How Order Flow Trading Works?

As a trader, I think it's a safe bet to say you are probably sick and tired of all the ICT trading videos and everyone claiming to be making millions a month. So you are probably looking for an alternative. You are asking how does order flow trading work? Good news! I am a trader like you; I have been a trader since 2007 and without the knowledge and understanding I have around order flow, I can safely say I would not be here today. As a trader that also has an institutional trading background, I can also say everyone wanted to know how order flow trading works and a lot of time an money was invested in getting all traders to focus on that flow of transaction based information. It just made sense.

In this piece I am going to explain exactly how order flow trading works with clear examples so you understand how large traders and institutions use order flow information to their advantage. If you are completely new to order flow trading, then you might want to start with How I Trade Order Flow In Forex.

So how does order flow trading work?

Well, first off you will need to have access to an exchange data feed. I get mine from Interactive Brokers, you can sign up for an account to get started. This will allow you to gain access to real data with live and real orders (CFD platforms supply data feeds for some assets but don't supply any real data). This is particularly important, if you don't have this, you can see prices but no transactions and you won't be able to do any order flow trading. So this is a must.

Once all this is in place, we can go to step two. This is ensuring you sign up for the right feed and getting your trading permissions enabled. This is easy but if you get stuck anywhere email or call support. This is support for professional traders, so it is impeccable, if I can say so myself.

You want to make sure you sign up for the Futures value bundle and Equities add on streaming which will include options data, you will find this useful down the line. If you are not going to trade equities, you can leave this out. You may also want to sign up for level 2 data to include CBOT and the CME. This will give you the full range of access across most markets.

It's time to make sure you are enabled for trading. You will have to answer a few questions around trading experience as required now by law from all traders before you can be allowed to trade any product held by a regulated brokerage firm. Once this step is out of the way, we can now start trading order flow.

As an order flow trader, you want to be able to correlate what you see on the time and sales (showing you real live trades as they happen) and what you can see on a simple candle stick chart and a Market profile chart. If you are not familiar with Market Profile, let's get you up to speed by reading What Is Market Profile Trading?

Let's take the above example in the image. This is a chart of Corn prices. You can see 2.50pm a 500 contract trade came in; this could be a block of trades or one trade, either way, it's 500 contracts at 501.50 or 501-1/2 as commodities are still quoted in fractions. The market held above that 501-1/2 level and proceeded to 502-3/4. The price chart shows a strong close higher.

It does not take a genius to workout the party long 500 contracts is in the money. Working a bid to buy at 502 and stops at around 501 or even 500 might be a good idea. Any idea what the price is trading at now? See the image below.

Seeing corn can easily do 9 - 10 points in any given day across the range it is reasonable to say we will see 505 before the end of the day. 500 contracts at $50 a point per contract, that's $25,000 per point, someone is making $75,000 in this trade. This is the importance of order flow trading if you are going to be successful as a professional trader.

While most traders are still absorbed in level 2 depth data that doesn't make it easy to pick out actual trades going through, smart traders will focus on the tape (time and sales recorded order flow trading). Level 2 has its advantages but due to HFT algos, strategies like layering and quote stuffing, we can expect that what we see on the level 2 is entirely fabricated to deceive. You will often see the visible limit orders disappear before your eyes as they get cancelled and magically re-appear as price moves away. This makes level 2 unreliable. The tape shows you everything that trades at market as opposed to the passive limits always subject to change.

If you still think you want access to level 2 information, then ATAS is a great option, they have a smart DOM, that blows all other DOMs I have seen out of the water. They have a free trial, try it out.

Okay, so it should be clear to you how order flow trading works and how to get started. If you still have questions then you can join my Discord Server and DM me directly or fill this form and I'll reach out to you.

Till my next piece, adios!