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The Art of Order Flow Trading

Updated: 2017-10-04 07:00:55

Wondering what the Art of Order Flow Trading is or how it works?

In this article one of our many successful students will share his journey to profitability using the art of order flow trading.

art of order flow trading

Hi there! My name is Milan and after I read the order flow trading book about 10 times and made a ton of notes, I saw it as my task to find as many order flow strategies as I could find. Initially I was all crazy about finding the next best strategy, like in my old days of technical analysis trading. The last chapter in the book promised me there are a lot of inefficiencies in the market that can be exploited and I felt like going nuts because I could not find them.

Then I focused on the core strategies presented in the lessons and for me, it was all about the order and stop information. Initially I interpreted many moves as stop hunts and was looking for the next best bid or offer level cited to bring a trading opportunity.

Well, after some time, I realized that was not really what order flow trading was about.

What transformed my mindset was the realization that this is not about knowing every level where bids/offers or stop loss orders reside, but getting an edge.

To do that I asked myself the following questions: What am I doing? Why should my strategy work? What advantage do I have? What about the participants taking the other side of my trade (not technically my trade, but generally the other side)? And so on...

This was the point where my performance took a sharp turn to the better. I reorganized my complete approach, recognized what my edge is, why it exists and what I will be looking for when trading.

I still take notes of various bid/offer levels and where I expect stops to be (both not hard to predict once you understand how), but what changed is that I don't care about those levels until I see a high probability trading opportunity. That is the point where I will focus on certain levels, but otherwise, I am not trying to interpret which bids and which offers will have any impact.

Sentiment is really the largest factor for order flow trading. I initially tried to find strategies for trading when sentiment was unclear. I HAD to trade. Well, it didn't work out well, because I was impatient, had the impression I must take some action and my trade ideas were just crap.

Focusing on clear sentiment gave me an edge. I must wait more patiently for a trade now, but guess what? That patience improves my self-confidence.

I generally monitor markets 12 hours every day, but only take a trade if sentiment is clear and I see a high-prob opportunity according to my trading plan.

Watching markets all day but doing nothing sounds crazy, but it helped me a lot. When I see a trade according to my plan, I TAKE IT! The patience gives me the necessary confidence in my trade ideas that I need for the entry, the trade management, and the exit.

I believe many order flow traders are drawn toward intraday trading. For a newbie, the newly learned material is likely very exciting and he/she is drawn into over-trading and over-interpreting various market situations. That is exactly what happened to me.

The key to success is to think really hard about your core strategy and your approach and ask the questions as mentioned above. Be tough with yourself regarding this.

Now, I come to one of my more recent light bulb moments regarding the art of order flow trading.

As I mentioned, I first tried to find as many new strategies as possible. I failed and turned to the core strategies from the book and I was doing fine with my trading, but I'm not one to settle with a "fine" performance.

The change from "fine" to "awesome" came when I realized that I have to focus on the various market patterns and fit them into my core strategies. The market is often telling us something with the price action and instead of trying to build everything into a new strategy, analyze IF it fits into your core strategies and if it does, how you can use it.

I will focus on the technical details of my strategy in a future article, but I hope it is understandable what I’m talking about here. A system can be profitable with only one core strategy.

It is all about finding suitable occurrences that you can exploit.

A trading journal is also something I found to be of great help in mastering the art of order flow trading.

Aspiring Order Flow Traders should take note of what you see in the markets, what you think about it, and how you feel during the day (emotions are probably the most underrated section of the journal).

At the end of the day, look back and write down the consequences of your thinking and behavior.

It's probably hard for some to find the motivation in the start, but trust me it's of tremendous help!

In the end, you want to prove to yourself that you have a consistent approach and a trade log will help you to identify your strengths and weaknesses, which is the path to find a solution to the problems you encounter and build on your strengths.

Beside that, a trade log is an additional tool to keep track of your performance. I keep mine in an Excel spreadsheet with all the tech stuff (entry, take profit level, stop loss level, volume, and so on...) and a description of the market environment.

I suggest you note if the market is in a range or in a trend, if sentiment was positive or negative (hopefully you won't trade during unclear sentiment) etc. Try to describe the environment the best you can.

In the end, grade your performance. I have a section for trade idea, entry, management and exit. I give myself 0 score for a bad performance in the particular section or 1 score for a good performance.

The market environment part helps you identify in which conditions you perform the best and the score part helps you to see your strengths and weaknesses more clearly.

Now this is really just scratching the surface and as mentioned there will be a follow-up post about Order Flow system development, but hopefully this has given you a broad overview of my path to mastery and sparked some ideas about your own process.

One thing I would strongly suggest is to get the book. Before consuming the lessons I was lost and confused, not even knowing where to start. It definitely helped me get on the right path to mastering the art of order flow trading and I know it will help you too.

Thank you for reading and may peace & profit be forever yours - Milan

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