Successful professional traders use various approaches to extract profits from the markets. Some of these are more effective than others. One such highly effective approach is order flow trading. Many professional traders owe their success to their interpretation of order flow data and the strategies they have formulated around it.

This approach to trading works in various markets, including the stock market. The principles are the same regardless of the markets you prefer to trade.

As one of the biggest proprietary trading firms in NYC, Black Eagle Financial Group offers a robust trading environment that allows traders to build strategies around order flow trading. This post will discuss some of these strategies in detail and how traders are using them to boost profits.

What Is Order Flow Trading? 

Order flow trading is a trading approach that involves analyzing the buying and selling activity in the market and using the information to make trading decisions. Order flow traders monitor trading orders and traded volume in real time using special charting software.

The idea behind this trading approach is that the number and size of buy and sell orders entering or exiting the market can provide some insight into the overall market sentiment for any tradable asset.

Evaluating these orders can help traders predict price movements more accurately as they can spot patterns and trends in the data.  

Details like the concentration of buy and sell orders at specific levels, the speed of order execution, and the number of executed orders around these levels can help order flow traders predict future price movements.

4 Effective Order Flow Trading Strategies

Some of the most effective order flow trading strategies include the following:

Absorption Order Trading

The absorption strategy focuses on identifying instances where large orders do not cause any significant changes in price movement upon execution. Traders who use this strategy evaluate order flow data to find these areas, which typically points to institutional buying and selling activity.

Identifying absorption is beneficial because you can use it to spot breakouts and reversals. If a large buy order enters the market without increasing the price of the underlying asset, it points to possible selling pressure or a supply block around that price level.

On the flip side, a large sell order that fails to cause a price decrease can point to a demand block or strong buying interest.

By trading absorption patterns, traders can enter the market in line with institutional flows. It also reduces the risk of entering the market when a price movement has reached exhaustion.

Iceberg Order Trading

Iceberg orders are large orders that specific market participants split into smaller or hidden portions to avoid giving away the participant’s true or full position on the tradable asset.  

Traders leveraging order flow analysis can spot these orders by watching for repetitive execution of smaller-sized orders around a specific price level.

Identifying these orders can help traders measure the strength of a trend and the potential depth of a nascent reversal move.

Exhaustion Pattern Trading

Exhaustion in order flow analysis points to the depletion of buying and selling pressure in the market. It often signifies a potential reversal in the direction of the market movement. Traders identify exhaustion patterns by monitoring volume and the speed of order execution.

A drop in the trading volume, a decline in the speed of order execution, and a sudden change in the order flow direction are all possible signs of exhaustion. Identifying these patterns can help traders prepare better for consolidations and trend reversals.

Buying and Selling Pressure Trading Via the Footprint Chart

The footprint chart is one of the most popular types of order flow charts. It provides traders with a detailed view of the buying and selling pressure around every particular price level. The chart divulges any imbalance in buying and selling activity.

Looking at the footprint chart can provide you with a clear picture of the strength of buyers and sellers at various price levels. If the chart points to an imbalance on the bid side, it points to significant buying pressure. An imbalance on the ask side points to tangible selling pressure.

The footprint chart does the bulk of the work by providing an easy-to-interpret visual of the order flow data, helping traders spot buying or selling pressure at a glance.

The Advantages of Order Flow Trading Strategies

Some of the top advantages of order flow trading strategies include the following:

More Accurate Market Analysis

Order flow trading provides a more detailed picture of the market than conventional technical analysis. You can see the market sentiment change in real time. This allows more proactive trading instead of the reactive nature of conventional technical analysis.

Seeing areas of buying and selling pressure in real time can drive better results than blindly relying on metrics like Pivot Points or support and resistance levels based on candlestick formations or technical analysis tools like the Zig Zag.

Analyzing order flow data gives you more predictive power while trading the markets. For example, a large number of buyers entering the market generally points to a possible uptrend for the tradable asset. Using that information, you can focus more on only executing buy entries on the asset.

Smoother Performance Curve

Order flow trading strategies excel at unearthing and following market sentiments. They can get traders in positions before the start of a trend and out of it before exhaustion turns into long-term reversals. As a result, you can conserve profits and avoid sharp, sudden drawdowns.

Important: Order flow trading is not the Holy Grail. Regardless of the strategy you choose, you’ll need to spend time understanding the mechanics and testing out the strategy in simulated environments to avoid losing your trading capital.

Similarly, the best order flow traders also incorporate some technical and fundamental analysis to further improve their chances of success. A possible reversal can quickly turn to a strong trend continuation due to a single economic data.

Better Risk Management

Understanding order flow is highly effective at helping traders to better manage their risk. By monitoring the flow of buy and sell orders, you can identify areas of potential supply and demand and adjust your position with those levels in mind.

Get Started with Order Flow Trading at Black Eagle Financial Group

Order flow trading requires you to have access to a robust trading platform that allows easy monitoring of the depth of market (DOM). Black Eagle Financial Group provides access to such a platform.

Our robust platform allows order flow trading on a range of markets including options and equities. Our platform also allows the use of a trading algorithm based on order flow trading strategies.

Contact Black Eagle Financial Group toll-free at (833) 253-2453 or drop us a line at [email protected] to get started.