Forex Blog

Order Flow Analysis – The Secret Weapon of The Professional Traders

December 7, 2022 | 5:36 am | Forex Blog
December 7, 2022 | 5:36 am
Forex Blog
Order Flow Analysis - The Secret Weapon of The Professional Traders

A Close Look at Order Flow in Forex Trading

When looking for an understanding of the financial markets, there are few technical analysis types available. The most popular methods include momentum analysis, which uses mathematical indicators applied to a price to look at the current forces in the market, and fundamental bias analysis, which relays on fiscal economics data releases. Mathematical standard deviation-based analysis; key levels analysis which uses daily pivots, Fibonacci levels, daily highs and lows, etc.

However, none of these very commonly used analysis types deal with the core question of why price behaves at a specific price level. 

When the price approaches a key level, different scenarios can be expected to happen; At a key level price may reverse, it may retrace shortly and break the level, it can break the level, or it may false break (aka, Fake-out). 

Order Flow Analysis provides a reliable definition for key levels, But also one more aspect which is very unique; that is how strong the resistance at that level may be. 

Before we go any further, we must understand what is the concept behind price changes. Prices move because of an imbalance between the amount of buyers demand to sellers supply. This is how exchanges determine what will be the next quote tick. This works on every market, from stocks, futures, options, commodities, bonds, and forex currencies.


What is Order Flow?

Order flow defines the amount of orders waiting to be executed at a certain price level.

While the price is rising upward in a very strong rally, we know for certain that it will eventually stop somewhere. The rally-up happens because there are simply more traders willing to buy than traders are willing to sell. This creates an imbalance between buyers and sellers. Whereas there are more buyers demanding the supply, therefore price shifts upwards. Eventually, the buyer momentum will end, and the price will be driven up to a level where there are more sellers than buyers. This new imbalance created by more sellers than buyers will push prices downwards.

This simple scenario is what happens in the markets on the macro and micro levels. This is the essence of what makes price move range or reverse.

When you look at a chart of a moving price and interpret this to the forces balance placed on different price levels.

It’s as straightforward as it is seen on the charts after the events. But what if you could forecast the upcoming price level with a relatively decent accuracy? What if you could know before where the opposite order flow will be waiting at a future time and price?

If you could be certain that you would know exactly where to place your entry and precisely where to exit your trade.

Order flow analysis is a unique trading analysis concept that can help you predict with a good amount of certainty where order imbalance awaits at a future price level. This can allow you to enter the market with precision and more confidence.

Order flow defines the amount of orders waiting to be executed at a certain price level.


What a Volume Bar Represents on Your Forex Platform

In most financial markets, order flow is the accumulation of orders awaiting at a specific price level. It is a combination of how many orders count and their size. 

The situation in Forex is different. There is no reliable volume data that traders can rely on.

The forex market is a decentralized market that has no exchange responsible for governing this market. Other markets, like the stock exchanges, futures market, and commodities market, have a centralized exchange that governs the respective market. These other markets can, therefore, provide the tape of the volume of the order flow. This is also known as a level two data feed. Level two data feeds are where the future orders are waiting, and the quantities of the orders are that are waiting on a future price above and below the current market price.

If you trade futures, stocks, or commodities, then level two information could be a very helpful graphic for you to analyze.

But as we mentioned, in forex currencies trading, there is no reliable level 2 feed because every single broker is connected to a limited aggregation of feed. This information is distributed amongst vast numbers of banks, each dealing with the others. If you do find a level 2 feed for forex, be alerted that any other feed can be extremely different to obtain.


Volume Data in Forex

Forex brokers provide an indicator known as volume. In forex trading, the volume is not capable of providing true order quantities. It can only present the ticks count, which is the amount of trades broadcasted at a specific broker. In most Forex platforms, the volume is the accumulated tick count, and it does not provide orders on the axis of price above and below market, as you could find in level 2 for stocks.

Therefore, in forex, you would have to analyze and figure out where the awaiting order flow is by analyzing the chart patterns.

Volume Data in Forex


What is Order flow in Forex Trading?

If you have read this far, we hope you’re not intimidated by now. And you should not because order flow analysis is truly a very simple concept to embrace. 

Order flow analysis is really just a very simple way of reading charts.

To make it easier to understand, It’s also referred to as supply and demand analysis. This analysis relies on the assumption of where you could find a future imbalance in order flow.

Trading order flow is basically looking at where in the nearest past, there was a major decision in the market to drop or rally in a significant manner. That means looking at wherever a strong price movement occurred. 

Simply looking up for big moves on the charts is the easiest thing to spot with the naked eye. 

This is the core concept to understand about order flow, and of course, there is so much more to it than this. Simplified, it’s reading the history of charts to understand the story of where the buyers and the sellers are located.

Trading order flow doesn’t involve any indicators whatsoever. It’s a naked clean chart with horizontal levels plotted. It’s the cleanest and simplest form to analyze price action.

Having said all that, the flow can also be supplementary to any trading technique you can combine it with. It can be paired with any style of analysis because it will provide you a layer of price reasoning which you can put together with something like momentum or fundamental reasoning standard deviation.

If we have opened your appetite to learn more about Order Flow trading, and it’s easier for you to understand it through video, we invite you to watch this four parts educational webinar we published a while ago:


Know Your Entry By Order Flow

When you base your analysis on historical levels and know what level you’re waiting for, you have a huge edge advantage for your trading. This leg up will practically provide you with the advantage of buying at a very cheap price and selling at the highest, most expensive. It will also allow you the comfort of knowing your trade ahead of time so you can set future orders to be filled at a future time whenever the price hits the mark. This reduces screen time and will make your trading routine very easy and relaxed, leaving you enough time to be an analyst and well-prepared for the trades.

Order Flow Long Entry

Order flow long entry


Order Flow Short Entry

order flow short entry

Since order flow is the core essence of price movement, this technique of trading is applicable for any time frame. From monthly charts to one-minute or tick charts – it works with them all.


Know Your Exit by Order Flow

In the same way, as entry is determined by order flow, so is the exit. We can always assume that the price will turn when it hits a place of significant change in the past. With this knowledge, we can create the other end of the trade cycle as our safe exit. We can create a full trade, set it on a limit pending order, wait for it to be executed, and get into the target as long as it’s recent by historical price.

Know Your Exit By Order Flow


Trading with Limit Orders

In short, a limit order is an order to buy below the market value or to sell above the market value. The order is set in motion once the market reaches your predetermined limit price. 

Order Flow Buy Limit

order flow buy limit


Order Flow Sell Limit

order flow sell limit

Limit orders are preferred by traders who want to decide on the maximum price they want to open or close their position. This control is favorable, and even if slippage occurs, the price will improve. 

However, a major downside of limit orders is that some trades might never be executed, as price may not hit the desired levels. However, being strict on the entry price may leave you out of the market often but, at the same time, will result in a preferred risk-reward ratio when your trade gets triggered. 

One thing to mind is when trading in tumultuous market conditions. At highly liquidated market conditions, such as in economic events releases or major surprising events, order flow levels might be washed off and not give the expected reaction. This is why using stop loss for your risk management is crucial. 


Order Flow Wrapped Up

All trading methods, analysis, and plans are dependent on the trader using them to make work. The right analysis, coupled with the right mentality, can lead to successful trading. However, trading Order Flow gives you an important edge for your trades execution. Order flow provides you with more advantages:

  • A simple concept to learn and understand the market’s behavior
  • High risk-to-reward ratio
  • Good precision entry and exit signals
  • Works on every trading asset with high liquidity: Forex, Stocks, Commodities, Indices, and Futures.
  • Works the same with any timeframe.
  • A complementary method for almost any other trading technique
  • Perfect for Set & Forget trading approach, by predefined price levels using limit orders


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