Order Flow in Forex Trading-
As forex traders, you’ve probably heard about using technical analysis or fundamental analysis to predict and understand market movements. However, what most analysts don’t tell you is that these methods fail to explain why prices behave a certain way at certain price levels. This is where order flow analysis comes in. This key analysis and strategy will help you advance as a forex trader.
Trading Order flow is a type of short term forex trading strategy that can help you enter the market more accurately. This is because the entire
process is based on recently executed buy and sell orders. many order flow traders will refer to footprint charts and the the depth of market (order book) for insight.
Order flow trading could be viewed as a type of volume trading. In order flow analysis, you are looking for areas of imbalance
where buyers outweigh sellers or vice versa. This can occur at areas of support and resistance.
Its important when studying order flow that traders are aware of a misleading trade called spoofing. Spoofing is when traders will enter an order and then cancel the order right before it gets executed. Some traders do this in order to throw off other traders in thinking there is an area of interest at a specific price point.
Order Flow Indicators-
One of the biggest benefits of trading with order flow indicators is that they can help you predict the placements and price levels of future orders. This can also help you predict price levels that have a good chance of being reversal sites where the market will start moving in the opposite direction. Keeping this in mind, we must warn you that the forex market can be quite uncertain at times. Nothing is 100% reliable. That’s why its important to use stop loss orders, to ensure that you keep your profits and don’t give them back to the market.
Some popular examples of order flow indicators are- volume delta, cumulative delta, bar delta (the delta of one bars session, for example- 1 minute, 2 minute, 15 minute time frame). VWAP (Volume weighted average price) Used by many institutional traders, VWMA (Volume weighted moving average) most popularly used in trend trading, volume profiles (Typically shown as a histogram, displaying volume traded at particular price levels), depth of market (order book), and footprint charts.
Using limit orders can give you the best execution price. One of my favorite aspects of forex trading is how you don’t need to place orders at present time using market orders. You can set up a trade to automatically activate once the market reaches a certain price level. With a buy limit order, you can open a buy position at a certain price level in the future. This is a great strategy to implement along side order flow analysis, as you can open a buy position in areas with an order flow imbalance. Additionally you can also incorporate a stop loss order as well, to prevent excessive losses from unexpected price movements.
Traders can also use sell limit orders. With a sell limit order, you can open a sell position at a certain price level in the future. Typically you would
place the sell limit order at a price level where there is an order flow imbalance as well.
There is no doubt that order flow analysis provides forex traders with a more reliable way of predicting and analyzing great trading opportunities in
the forex market. It is also important to know how to detect areas of support and resistance when using this method to get more accurate results. That being said, the forex market can show volatility at any given moment, so always trade with caution, and use stops at all times.
Written by- Alyaziah H. (FOREXtraWealth.com contributor, forex trader, and fact checker for Investing.com)
