When it comes to order flow, many newer traders tend to think of volume bars or time and sales information. It is much more than that, and it really helps to understand the premise behind how markets facilitate order flow. It may not give you an immediate strategy to make money with, but what it does is provides an added sense of confidence when initiating trades with order flow ideas in mind. To see recorded trade review videos that explore order flow analysis, subscribe to my Youtube channel here.
Whether you are trading stocks, futures, forex or bitcoins, financial systems such as these are affected by one thing: People’s beliefs of the future. At any one moment, a countless number of participants are taking action (initiating trades or placing orders) for a limitless number of reasons.
Some people are buying as an investment, some are selling for a quick profit, some are placing orders to enter the market at nearby prices. Who knows why and who cares. As a professional speculator I am not interested in the why, I am interested in the when and where. It is human nature to want to know why and people go crazy trying to figure this out. If you want to be ahead of the crowd, you must stop thinking like the crowd. You must let go of the conventional mindset. The forex market is just a constant flow of orders. It just is. Don’t ask why.
Now looking at the market as a flow of orders constantly acting on the current price, the price is going to change. This means price is the value that the entire world agrees on that this particular moment. One of the basic theories that I learned from the Market Technicians Association through their Chartered Market Technician program (CMT) is that price reflects all the known information in the world at the moment. As new information enters the market, participants react based on their expectations (this is sentiment) and prices change to reflect a new consensus. Keep this in mind: It doesn’t matter what you think or how smart you are, or what the reality is, the market is ALWAYS right. The market can be irrational and go against fundamentals as much as it wants. Why? Market prices are a reflection of participants aggregate feelings and these feelings change. Fast.
So now that we know that the market is nothing but a reflection of a large group of peoples aggregate feelings, we have to have a way to measure these feelings in a way that will provide insight as to what the market participants will feel in the near future. Realize: No one, I don’t care how long they have been in the markets, how important or popular they are, no one can predict the future of prices. There are so many variables that they have no way of knowing what will affect the market community’s feelings in the future.
The best we can do as professional speculators is take risks to gain worthwhile short term profits by gaining insight into what the market is most likely to do next. We must accept that the market may change it’s mind along the way and we need to be open minded and nimble enough to adjust.
Using principles based on price action and order flow, trader’s can get a much better feel for these immediate intentions and adjust. This is what flexibility is all about.
As a newer trader, as you experiment and develop your methodology, it is important to incorporate information that is relevant to its natural order flow process. This begins with first understanding and acknowledging how flow affects prices. Without without these concepts, traders will attempt to measure the market in ways that produce no relevant information in terms of market reality. Mix that scenario with your emotions, and you become another member of the market crowd, and will serve as profit potential for professionals. I hope you gain insight from my article. Please feel free to share your thoughts.
Marc Principato, CMT,
*No Relevant Positions
Trade Confidently in 6 Weeks
This seems like a great introduction to an article about order flow but where is the content? This is all fluff which amounts to…nothing
Thank you for the kind words. This article is exactly that, and introduction. I can’t cover details of order flow analysis in this format, but I want traders to understand that this is area and theory to focus on. That is also why I linked this article to videos that do explain details. So that is where you “content” is.
On the subject of reasons behind the order flow, for those who like historical contexts, I came across this in Barton Briggs book Hedgehogging. A quote from “Ten Years of Wall St” by Barnie Winkleman, written in 1932. The more things change the more they remain the same!
“No discussion of the interrelation of stock prices and business conditions would be complete without emphasising that in the clash of speculative forces on the exchange, the emotions play a part which is not paralleled in the normal processes of commerce and industry. The golden mean is non-existent on Wall St., because the speculative mechanism does all things to excess…..those who seek to relate stock movements to the current status of business, or who ignore the strongly imaginative taint of stock operations, or who overlook the technical basis of advances and declines, must meet with disaster, because their judgement is based on the humdrum dimensions of fact and figure in a game which is actually played in a 3rd dimension of emotions and a 4th dimension of dreams”.
Andrew thank you for the great comment. This is very interesting, as you said it shows what drives the market hasnt changed. The aggregate action of the crowd is what will always drive markets. The faster traders can acknowledge that, the faster they will be able to improve their results. Now I know many less experienced traders will read that quote and say ,”Well how do I make money with that? It’s just a bunch of fluff. Where’s the content?” As someone said earlier in the comments. For those who think that way, you are clearly dont see the value of such information. The value is you can now focus your attention on information that only relates to order flow instead of information that is irrelevant. Examples? Volume analysis, price action techniques.
By the way Andrew, this quote is going into my book along with a mention of you. Thanks again.