How & Why Order Flow can improve your trading…

Opening arguments…

Why does price move? Supply and demand. You know this already. It’s why:

  • hotel rooms & flights go up in price at peak season… there is more demand than supply
  • movies on DVD cost virtually nothing… nobody buys physical media any more… there’s more supply than demand
  • you probably didn’t pay the asking price for your car… you knew there were multiple dealers with similar cars eager for your business and they’re all competing with sales targets… sufficient, if not excess supply, vs. demand

This all happens in real life and we conduct daily life within this framework. So why should the trading decisions that you make on the futures/stocks/currencies that you trade be based on anything different…?

Many retail traders are stuck using technical analysis. Chart patterns. Indicators that are derived from price. Some trade ‘price action’ – the naked chart. Let’s go through this again. Price moves because of supply and demand. Price-based indicators are… based on price. They are a layer removed from price information which in turn is dictated by supply and demand.

If you are not considering supply and demand in your trading decisions, your trading decisions are late, you are taking on more risk in your trades by using the boundaries of price and you have a hard-to-read chart covered in lines.

Order flow can really simplify your approach to trading…

Informing your decision…

We are a vendor of trading software and educational services. This puts us in the middle of an industry renowned for snake oil, magic, expensive and poor-performing red arrow/green arrow indicators and a large amount of cynicism on internet forums!

We believe that if we are transparent with knowledge, help clients understand concepts from first principles and enable them to make informed decisions, then we will be rewarded with ongoing relationships that benefit both parties. If we provide clients with good information and tools that help efficiency and profitability, clients will remain clients!

Please follow the links below to explore our website’s resources  that introduce order flow so that you can form your own opinions as to whether we are talking sense, offering something useful to your trading and ultimately people that you’d like to deal with!

 Feel free to ask a question as you explore!
technical analysis cluttered chart
Typical technical analysis chart covered in lines.

At this point, we’ve either scared you, made you wonder, or angered you by dismissing technical analysis and price action. Actually, we understand and like technical analysis and price action very much because so many people use it. That means it signposts likely points where price will reverse… or hold. By analysing supply and demand at these prices, we can assess this before the technical analysis indicators or price action patterns ‘confirm’ what has happened. This lets us be the traders that are selling the upwards breakout that halts before pulling back, stopping technical analysis traders out (again… 1 tick below their entry candlestick) while we buy it back and take the breakout trade successfully. By the way, we were most likely long before the technical analysis trader though about trading the breakout and we were trading long to the potential breakout point.

If you don’t agree with our premise that price moves because of supply and demand and that for some reason different rules apply to the futures/stocks/currencies that you trade, that’s fine. We can stop now. A parting thought… in Reminiscences of a Stock Operator, Jesse Livermore was reading the tape, assessing the quantity of contracts being bought and sold to make decisions. Computers came along but exchanges were not broadly publishing real time traded volume. Clever mathematicians came up with formulas to analyse price in order to predict future price movement. It caught on with retail traders as PCs became readily accessible in the 1980s and 1990s. Meanwhile, the traders in the  trading pits were still trading with hand signals and shouting at each other basing their decisions upon the volume of contracts bought and sold. The forces that moved price hadn’t changed. The trading pits are gone but we all have broad access to real time traded volume information… and computers to interpret it, so if you’re not considering volume in your trading decisions, you’re making decisions using methods from 25+ years ago while others have moved on… 

Trading with Order Flow - keeping it simple…

Glad you’re still with us! We have an Introduction to Order Flow in our Knowledge base, but for now, all you need to understand is that trading with order flow is about:

  • keeping track of the quantities that have been bought and sold at different prices
  • using this information to identify patterns in supply and demand – we can then note price levels at which there is been supply or demand
  • seeing whether this supply or demand holds or breaks when these price levels are revisited
If we know that there was significantly more buying than selling at 2888.50 and we are trading above this price, we can be prepared for signs that the level will hold. If we are short, we could be prepared to buy to close our position at this level. If we have a long bias we could assess whether the level holds when we are near it as the buyers either buy more or defend their earlier positions.
 

The tools used to visualize buying and selling volume at different price levels are the Footprint® chart and volume profile. These organize and present the raw buying and selling data. This is all you need once you are able to interpret supply and demand conditions from the raw data. We can help you acquire these skills through our online material, training courses and coaching. You don’t need any indicators to do this. Ours or anyone else’s…

…however, by applying order flow indicators to this raw data you can save time and perform analysis that is too hard for humans to do or too fast to interpret. Let the computer analyze the numbers and present this refined data in a way that’s easier to use to make decisions. That is what emoji trading software does. We

  • locate significant events in supply and demand
  • present them to you, and
  • track how the levels behave over time.

You can use this information for manual discretionary trading, for alerts or even to automate your trading.

Which approach would make more sense to your grandmother?

Order Flow Trading…

…do you trust this…

We haven't run out of buyers at the high of the day, but we have run out of sellers at the low of the day…

…so once I see that sellers are overwhelmed by more powerful buyers and buyers are getting aggressive, I'll go long to at least today's high so long as the distance from entry to today's high (my reward) is at least twice the distance from entry to where the buyers are (my risk)

Technical Analysis…

…or this

Enter long with TP20, SL10 because…

…RSI has turned up from below 20, the MACD has crossed the signal line and we're above the daily pivot point.
emoji trading delta scalper indicator
An emoji trading order flow indicator showing supply (red line) and demand (green line)

OK, so what can I trade with order flow?

The short answer is anything – the behaviour of every market is governed by the laws of supply and demand. If a market does not observe them, then it’s not viable to trade, however some assets and markets are more favourable than others. Here’s why:

Forex

Very popular with retail traders because of easy access to accounts and perceived low risk from small pip values.

However… forex is a decentralised market. If you are able to receive data about volumes, it will be your broker’s volume, otherwise your trading platform will approximate volume into the number of trades that moved price up and the number of trades that moved price down. As a result, supply/demand information is less accurate than for equities and futures.

Combine this with the presence of brokers that will trade against the orders of their clients and alter the price spread based upon their own bias and it is not a market that we favour at all. For us, forex is a roulette table, housed in a casino in a country where you’d value a bodyguard.

Equities

Better information than forex, but in our opinion not so favourable as futures for day or swing trading using order flow. Why…?

First, although equities trade on their exchanges (NASDAQ, NYSE, etc.) there are multiple trading ‘venues’ and dark pools, i.e. parallel exchanges where the same shares can be bought and sold. This means that the volume information that you receive from your broker does not capture the entire picture of buying and selling in the market.

Second, the ‘pattern day trader’ rule requires that if you day trade 4 or more times within a 5-day period, you must maintain a minimum $25,000 account balance and can trade up to 4x your prior day maintenance margin excess. This rule has been designed to reduce the risks to small traders, but the account minimum is large compared to that necessary for a futures account

Cryptocurrency

Popular with traders because of some exchanges providing large leverage. As with forex, you will only see volume that trades on the exchange where you are trading.

Our challenge with cryptocurrency and order flow is that whenever we have looked at these markets in depth, the sense of ‘order’ in the supply and demand is low by comparison to futures markets.

In part, this is because there is nothing ‘real’ sitting underneath the cryptocurrency contracts.

A futures contract relates to an underlying asset be that an equity index (i.e. a proxy for a basket of shares), commodities (e.g. gold), energy or agricultural products, etc. Futures contracts are used by commercial entities to hedge their real activities so one can be confident that futures trading volume represents real supply and demand interests.

Futures

In our opinion the best markets to trade using order flow. 

Futures contracts trade on single, centralised exchanges. This means that you have visibility of all of the volume traded and have the full supply & demand picture.

Some traders get worried about volatility and margins but with order flow, you can trade using very tight stops, typically 4-6 ticks.

Micro contracts (for CME currency and equity indices) have low margin requirements – many brokers are sub-$100 per contract for day trading – and small tick sizes, e.g. $1.25/tick, in line with forex pip values.

Markets trade virtually around the clock (like forex) although certain times of day are more liquid and volatile than others.

If this is so easy and powerful, why aren't you trading with it rather than trying to make money selling software and education?

This question is asked of trading software vendors and educators a lot.

We do trade with it. The founder of emoji trading trades CL and ES both for profit and to look for supply & demand patterns and events that can be tested for reliability and consistency, productised into indicators and used in automated trading systems.

emoji trading indicators were initially created for our founder’s own use, but with a background in hardware and software development, he built them to commercial standards and offered them in the market (supply). This was met by demand! Our clients also ask for guidance, tips, training and coaching so we offer these associated services.

If you are sceptical, we have a Free Indicator Sampler for you to assess our products and whether we deliver on what we say. You can also try our Order Flow Suite free of charge for 14 days with no obligation to continue into a paid subscription.

Thank you for reading and feel free to ask us any questions about our order flow software and education as you browse our website.

Words from our clients…
Many thanks for your excellent webinar. It looks like a very solid approach to trading.
Phil B