Are you still trying to develop a profitable order flow trading strategy?

In todays article you’ll learn the steps for developing an order flow trading strategy.

Broadly speaking, developing an order flow trading strategy is a 3 step process:

  1. Develop an order flow trading mindset
  2. Define your core strategies
  3. Note various market inefficiencies and identify which ones fit your strategies


Reading sentiment is one of the most important skills an order flow trader will need. If you identify sentiment correctly, you have an edge and your order flow trading strategy will be robust because of the higher probability of order flow being in your favor.

The 30 day exercise described in the Order Flow Mindset is really the most efficient way to master it. Then focus on the one or two news providers that really cover all the information you need and build on that.

Our news feed (Order Flow News) will be of great help in this task as it will update you on all the latest news, market flows, and in-depth economic analysis reports you need to make an accurate assessment of sentiment, but you can use whatever service you prefer.

Just make sure that you do not suffer from information overload!

When you use a feed or a website frequently, you will quickly figure out which categories/ journalists you want to follow. Focus on the information you feel is helpful for you to determine sentiment and don’t try to read every piece of news out there. When you have an idea what the bias in the market is, check out price action across various markets. If the overall bias is negative because of, let’s say bad economic data and weak Chinese growth, but somehow the Aussie is moving up without any significant news release from Australia, be skeptical of this move. It may offer you a trade opportunity.

What are the key questions for determining sentiment?

  • What are the current key macro themes in the market?
  • What are the factors that drive current positive/negative sentiment?
  • How is price action behaving compared to my sentiment analysis?

I fill out a paper every day that is divided into four categories: Asia, London, NY and Summary. I describe ahead of every upcoming session the sentiment of the previous one with an outlook for the next session. At the end of the day (22:00 London or 17:00 NY), I make a summary of the day’s event and compare it to the outlooks I’ve written down during the day. I note the reasons why I was wrong (shifts in macro themes or short-term noise?). I’m quite interested in economics, but to be honest, I don’t incorporate it too much in my trading. It’s all greed and fear driving markets or better expressed – it’s all EMOTIONS. Keep the sentiment analysis simple.

My point here is that you should always be aware of the key macro themes driving markets and not focus too much on intraday events; which will have only short-lived consequences. Sentiment will actually be mixed most of the time.

To sum it up, focus on global macro themes and when things align, you will be able to say that sentiment is clear and go hunt for trading opportunities. Generally, when you don’t overcomplicate your core order flow strategies, you should find plenty of opportunity to operate in those environments.

Also, be aware of intramarket (e.g. relationship between assets, like EUR/USD and GBP/USD for example) and intermarket (e.g. EUR/USD and SPX500 or AUD/USD and GOLD) relationships. The simplistic model of Risk-On/Risk-Off is basically gone and it is not that easy anymore as “USD, JPY, CHF up = all other risk currencies down”. Stay alert to constantly changing correlations as the ZIRP environment and changing structure of central bank policy is mixing things up.

Cracks in correlations can be either medium-term driven by fundamentals (in the end, it’s all about interest rate expectations) or short-term caused by activities of certain market participants. EUR/USD and GBP/USD have a pretty strong correlation for most of the time. If we see EUR/USD trading higher going into the London trading session, while GBP/USD drops, triggers sell stops and posts a lower low, what does that mean? There was buying power in the E/U stronger than selling one. G/U, on the other side, failed to attract demand and participants went for hunting the sell stops. If G/U recovers near the level of stop losses and rebounds, it is a sign that large money was not willing to buy the Pound at the pre-London level and they pushed price down into the stops to accumulate their position. Such correlation cracks are most important at key supply/demand zones and the longer it lasts, the larger the impact of course. Don’t waste your time on short-term cracks in correlation; they can occur sometimes just randomly, that is, without a clear initiative behind.

Now with sentiment covered, let’s move to defining core strategies.

Darkstar recently published an article where suggested he is managing a portfolio and using a stop hunt strategy trading futures to hedge the downside. I had to smile at the end of the article, because I imagined how clueless I would be reading it at the start of my Order Flow Trading voyage. My expectations back then would be something like this: “He has an ultra-complicated system containing at least ten strategies taking advantage of various ‘secret’ market inefficiencies and it would take forever for him to explain it to someone new to OF trading”.

But that isn’t the case. Like many successful traders, he is all about having a few core strategies that are simple, so he can easily adjust for various market inefficiencies and conditions that suit it/them. After some time of seeking the next best strategy, I can fully appreciate the suggestion in the last chapter of the Order Flow Mindset describing a few core order flow strategies. He kept it simple and easy to understand and that is way more helpful than if he had offered a complicated description. Use the general information in the book to develop a system that is simple in its core, but has a clear edge!

When you have an idea what you want to use as core strategy, ask yourself:

  • What is the idea behind the strategy?
  • What are the strategy’s strengths and weaknesses?
  • What factors are giving my strategy an edge?

I’m using the stop hunt strategy myself, so I’ll answer the questions in the way I perceive it:

What is the idea behind the strategy?
Large traders cannot simply accumulate or distribute positions whenever they wish to do so, because they would suffer from slippage. Slippage can have a great impact on your P/L if you are one of the big players in the market. Price levels with a concentration of stop loss orders are an attractive target for those participants to both accumulate and distribute their positions, as they provide liquidity to them. Stops are hybrid orders, both demanding and providing liquidity.

What are the strategy’s strengths and weaknesses?
Strengths: Initiative of large traders behind it, clear sentiment gives us the support of other participants, clear profit target.
Weaknesses: Entry point can be somewhat hard to determine, another reason why we should focus on strong sentiment, so that we have the support of “the flow”.

What factors are giving my strategy an edge?
I only trade when sentiment is clear. I look for the market to trigger buy stops during positive sentiment and when sentiment is negative, I target sell stops. If sentiment is positive and price action starts to move accordingly, other participants will start to join the move. So you can have both the support of large traders, who are targeting stops for increased liquidity, and other participants that are accumulating. The later ones are not really targeting stops, but help with their buying.

Additional Tools

There we have something we can already work with. Let’s expand it by describing some market events that may help us.

As has been mentioned many times, the markets are all about greed of fear. Even professionals with a long and successful track record will sometimes find themselves in one of those states. It is not meant for us humans to be like robots, not even in trading. In combination with sentiment analysis, try to incorporate some psychology. Regarding those without a position yet, it is all about perception. Where will key demand and supply be located? And then are those with a position on, what’s their target? Do they have sentiment in their favor? Which side of the market is the weaker one? Where are the stops of the weaker side? Some questions you can ask yourself and note in your journal. While those questions are not easy to answer sometimes, it is about keeping it simple by observing and taking notes. Your subconscious mind is capable of amazing things and you have nothing to lose by trying it.

There is no need to over complicate it. Just combine your sentiment and technical order analysis and write down your thoughts about who likely has the upper hand and what their targets could be. Squeezes can lead to powerful price action. It’s about identifying the weaker side of the market and target their stops to get triggered in the squeeze, leading to further momentum against the trapped traders. When price is declining heavily, it’s not just all about selling pressure; it is also a lack of buyers.

Your best bet is to focus on key supply/demand zones on higher time frames that will likely attract the flow necessary to ignite momentum.

If you are monitoring the anticipated supply/demand levels, wait for price to hit it the first time and see what the reaction is. Ideally, price gets clearly rejected. I like to wait for a retracement back near to the level and enter there. I might miss a move if it is rejected sharply without any chance to enter on a retracement, but that is better than acting on an unconfirmed supply/demand level and see your stop getting eaten within a few minutes.

Summary

If you are at the beginning of your Order Flow Trading Strategy development journey and looking for more information, you should start with the training program: