Why is order flow so important?
ORDER FLOW BASICS:
When it comes to order flow, many traders think of volume or time bars and sales and purchase signals. In reality, however, the order flow is much more than that – it helps you to understand the market much better. Logically, it doesn’t offer you an immediate trading strategy to make money, but if you take a deeper look at the candles, it gives you better confidence and understanding of the markets.
Whatever you trade – stocks, currencies or cryptos, etc. – all financial products have one thing in common: traders are thinking about what will happen in the future (either in the near future or in the long run).
There are people who buy as an investment, those who trade for quick profits in the day and others who place orders to enter the market at the closing price. In reality, no one knows why and who. As a speculator, I am only interested in when and where this is done – those who want to stand above the crowd must think differently from the masses.
The market is a flow of orders that constantly affects the current price, so that the price is constantly changing. This means that the price is the value that everyone agrees on at a given time. It is therefore a reflection of all the information known in the world at the time. When the information is updated, participants respond according to their expectations (instinctively or intuitively) and prices change to reflect a new consensus.
So why is order flow so important?
By using this instrument, we can better assess the intentions of the market, the positioning of supply and demand, and move in the right direction.
With the need to interpret a proper context and to correctly determine the trend in the trading world, many traders use footprint charts. This type of chart can only be displayed with a powerful trading tool, such as ATAS. ATAS is the only trading platform in the world to offer over 25 footprint variants.
With footprint charts you can determine the traded volume at each price level and see who drives the price in one direction or the other by the pressure of supply and demand.
A very common view of the order flow is the “balance or rebalancing mode” – technically called “imbalance”. Here is an example of the BIDxASK Imbalance Chart of ATAS:
The volume traded at a price level on the market may be equilibrium, or unbalanced. If a level is unbalanced, it means that in proportion there are more buyers than sellers at that level, or vice versa. The most commonly used values of the imbalance rate are 250, 300, and 400.
What does a “purchase imbalance” mean? It means that the amount of demand or purchase to the market is proportional to 250, 300 or 400 higher than the amount offered or sold at a certain price level, so the distortion of the movement gives us indications that the price shift is should continue to be bullish.
What, in contrast, does the “sales imbalance” mean? It means that since the quantity sold or offered is 250, 300 or 400 higher than the amount of contracts in demand, the downward price shift is the logical consique.
Below you can see the presentation of the prices in a Foot Print Chart in Imbalance mode with a rate of 250:
How to read the chart?
An operational method of working with the imbalance is to observe when the imbalance between supply and demand occurs. If supply or demand occurs massively and no reaction is observed in the direction of entry, it is an indication that the price is beginning to turn in the opposite direction. For example, if a large buyer causes an imbalance and the market cannot continue to rise, look for sales. Conversely, if massive sales arrive and the price doesn’t fall further, look for a purchase in the opposite direction as the price will change from bearish to bullish.
The onset of a downward or upward trend, as well as the extremes of such a trend, are often characterized by market imbalances caused by aggressive participants.
A final note for those who do not yet know this type of market analysis with Order Flow in Inbalance mode. The way it is read is diagonal, which means the layers are to be read as the graphic shows. This is the only way to correctly integate this form of presentation for BID and ASK at each price level.