears the next candle if it confirms the continuation of the current order flow will print a dot under the candle and a shaded area around the candle of the same colour as the order flow direction.

So how can we use the signals to succeed?
OK. Well let’s walk through how we can use the signals from the indicator to execute and manage trades profitably.

In the example below we see that price make a potential double top, we monitor the candles for a change in order flow dynamics to potentially enter short positions against the structural resistance level.

$EURUSD (Daily) 04_07_2013 - 08_05_2014

When the next daily candle closes we get an Order Flow confirmation meaning that larger players are now participating in selling and it is there is a high probability signal for us to join them a sell. As such we enter short positions on the close of the candle with protective stops initially placed above the double top resistance.

$EURUSD (Daily) 09_07_2013 - 13_05_2014

So now our job is trade management, we want to monitor each candle close and use the Order Flow indicator signals to manage our risk as the trade potentially progresses in our favour. As long as the red dots and red shading continues to print we stay short the market. If the market continues to move in our favour we can use the Order Flow Trader to trail our stops and take profits.

$EURUSD (Daily) 30_07_2013 - 03_06_2014

Once the Order Flow gives a counter position signal we have two options, take profits on existing position at market or trail stops on current position using the last red dot that formed as our trailing stop level. In the example above we trail our stops from our 1.3760 short entry to 1.37 locking in 60 pips profit.

$EURUSD (Daily) 27_11_2013 - 01_10_2014

As price consolidates from the impulsive decline from the double top we hold our trailing stops on our short positions. Price break lower from consolidation and we monitor the price action for the next opportunity to tighten our trailing stops and secure more profits. We get a a counter signal to our position and trail our stops to the last red dot again. By this stage we have secured nearly 500pips in profit.

$EURUSD (Daily) 30_01_2014 - 01_12_2014

As the price action continues to develop we repeat the process our trailing stop eventually get triggered after we have secured nearly 1000 pips in profit. From this example I trust you can see the advantages of using the Order Flow indicator and how trading on the coat tails of the big boys can really turbo charge your profits!

And what platform is the Order Flow Trader available for?
We do an Order Flow Trader indicator for NinjaTrader, MT4, and also MetaStock Pro.

Got any video guides on the Order Flow Trader?
We sure have, watch the video below…

Get the Order Flow Trader Indicator here:

For NinjaTrader

For MT4

For MetaStock

— The Order Flow Trader Indicator is available free with our new Forex Trading Course. To find out more or purchase the course, click here