Strategic Order Flow Trading
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Module 5
Leveraging
Order Flow
Disclaimer
Understanding how price fluctuates to facilitate trades and the role of the
aggressor is key to trading order flow effectively. Here are some key points:
Price moves when an aggressor is willing to cross the spread and initiate
transactions at the bid or ask. Without aggression, price stagnates.
Aggressors absorb liquidity from resting orders on the books to facilitate trades.
This moves price towards aggressors' intended direction.
Watch for aggressors lifting offers (or hitting the bid for selling) signaling buying
interest versus joining the bid queue which lacks conviction.
Obvious
Not so obvious
Lifting offers, then sitting on higher bids.
The more aggression applied; the further price is propelled. High volumes
transacted rapidly reveal aggressive appetite.
Initiating transactions require paying the spread cost. Passive traders won't
cross spread, allowing price to gravitate towards aggressors.
Traders must determine if emerging aggression is genuine or false through
assessing order flow nuances. (Take context into consideration – where is the
market moving away from?)
Balanced markets see rotations between aggressor and passive stance. Buyers
and sellers alternate control.
Aggression followed by what?
Strong bids.
Rotation between aggressors.
True one-sided aggression that goes unchallenged creates directional
momentum and trends.
In essence, the aggressor is the engine driving price movement. Reading
aggression and initiative activity in the order flow is key to trading it profitably.
This takes practice to master.
One-sided aggression
One-sided aggression.
What do the selling imbalances on the
way up mean? Why is that not two-way
aggression?
Recognizing flow-driven days with high volume and high volatility can provide
potential opportunities for traders, despite the perceived volatility.
Flow-driven markets are characterized by participants who are more aggressive
and not so much price-sensitive, with less emphasis on technical analysis,
making it crucial to understand the dynamics and adjust trading strategies
accordingly.
Flow driven market takes out support levels.
Technical levels don’t matter.
Differentiating between flow-driven and technical markets is essential for
effective trading. In flow-driven markets, where participants are initiating trades
and responding to market conditions, the emphasis is on price direction rather
than technical analysis. Liquidity providers play a critical role in these markets.
Conversely, in technical markets, where price movements respect technical
levels and patterns, traders need to adapt their approach. Recognizing the
characteristics of each market type enables traders to adjust their strategies
and participate in market moves with higher probability.
A technical market stops at support levels.
Flow driven has a mind of its own.
A flow driven market does not stay inside the days range. It moves away from
the day’s value and the day’s range.
In flow-driven markets, where volatility is often high, traders can take advantage
of price fluctuations and the heightened activity. In technical markets, where
volatility is relatively low, traders can leverage technical analysis to identify
potential entry and exit points.
In flow-driven markets, just go with the flow…so to speak.
Flow-driven markets are the ones where you want
to trade the breakouts.
In a volatile market, liquidity can be scarce, meaning there are fewer
participants providing liquidity for buyers and sellers. This scarcity of liquidity
can have significant consequences for traders. For instance, when the market
experiences a sharp rally, the price may briefly touch a resistance level before
rebounding. However, in a volatile condition, there may not be enough liquidity
to sustain the price at that resistance level. As a result, the price might quickly
break through the resistance level, causing traders who were trying to short at
resistance to incur losses.
On the other hand, in less volatile conditions, there is usually more liquidity
available in the market. In this scenario, when the price approaches a support
level, there is enough liquidity to absorb the selling pressure, causing the price
to halt its decline and potentially reverse direction. Traders who enter the
market at this point may be able to profit from the rebound.
Volatile market breaking
through resistance.
Less volatile market. Respects resistance.
Finished and Unfinished Auctions
One of the key concepts in footprint analysis is the idea of finished and
unfinished auctions. An unfinished auction occurs when there is trading activity
on both the bid (buy) and ask (sell) sides of the market. This indicates that the
market is still in a state of price discovery and is considered an unfinished
auction. On the other hand, a finished auction occurs when there is a significant
volume of trades on one side of the market, indicating that price discovery has
concluded.
A finished auction is a strong indication that price discovery has concluded, and
a reversal may be imminent. Traders look for instances where there is a
significant volume of trades on one side of the market, signaling a potential
turning point.
Finished auctions on retests of highs. Swing highs.
Swing low, unfinished auction
Unfinished Auctions occur exclusively at the top or bottom of a price bar. These
patterns indicate that the market has not fully explored a particular price level
and can provide valuable information about potential reversals.
Traders can use Unfinished Auction patterns to identify opportunities to trade
back to highs or lows, to finish the auction.
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This concludes Module 5.
In Module 6, I will discuss
Order Flow Strategies & Setups