The Only Orderflow Guide You'll Ever Need

What is Order Flow and How to Use It in Trading?

Introduction to Order Flow

• The video introduces the concept of order flow, emphasizing its depth compared to price action by showcasing real interactions between buyers and sellers.

• Order flow is a trading style prevalent in institutional trading, which the speaker has successfully utilized for over a decade.

Understanding Market Dynamics

• The market operates through the interaction of two forces: buying intent and selling intent, represented as volume.

• There are two types of market participants: aggressive (market orders) and passive (limit orders), each playing distinct roles in price movements.

Execution of Orders

• An example illustrates how aggressive buyers execute a market order against passive sellers, leading to price movement.

• After an execution, the footprint tool records detailed information about both bid and ask sides, showing active participants in the market.

Insufficient Supply Scenario

• When demand exceeds available supply (e.g., 75 aggressive buy orders with only 8 contracts at a specific level), prices move up to fulfill remaining contracts at higher levels.

• The footprint reflects these executions across different price levels, demonstrating how orders interact when liquidity is insufficient.

Characteristics of Market Participants

• Passive limit orders have pricing authority but face execution uncertainty; they choose their fill level but may not get filled if no one accepts it.

• In contrast, market orders guarantee execution but lack price certainty; they can be filled at unexpected levels due to slippage.

Live Interaction Analysis

• Transitioning to live analysis on an order flow platform shows real-time interactions between aggressive sell orders and passive liquidity.

• Observations indicate that aggressive sellers push prices down by executing sell market orders against available liquidity.

This structured summary captures key insights from the transcript while providing timestamps for easy reference.

Market Dynamics and Order Flow Analysis

Understanding Aggressive and Passive Orders

• The market exhibits three levels of order book interaction, with aggressive sell orders pushing against passive liquidity. A key level of aggression is identified at 6,840, where buyers dominate the market.

• At the level of 6,841.5, aggressive sell orders re-enter the market, pushing liquidity down to 6,840.5. Buyers are expected to protect this level as sellers get absorbed.

• The path of least resistance appears upward as price movements indicate a rejection at certain levels before returning to fair value within the range.

Interaction Between Buyers and Sellers

• Observations reveal horizontal control points for both sellers (6,841.5) and buyers (6,840), indicating areas of significant interaction between aggressive and passive orders.

• The role of aggressive market forces is to create pressure that moves the market while passive orders provide resistance; understanding these roles is crucial for analyzing order flow.

Resistance Levels and Market Behavior

• An example illustrates that a total contract count on one side indicates higher resistance from passive participants compared to another side with fewer contracts.

• The concept of "path of least resistance" suggests it’s easier for prices to move higher through less resistant levels rather than breaching stronger ones.

Absorption vs. Initiative Auctions

• A breakdown shows buyers exerting significant effort without reward due to absorption by passive forces; this results in short candles reflecting buyer frustration.

• In contrast, an initiative auction occurs when high effort from buyers leads to substantial rewards—indicating a successful push upwards in price.

Book Sweeping and Delta Concept

• An example demonstrates low effort but high results during book sweeping where minimal selling pressure allows prices to rise significantly.

• Delta represents the difference between aggressive buy and sell participants; visualizing delta can help identify absorption patterns or potential continuations in price movement.

Visualizing Market Dynamics

• Delta footprint profiles illustrate seller dominance despite candle closures indicating absorption—a critical insight into market behavior during consolidation phases.

• Vertical delta information can highlight periods where aggressive buying has been absorbed yet still results in positive candle closures—suggesting potential future movements.

This structured overview captures essential insights into market dynamics based on order flow analysis while providing timestamps for easy reference back to specific discussions within the transcript.

Understanding Market Dynamics Through Delta Footprint

Initiative Auction and Buyer Aggression

• The concept of the delta footprint is introduced, highlighting its role in identifying market trends through buyer aggression.

• A consistent pressure from buyers indicates an imbalance, which can signal a strong trend development when supported by a strong delta.

• An example illustrates aggressive momentum where price movement is led by delta, showcasing the effectiveness of initiative auctions in trading strategies.

• Closing prices above average volume indicate aggressive market participation, providing signals for trend-following traders.

Absorption and Market Order Dynamics

• An absorption example demonstrates how sudden drops in delta can occur amidst market order aggressiveness, leading to price movements that ignore small inefficiencies.

• The correlation between volume and price results is emphasized; understanding this relationship helps traders gauge market efficiency and participant behavior.

• General absorption patterns are discussed, indicating that significant volume input may be absorbed without affecting the closing price direction.

Identifying Exhaustion Signals

• Decreasing volume alongside contrarian imbalances suggests potential exhaustion in market momentum, often leading to reversal opportunities.

• Divergence between rising prices and declining volume indicates a snap back to value efficiency, marking critical points for reversal trades.

• Drying up of volume during upward trends typically precedes sudden reversals in price action.

Volume Profile Insights

• The concept of the volume profile is introduced as a visualization tool for transactions occurring at various price levels based on limit orders matched with market orders.

• A Gaussian distribution represents transaction density within the volume profile; moving away from this mean indicates potential imbalances in the market.

Understanding Value Areas

• The value area defines where most trading occurs within the volume profile, marked by value area high and low points representing 68% of transactions.

• The point of control (POC), where maximum transactions occur daily, serves as a key reference for fair value assessments among traders.

Trading Strategies Based on Market Conditions

• High execution levels within defined value areas suggest strong acceptance among institutions; these conditions can lead to range-bound or consolidation strategies before new trends emerge.

• Recognizing when prices accept below or above value areas informs traders about potential trend developments early on.

Understanding Low Volume Nodes in Market Dynamics

Concept of Low Volume Nodes

• The accumulation or distribution phase is complete, signaling readiness for significant price movement.

• Low volume nodes indicate inefficient transactions where prices shift rapidly with minimal trading activity, leading to poor market conditions and dissatisfaction among participants.

• These low volume nodes are critical levels that often act as rejection points; markets tend to rebalance at these areas before continuing the trend.

Importance of Price Discovery

• In price discovery phases, markets frequently return to low volume nodes to rebalance and establish a pivot point before resuming the auction direction.

• Unfilled buy orders due to low volume can create opportunities for traders using confluence and order flow patterns.

Auction Market Theory

• Institutions determine value by observing accepted price levels; when out of balance, they return to previous distributions marked by low volume nodes.

• A strong rejection point is identified at the value area high combined with low volume nodes, providing conditions favorable for trend alignment through order flow patterns.

Continuation Setups and Value Areas

• After establishing a new value area, the market may show acceptance days indicating shifts in value; multiple low volume nodes signal potential rebalancing points.

• Traders look for setups below the value area low combined with low volume nodes as indicators of future price movements.

Institutional Trading Insights

• Institutions build value on the upside during aggressive buying phases; this creates expectations for directional moves in subsequent sessions.

• Recognizing failed auctions or "fake outs" helps traders avoid traps set by institutions while utilizing order flow tools enhances real-time decision-making.

Understanding Volume Profile in Trading

Overview of Volume Profile and Trading Sessions

• The speaker discusses using a volume profile template specifically for the cash session of NASDAQ, emphasizing its significance as it represents the majority of daily trading volume.

• Focus is placed on trading during the New York session for US indices, as statistical validation shows that the London session adds little value to this profile.

Analyzing Price Action Over Two Months

• The analysis covers price action from November 20 to two months later, focusing on how volume distribution informs market bias.

• A strong upward movement indicates buyers are in control, characterized by a P shape in the profile and a higher PC above 50%, suggesting aggressive buying behavior.

Identifying Key Support and Rejection Areas

• A clearly defined value area low acts as support, marked by significant rejections below this level; these areas are highlighted for their importance in future trades.

• The market's attempt to break below this support fails, indicating strength at this level and allowing traders to merge profiles for clearer insights.

Merging Profiles for Enhanced Insights

• Merging overlapping profiles reveals balance over two days, providing critical information about market acceptance levels.

• Observations include a double distribution profile with thin lows and significant volume traded on the upside; rejection areas are marked for potential trades.

Recognizing Market Shifts and Trends

• After identifying key rejection points, traders can anticipate trends based on previous price actions; merging profiles aids in pinpointing precise value areas.

• Following an acceptance phase at psychological levels (e.g., 25,500), traders can identify clear long trade opportunities based on auction clarity.

Monitoring Market Behavior and Indecision Days

• As the market begins to distribute after rejecting highs multiple times, caution is advised; monitoring these shifts helps identify potential trend changes.

• A breakout from previous balance areas signals a trend continuation; traders should note rejections at value area lows as confirmation points for short trades.

Conclusion: Anticipating Future Movements

• The analysis concludes with observations of strong downward trends following indecision days; recognizing shifts from down profiles to up profiles is crucial for future trading strategies.

• Traders should remain vigilant about rejection patterns that indicate changing auction dynamics while preparing for potential reversals or continuations.

Market Movements and Trading Strategies

Auction Dynamics and Market Reactions

• The auction process was sustained for three days, but attempts to shift down failed, indicating a potential stop loss scenario for short positions.

• A long position setup was identified before a market shift led to rejection on the upside, resulting in a market collapse.

• Stronger rejections at sensitive levels were noted due to being at the upper part of the distribution, which was predictable based on prior analysis shared with the community.

Key Levels and Community Insights

• A significant level around 25,200 was highlighted as likely to experience strong upward rejection; this prediction proved accurate.

• Transitioning from full profile footprint trading to scalping required a new template for visualizing executed orders quickly.

Order Flow Analysis Techniques

• The deep trades view focuses on large market participants' executed orders, aiding in identifying qualified areas for short positions.

• Observations of absorption at specific horizontal levels indicated aggressive selling efforts being absorbed, confirming potential downside movements.

Position Management and Risk Assessment

• After observing strong results from candle patterns indicating added short positions, traders could capitalize on downward movements while managing risk effectively.

• An example of long-side trading showed that aggressive orders were rejected multiple times at key levels, emphasizing the importance of volume profile analysis.

Summary of Trading Methodology

• A methodical approach involves qualifying important areas using various tools like volume profiles or VWAP alongside execution insights from market participants.

• Buyers faced challenges due to absorption effects; traders can adjust stop losses to break even after breaking key levels during price action fluctuations.

This structured summary encapsulates critical insights into market behavior and trading strategies discussed in the transcript.