Order Flow Trading: How to follow trend

Today, I am going to show how you could have captured recent negative movements of equity futures by the use of order flow and volume strategies.

Several catalysts have pushed down the major equity indexes: end of QE in USA, risk-off in Europe (Portugal’s issue) and the conflict in Gaza.

I’m about to show you what happened on Dax, German Equity Futures and how you could have used order flow tactics in order to be on the right side of market.

What I want to emphasize is that the key remains to follow order flow surfing in the right direction.

After opening at price level on Monday, Dax has been falling to price level, actual market price, meaning a loss of %. A basic approach consists of following the flow by the use of this famous indicator: OBV, On Balance Volume.

Basic Order Flow strategy suggested entering short around 9940-9930 price levels ( Linear Regression(OBV) crossed below its 0 level). Signal is confirmed by the break of significant volume level, placed at 9950. If you followed it, you would be in the market with a gain of 3% at actual price.

Linear Regression of OBV and Volume profiles are two useful instruments to proxy trading approach that we adopt at LittlefishFX. I think it is a good point to start at in this fascinating path.

In a trending environment, the best way for trading consists of following trend direction; trading against the trend may be very unprofitable when trend is on the way. Thus, if you are not in the market during strong movement, wait for a correction in order to enter in the right side of market at “good” level. Easier said that done right? Is price moving due to continuation or correction wave? Order Flow and Volume analysis helps us: strong movements are supported by high volume while correction waves show light volumes.

To answer it, I want to show you one tool that I use for my intraday trading. It helps me to understand volume’s degree that pushes price,: Acceleration. It measures the speed of order flow.

See this intraday chart of DAX last week;

Price moved in a downtrend as you can easily observe on the chart. Price movements in direction of trend are supported by rising of acceleration, while upwards corrections by falling of acceleration. This easy application of order flow tools provides a powerful help to decide when you can enter in the market following the trend.

If you have any comments or requests, feel free to tweet me @LFXGabriele

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