Flow trading forex

I have been searching about order flow trading in forex market because it is one subject that used to arouse my curiosity and there appears to be very little information about how to actually apply order flow knowledge into real live trading situation. Fortunately I stumbled upon a work by a trader called Dali who started a Order Flow Trading Thread at babypips. Thanks Dali for the great order flow trading information…if you ever happen to visit forextradingstrategies4u.

The definition of order flow trading tends to cause a lot of confusion. Here are 3 potential definitions of what order flow trading is:. You see, there is no clear definition-all these mentioned methods are based on anticipation of future order flows in the markets. Well, instead of just looking for technical patterns, a trader should go a step further and think about what other market participants might do.

This is a very important concept in order flow trading-thinking about what order market participants might do. And when you think along that line, you can anticipate what kind of actions they will be taking in the market. If you want to buy an asset you are the buyer , there must also be seller that is willing to to sell that asset to you as well.

Now if you are the seller, you also need a buyer looking to buy whatever that you are wanting to sell. Liquidity is created when traders place orders in the market and these orders are called the bid and offer.

If you are a large trader, liquidity is a very important factor. Large traders cannot simply think about how much price will move, but also how they will get out of their trade when the time has come.

This is not a problem for us retail trader, but definitely a key factor for those trading big amounts of money-size is a big problem. A buy market order will be filled against the best offer and a sell market order will be filled versus the best bid available.

Market orders take away liquidity from the market as the participant that issues them wants to trade immediately and eats available liquidity via limit orders. If I issue a 1 million bid buy limit order at 1. This means my bid at 1. Order books or DOMs Depth of Market are mostly used in Futures trading, as the FX market has no aggregated volume data. In this asset, we have no orders at 44 and 45, which means you can currently buy at 46 the best available offer and sell at 43 the best available bid.

If I decide 45 is a good price to sell at and issue an offer at that rate, the spread will narrow and buyers will be able to buy from me at 45 the amount I offer to sell. He will again reduce the spread and now sellers are able to sell at a better price than before. The order book looks now like this:. The order book above shows the availaible liquidity and it is visible that he will not be filled at 45 as there is insufficient liquidity.

Trading Blog | Order Flow Forex

The order book will stay this way until there are new bids created below 47 OR there is even more buying at the market price at the best offer which drives price higher and further consumes offers. It is being stopped because otherwise, if you create a bid at the price where offers already exist or above, it would become marketable order and would be executed immediately. Chances are good there are not many buyers at those levels, as price will be perceived as high and liquidity is a bit thin.

My shorts will be filled and price is likely to move quickly in my favor as most buying came from shorts that were stopped out. Large traders need it for liquidity as above described and bank dealers will also use it also to control their book better.

I know there are stops above 50 and those will likely get the attention of predatory traders which will push price into the direction of stops. Those traders determined that they want to get out of their short position at those rates and their demand will accelerate the move and trigger my offers. I provided liquidity to them, but I exploited the weaker side of the market and got into a position at a better rate.

Even if you have the DOM for i. It can be speculators, model funds algos buying into short-term momentum or dealers who do it to manage their books. I will cover this activity in a later article, but the key is that a larger cluster of stop loss orders will have the attention of other traders, especially when they are near.

As price declined, there were traders who lowered their stops to protect their gains and in general, more buy stops were building above. First stops above 1. However, up momentum disappeared and price quickly dropped below.

Do you see what happened? As I covered in the previously, large traders cannot simply accumulate or distribute a large position whenever they wish.

Sam Seiden: One Day One Topic: ORDER FLOW - Trade What is Real, Not What You Feel

They have to look for liquidity and stops are helping them in an indirect way, like I explained in the example above. That is why stop hunts tend to be quickly faded: The large bids or offers got filled and with the stops triggered, there are no buyers left in a buy stop-hunt scenario and no sellers in a sell stop-hunt scenario.

There are also traders that anticipate such moves and look to take profit near the level where stops are rumored to be. While there are looking to make some profit from short-term trading, their main task is to provide clients with liquidity and get them filled with less as possible slippage. This means those clients want to get out of their position once price breaks above the determined rate.

If he does nothing and waits for price to break above 1. There will be stops from other market participants above 1. He would fill his clients at a bad rate, earn nothing from it and his reputation would be seriously hit if this would happen several times.

He can gradually start to accumulate a long position and anticipate a break of 1. Buy 20 million 1. So he will distribute his position as price breaks above 1. Again, banks do not open their order books directly to just any outsider, one would need good connections. So people claiming they have some software that shows the order books for the FX market are scammers. The one you maybe see in your trading platform is only the DOM of your broker and retail brokers have a small role in this huge market.

Those are people that have some connections in the trading industry, mostly as they worked as traders too in the past. Market participants always look for the weaker side of the market, so both buy and sell stops will be targeted. When using this, it is very important to keep in mind that this is additional information that may help you in your trading, but you should not trade off this information alone — that is, using them as trade signals.

There are always bids and offers, smaller and large ones, but in the end it depends on the power of the bulls or the bears. I therefore will only look for opportunities to sell the pair. Second, note key price levels.

Third, watch for price action to give you a high probability opportunity to enter short. I will cover later some of the various Order Flow techniques I learnt. For now, I just want to note that you should always use flow information like bids and offers with caution. You want the market bias to be in your favor and wait to see a reaction to those levels, not enter ahead. I hope I have emphasized enough how important it is not to use them as trade signals, so I will post now the resources I use for the flow information they are free:.

Forex News Currency News by ForexLive. The Thomson Reuters IFR feed also includes good flow information and Oanda offers it for free to clients. If you decide to apply the stop hunt strategy, you can either enter on momentum e. Make sure you concentrate on the high probability opportunities.

The set up will give you the opportunity to use a tight stop, but here it is even more important to only apply it when sentiment is clear.

Obviously, someone who would have applied the strategy here and went short, would have got stopped out. Sometimes, more detailed flow info can be leaked i. I also agree with your 2nd statement and this is why I strongly advised against using such info as trading signals.

Sentiment has always priority to order info and traders should wait for a reaction to the reported levels, not acting ahead. Before we dive further into the world of Order Flow Trading, we must be aware who participates in the FX market.

While not all groups have the same characteristics, there are some most have in common. I will split the groups up and explain them all in more detail. A dealer quotes his customers a bid and an ask price and the difference the Spread will be his profit. As a transaction with his customer takes place, he takes the other side of the trade and can either get rid of his exposure via the interbank market or he can hold the trade if he thinks it will benefit him.

Dealers therefore can hold trades for speculation, but they usually close them in a short time period. They mostly finish their trading day without any open positions. Dealers are well-informed traders and have a good sense for short-term market movements, so it only makes sense for the banks to let them also do some discretionary trading beside handling customer trades. They participate in stop hunts, as I explained earlier in the thread, because they look to manage their book.

This group includes central banks and institutions like the Bank of International Settlements BIS. Central banks operate in the FX market on a daily basis and when other participants become aware of their presence, they will pay a lot of attention to what they do. Asian Central Banks are one group within the Sovereigns that are often identified in the marketplace and news providers like Reuters are reporting about their business.

Especially if things are rather quiet, they can have a strong influence, so keep that in mind! They are in this game for the profit and are the group with the greatest variety amongst members. Most of the hedge funds however, will look for stable trends to ride, like the current GBP and JPY downtrends.

As they are leveraged players, they can feel the pain sooner when a squeeze is happening in the market. It is certainly not just the retail traders getting stopped out, large specs can be caught with a vulnerable stop loss too. They are called that way because they do not use leverage. Included in this group are mutual funds, classical investment funds and sovereign wealth funds. They are conservative and will generally either look to manage their currency exposure or, if speculating, look for stable trends.

Hedge funds do too look for trends, but they have the ability to leverage up and switch to short-term trading if they wish to. Real Money will be usually a bit late in a move, but their presence is still worth noting, as they look to accumulate positions.

Their activities can have an impact on the markets if they are trading in a big size, but they are not participants one should follow, as they are not profit-motivated in the first place. The popularity of Technical Analysis TA led them to place their stops at predictable places and this can be exploited by Order Flow Traders. Even as the number of proven trading strategies shared free has increased over time, most retail traders lack the consistency and discipline to make it in this business.

You are competing against other traders in the market and some of them are powerful players with a lot of experience and capital. Without losers, there would be no winners. Start thinking about how could you exploit the characteristics of other participants. Markets are all about fear and greed. As price moves, some will start to feel pain and will have to cover at some point.

Hunting stops and initiating squeezes in the market place is not just about retail traders, professional traders also get stopped out or are forced to cover as the position moves against them.

One of the most important thing is that Order Flow Trading is a mindset that teaches you to exploit the weaker side of the market. What are the main factors driving current sentiment? Follow a news feed or get some headlines from either Reuters, Bloomberg or Financial Times website.

Keep it short in form of notes. As prices moves further, compare it to your sentiment analysis. Think about the characteristics of other participants. Think about what it means for bulls if a key support level holds. Will they be accumulating further?

Eventually, I will cover this in more detail through the thread, but take some time to see the markets in a different way than you did before. When I just started with OFT, I thought about these themes and made a lot of notes and observed the markets.

Again, they have to be used with caution as orders can get cancelled or can have little or no impact. From the above mentioned info we could say that there is buying interest demand at 1.

When trading of reported orders, I recommend waiting for a reaction and not putting a limit order ahead. We see price stops at the level and retraces back up. Does it seems that there is real momentum building to the upside or are rallies hitting quickly into fresh selling?

Reading the order flow directly is a bit tough in the beginning and it is hard to explain it in words. You have to monitor price action as it happens and take notes. Sentiment will give you the biggest advantage. Note key factors that are driving price action currently, analyze price action itself and keep track of how they correlate.

Sentiment is positive as the RBA indicated it will not cut rates in the near future and on better economic data. What really turned my trading into a profitable business was focusing on the high probability trades. You can anticipate a reaction to the reported levels and fade any rally or drop back to the mid range level. They taught you to place your buy stop above the big figure i. Obviously, sell stops were building above 1.

As we moved up, they came more and more to the attention of other traders and of dealers, so it was only a matter of time. In my opinion, it is better to enter on momentum and push into the stops, than try pick a perfect entry when you have missed the chance. Obviously, some of those concepts will be familiar to you from some of the technical analysis concepts.

It is a mindset that will give you a real advantage in the market as you focus on the core mechanism of the markets and on sentiment. I will be honest in saying that my capabilities in explaining some of those specific concepts are not that wide but I hope you get something from these. Order Flow Trading can be applied in many ways and the above mentioned are just the basic examples. I have some more article coming soon, then I will try to make the concept more understandable through trade examples and similar.

Price action patterns can be traded successfully without the knowledge about order flow, but knowing the OFT concepts will give you an advantage, as you are more aware why is it happening and you will understand better the factors driving PA. As I mentioned, it is part a collection of methods based on market microstructure, but also part a mindset.

My path was the following: It might seem a bit complicated to some in the beginning, but IMO it is worth the effort. However, it is important to suit your trading strategy to yourself. When there is talk of sovereign i. What changed OFT for me, was that I could better determine the forces that were causing the PA pattern. Together with sentiment analysis, I can focus on the high probability opportunities and learning OFT also improved my skills in reading PA. There are a lot of inefficiencies one can exploit in the market once we get more familiar with market microstructure.

One could focus only on the technical stuff, but incorporating sentiment reading into your analysis will help you to focus on the higher probability trades. I do not in-depth analysis about the global economy or specific countries, but rather focus on the key themes in markets and follow news.

I personally use only the IFR Markets feed from Reuters, but again, the one from Dow Jones or websites like ForexLive will also serve you well. This should not be too difficult to identify, as news services will report about them frequently. The long-term impact themes are the ones that are driving flows and even if you are day trading, going with the flow will give you an edge in the market.

I will always look for obvious sentiment like currently e. AUD-positive and keep track of the price action. If bias for a currency is positive, because of e. One of my favorite patterns is the counter-sentiment stop hunt, which I explained earlier in this thread.

If we take again the example of the currency with positive sentiment, we want to look for a stop hunt down into sell stops and fade it. Like I mentioned in one of my earlier articles and Minotaur wrote about a few posts above, price action also influences market bias. Shorts were worried keeping their position open over the weekend as any improvements in the Cyprus bailout deal could lead to a larger spike on the Sunday opening.

Once buying picked above 1. We had reports of large offers sitting at 1. Finally, combine it with technical order flow key levels, stops and keep in mind that price action can influence sentiment too!

I shorted CL Crude Oil Futures contract at an average price of Sentiment turned negative pretty quickly in FX markets, but US markets were still trading in a tight range. The choppy price action in the indices and my strong conviction about current negative sentiment in the markets gave me a good reason to stalk a short set-up in CL.

While upside momentum was quickly regained on the previous move, this was not the case after it hit So, price action combined with my view of negative sentiment, made me short CL at If the option expires worthless, the option writer has earned the premium similar to a comission as you enter a trade and the option buyer has lost.

If the option is in-the-money, the option writer has to pay out the option buyer the specified amount.

5 Order Flow Trading Strategies You Must Try in - Littlefish FX

Knock-In Options — the option is worthless until the underlying asset hits the specified barrier price in the set time period. The option is worthless until it breaks above the 1.

Knock-Out Options — the option becomes worthless if the specified barrier level is hit. I think the pair is heading higher, but do not expect much volatility. However, if price breaks above 1. Double No-Touch Options -Just like the knock-out option, but it has two specified barrier levels. DNT option for 1. If price stays within the set range during the stated time period, the option writer has to pay me the specified amount. However, if price breaches any of these two barrier levels, the option will become worthless.

Double One-Touch Option — Knock-in option with two set barrier levels. I will get paid on the option if it reaches either of the two set barrier levels during the specified time period. If it does not, it expires worthless.

Barrier options can trade in decent size, there are sometimes ones in the value range of million up to 1. This is why option desks will gun for these barriers and try to get them triggered. Similar to the FX spot dealer, you want establish a short position and increase downside momentum.

On the other side, there is the option buyer that has great interest to keep price away from the 1. He will try to buy ahead of the level and hope there will be also other bids in decent size.

A good example is the 1. The option buyer was lucky yesterday, as there was decent demand from Asian Sovereign names and corporates that kept the pair above the barrier level. One could not have a more beautiful OF trade: Establish a short position and gun for the barrier and stops below. But a good approach would also be to establish a position and take partial profits as each of the barrier gets triggered to your final target.

In general, it is more preferable to go with the option writer and attack the knock-out barrier, especially when sentiment favors such price action. However, in a market environment with little volatility and tight ranges, barrier protection can be stronger. Putting ourselves in the shoes of other traders is an effective way to get a better feeling for current market bias.

Having a good understanding about market psychology can give you an additional edge in the markets. Going into the last ECB press conference, the market was largely short and buying interest was not very high. However, after the ECB meeting, the Euro rallied.

While there were fundamental reasons for the move, price action itself contributed to the shift in sentiment. As we broke above 1. When sentiment takes a turn again, the process will repeat. Even if it is lagging a bit, it is still useful, especially when positioning hits extreme levels. For short-term positioning you can guess it pretty easily once you watch price action for a certain period and get some feel for the markets.

In the previous sections, you have learned about other market participants characteristics and how to identify stop clusters. Combine it with the above mentioned method. We all know how these stories end — with a blown up account! We all felt that excitement about trading currencies, right? The largest market in the world and a truly global one — open 24 hours, 5 days a week.

I thought this has to be the key to successful trading — an approach that rationalizes price movements with all available information included in the charts. This gave me a little better understanding about the markets, as I focused on price action, not on indicators.

I did better than in the first stage of trading, but still lacked consistency. After spending some more time with price action trading, modifing various strategies, I stumbled upon a few threads about order flow on FF.

It is the way of thinking — the mindset — of an OF trader that was a game changer for me. Instead of rationalizing everything through technical analysis, I chose to study what other participants operate in the marketplace and what characteristics they share. I see the markets completely different now and I can get a feeling for market bias much easier. My knowledge about market microstructure help me understand events that occur in the market in a clearer way. It is a constant seek for liquidity and clearing out the weaker side of the market.

Trading is not my primary source of income, but it provides a nice, additional flow of money and I love to trade. You have to think objectively about your trade and focus on your plan. As soon as you start to think about the cash, stop the thoughts! You have to feel comfortable applying it and you need to have confidence in what you are doing.

Doubt can be very costly in trading. It is key that you keep a cool head and think long-term. I wrote all my trading rules analysis, strategy, entry, management, exit, money management on a paper sheet and sticked it on the wall, so I can always see it from my trading desk. When you find yourself tempted to break a rule, keep an eye on the plan and do the right thing….

But what I want you to understand is that if you study OFT and apply it, it is not limited to a specific strategy. It does not mean you have to trade stop hunts. Like I described earlier, it is a mindset and you can combine it with other strategies, which do not have to be directly OF-related. Understanding the importance of liquidity and what role stops play in the markets, you can now apply it directly in your trading.

While there are several services that report where stop loss orders reside, it should be your goal to learn it yourself. After all, we want to make sure we are not too dependent on any news service or similar in our trading. There a few key things you need to keep in mind about the accumulation of stop loss orders in the markets:. Simply, more traders will notice a pattern on a 4-hour chart than one on the 15 minute chart. There is a lot of noise on the minutes charts and not many traders will bother with interpreting too much into it.

Limit orders will start to cluster at both levels and stops will be placed below 1. The longer the range exists, the larger the stops will grow until one side finally cracks and triggers the stops. Stops were growing larger on both sides as price remained within the range.

RIGHT LINE TRADING FOREX

There were two things telling us that the downside was more likely to crack than the upside: The sellers were able to play this game for quite a while and they finally gained the upper hand on Friday, being able to push the pair into the weak sell stops. Applying order flow trading is considering the technical picture and taking advantage of the weak side of the market. If you wish, draw a Fibonacci retracement from the latest major swing low to the most recent major swing high.

Again, draw them in a different color than the previous ones, so you can regonize them more easier. I started with the Daily and moved then to the 4H chart, noting key support and resistance levels. I did not mark the Daily SMA and the Fibs on the example above, but feel free to do so if you consider it helpful. Stops are building below major support levels and above major resistance levels with limit orders very likely ahead.

Your task is now to get a feeling for market bias and read price action to recognize the weaker side of the market and take advantage of them. Just think of the situation where you feel quite comfortable with a position and think it will run further in your favor and then suddenly you see a sharp move which takes out a i.

If we get another run into 1. Bulls will have gained the upper hand in the short-term as they cleared some of the shorts, but much will depend on price action after this event. Most important of course, are fundamentals. But then, are the dips well-bid compared to the selling that occurs at the rallies?

Are bulls showing a strong initiative to keep price above? A false breakout followed by another drop would mean this was just a short victory for the bulls. When trading you want to think about the other participants and what they are likely to do in a certain scenario.

Sentiment analysis can give us a very good edge and it can compensate if you struggle a bit with understanding fundamental analysis. Price action can also reveal a good amount of information — keep an eye on how the dips and the rallies look like. If we have small rallies, but strong downmoves, the bears are in control. All resources you need for sentiment analysis are available for free, so there is no need to subscribe to any services with in-depth analysis.

When I was a beginner in order flow trading, I found it more useful to focus on the key headlines and topics traders are talking about. Even if sentiment is in our favor, we must keep in mind that orders can be withdrawn or that a sudden turn in flow occurs and the levels breaks without much effort needed. While sentiment remains negative overall, there was quite some short-covering going on today and it took out the 0.

Look how price acts once it has broke a major technical or large order level. It all comes down to risk-reward, when there is clear sentiment, you can go sometimes ahead and fade it, but the most important thing is that you accept when you are wrong. For example, if someone focused on the AUD-negative sentiment and forced himself to believe the Aussie has to trade lower, he would have got hurt today.

If you fade and the trade goes wrong, accept it and either a go with the flow or b stay out of the pair. The point of order flow trading is going with the overall flow and taking advantage of inefficiencies and not fighting the strong flow.

Not only that, but how little support it found after that stop hunt? Combine this with mixed sentiment and you have a good fade trade. Traders expected that the Japanese Prime Minister Abe and his party will win the majority in the Upper House election — which they did.

This resulted in a squeeze of the traders who were positioned long. Those who where long, took profits, and some predatory traders joined the selling to profit from the move. Once the stops below started to getting triggered, downside momentum picked up until we ran into good-sized bids around Large players can engineer a short squeeze without an event to gain more favorable conditions for themselves.

This is most commonly seen as a stop hunt, as the stops from those short-term traders are usually triggered in this process. You have to keep in mind that it is the job of financial journalist to always find a reason why a certain price move has happened. So if you notice that there is really no reason why a certain pair moved, but you are aware of the fact that positioning is either overly long or short, you can imply that this was simply a stop hunt.

The majority of traders expected they would do so and positioning is extremely short. We will see a larger short squeeze driven by position covering and stop loss triggering.

Retail positioning is of course not significant for such a large market, but you can use it to get an idea what some of the retail traders are doing. Most of them use similar strategies and a large majority of them is positioned wrong, so you want to notice when market positions is overly long or overly short.

Foreign Exchange Positions Forex Open Position Ratios OANDA fxTrade. COT Charts based on the CFTC IMM report released every Friday: Commitments Of Traders Reports — COT Report, COT Charts, COT Analysis and COT Data — COTbase. FXWW Market Commentary Blog — FXWW Market Commentary. Menu Simple Forex Trading Strategies Price Action Trading Course Price Action Trading Strategies FX Trading Signals. Table Of Contents What Is Order Low Trading And What It Is Not Order Flow Trading Is A Mindset Think About What Other Market Participants Might Do What Are The Steps To Learn Order Flow Trading?

Types of Orders And How Price Changes Liquidity How Liquidity Is Created In The Market Types Of Orders Market Orders Limit Orders How Price Changes Stop Orders Additional Information About Stop Orders Stop Hunting How to Use Order Flow Information How to Use This Information Participants In The Forex Market Dealers Sovereign Names Large Speculators Real Money Commercials Retail Traders Some questions to think about … Think about the stops of other participants Reading Order Flow So what is Order Flow Trading about and how is it different?

Key Themes in the Market 2. Barrier Options Barrier options are exotic derivates and an option on the price of the underlying asset. The option writer typically banks sell options to the option buyers. FX Options are traded over-the-counter and not on exchanges. Why does it matter? No Problem If You Do These 2 Things. Prev Article Next Article.

Recent Posts Free Forex Trading Signals Published Weekly. Trading Confluence Input From A Blog Reader. Candlestick Pattern Indicator For Trading Reversals.

Support And Resistance Indicator MT4 DOWNLOAD LINK. London Breakout Forex Trading Strategy. Let Your Profits Run With 1 Simple Trading Tool.

Can A Forex Trader Really Make Millions? Popular Posts Free Forex Trading Signals Published Weekly. Forex Trading Signals Archive. Forex Trading Signal Reviews. Bearish Harami On NSE Index Chart Technical Analysis Based On Price Action. How Much Do I Need To Start Trading Forex? How To Do Multi Timeframe Trading In 3 Simple Steps. Bruce Kovner — Taxi Driver To Hedge Fund Billionaire Trader. Metatrader Forex Trend Indicators — Catch the Big Moves.

Does Trading With Intuition Make Your A Better Trader? Bull Trap Trading Strategy Forex. Stop Loss Placement Options For Price Action Forex Signals. Recent Comments shaned on Free Forex Trading Signals Published Weekly john williams on Free Forex Trading Signals Published Weekly shaned on Free Forex Trading Signals Published Weekly shaned on Free Forex Trading Signals Published Weekly mario on Free Forex Trading Signals Published Weekly. About Contact Forex Advertising Simple Forex Trading Strategies Disclaimer Privacy Policy.