Order Flow Trading

A stop hunt example from today:


  1. Market bias for the Pounds continues to be negative. Yesterday’s rally was caused by better than expected PMI numbers, but this was quickly faded and overall sentiment remains bearish.

  2. Price action supports the above mentioned statement as the pair hit into decent offers ahead of 1.52 and failed to maintain upside momentum.

  3. Flow data in the early London session mentioned sell stops at 1.5090 and 1.5040. Bids were mentioned at 1.5100, 1.5080 and 1.5050. Stops seemed weak and vulnerable given the bearish conditions. All this favors the establishment of a short position.

  4. Look at how the bids at 1.51 and 1.5080 were eaten. They had little impact in the market and this is suggesting bears are in control. We want to take advantage of the weaker side in the market. As they pair trades higher after the first stop hunt, this can be used as an entry opportunity for a hunt into the 1.5040 stops.

It all depends on the conditions, sentiment and the strength of the trend (momentum). You can accumulate your position at support/resistance levels or enter into momentum when we get near to the stops.

I seriously think Babypips should have a section on order flow… its so empowering to know.

fantastic articles look forward to reading the rest of the series

This is a trade I currently have running: Short 1 futures contract of New Zealand dollar.

I was skeptic of the recent Kiwi strength given the concerns expressed by the RBNZ and the current drought. Traders didn’t really pay much attention to it yet, but it could have a larger impact on the NZ economy than thought.

Price action confirmed my views, the rally up to 83.40 looks like a clear intermediate term top to me. So I took the chance to fade a stop hunt above the 83.00 level today and enter short. My current target is to get the stops which are resting below the 82.50 figure.

The stop hunt in NZD/USD was successful. :smiley:

For today, I’m looking to play the range in EUR/USD ahead of the NFP.

NFP will be interesting because it will show whether the market is now [U]buying USD[/U] on good US econ data. Another indicator that the “Risk-On/Risk-Off” environment is gone.

Hi Ben -I’m new to order flow trading but already with my limited understanding the principles have really helped my understanding of the market and I am seeing a slow profitable turn around as a result.

I have also read DS’ book and found it very interesting. I have a few questions though…

  • What timeframe do you tend to trade from in FX? It looks like you use the 5m charts?
  • What price action training from DS have you used? This is an area I need to work on as I understand the concept of sentiment, liquidity and immediacy of order types and the hunts that occur, my weakess is knowing when to enter? What is your suggested method and system that you follow?

Thanks mate,

Larger sized trades, including combinations, are not placed with any of the above because a basic block order submission causes acceptable price at the start of execution rapidly give way to deteriorating prices as the market moves.

You could split up your order manually, and submit multiple, smaller orders at various price levels to minimize your footprint, but this requires time, effort and constant monitoring.

Your solution are

[B][U]Scale Orders[/U][/B]

If prices move and a component of the order becomes unmarketable, the entire order waits until the component price becomes marketable keeping your footprint to a bare minimum. That’s what the term “Orders need to be absorbed.” means.

In addition, you can set a “scale offset” amount to submit opposite-side profit taking orders against your original order components. This allows position traders to pre-define the minimum amount of profitability acceptable for exiting a position.

Second that. On most exchanges, there are iceberg orders which only display a fraction of a large block (in the so called dark pool). With the presence of futures-spot arbitrageurs, these orders can impact the market without any warning. And in the spot market, no institutional participant will route their big orders through a single channel. In effect, though useful, this information on stops, limits and also OTC options is only good in a reasonable number of cases. So a caution must be exercised in utilizing this information for trading decisions.

Btw, Ransquawk also publishes this information. Their free channel runs from Frankfurt open to NY close and is delayed by 5 minutes, but its good for someone just looking for a hint on major price barriers.

Good thread. However, the explanation below is incorrect as it ignores the existence of market makers and ECNs around which current markets are based.

Market makers create liquidity in a market by offering to buy and sell large volumes at set prices. The bid and ask prices are set by them. ECNs offer the best bid and ask prices available across several different market participants.

Bid and ask are not based on limit orders.

Price moves due to the execution of market orders. This is how I see it from the market maker’s perspective:

Tick 1

  1. Spread at 2 pips
  2. 10 lots sold @ 1.3002, 10 lots bought @ 1.3000
  3. No change in bid/ask

Tick 2

  1. 10 lots sold @ 1.3002, 10 lots bought @ 1.3000
  2. Previously accumulated orders offloaded completely by matching against new orders
  3. Profit from spreads = $4000
  4. No change in bid/ask

Tick 3

  1. 10 lots sold @1.3002, 11 lots bought @ 1.3000
  2. No change in bid/ask

Tick 4

  1. 10 lots sold @ 1.3002, 10 lots bought @ 1.3000
  2. One lot bought @ 1.3000 (from tick 3) unable to be matched against a sell order. This is a risk as a loss will be incurred if price falls below 1.3000.
  3. Increase bid to 1.3001 and ask to 1.3003.

The increase in bid and ask is done to make price less attractive for buyers and more attractive for sellers, allowing the market maker a better chance to balance the order book.

If there is more buying than selling, market makers have to increase prices until supply and demand reach equilibrium. If you ponder over this it explains why spreads widen during news releases.

Limit orders do not add liquidity to the market. Similar to other kinds of pending orders they have no effect on price until they are executed, i.e until they become market orders and have an impact on supply and demand.

However, large pending orders (not just limit orders) do provide incentive for dealers that make money on commissions. This means if the dealer sees a large cluster of pending orders, they may start to accumulate positions to nudge the price towards the zone. This is to increase the chance that these orders get executed and also to ensure that they have enough volume to fill their clients’ orders once they get triggered.

Pippatron, technically bids and offers of MM are limit orders. Understand the order types in context of an auction market (OTC markets are a bit shady to understand the technicalities clearly). If you are scalper dealing in an exchange traded security (market maker is just a scalper technically, as both are playing with probabilities of incoming market orders), you would place your limit orders just across the spread. Example: You place your offers at the current bid-ask (volume): 100(100)-101(200). A big market sell order of volume 150 units come and consumes all units at 100 and 50 units at 99. The exchange will move the ask price to 100 and place the limit orders of 101 ahead of the existing queue at 100. The new quotes are 99-100.

Now in the forex market, banks are MM and there are no exchanges. Though large brokers and liquidity aggregators in the ECN market have some rules for these banks to offer competitive spreads, they can easily be skewed in the banks favor. Thats why during a news event, spreads often go to 10 times that of the normal spread which will never happen on an exchange traded market. Your example of tick 4 is how the banks skew the probability distribution of consuming market orders in their favor.

Limit orders are never made market orders. But there are market if touched orders, which is a bogus order type actually, as they reside on your brokers servers rather than on the exchange and so there is a strong possibility of a slippage in the event of high volatility.

Hi Shemz,

I assumed ‘limit order’ was being used in the traditional sense:

An order [B]placed with a brokerage[/B] to buy or sell a set number of shares at a specified price or better.

Read more: Limit Order Definition | Investopedia

That post I quoted seems to be referring to the limit orders lying around with brokers and doesn’t mention market makers.

Hi Will,

I use the Daily, 4H and 1H chart, but trade on the 5M to execute my trade idea.

Depends on what type of strategy you are concentrating. If you decide to apply the stop hunt strategy, you can either enter on momentum (e.g. break of intraday S/R level -> target stops below next level) or wait for a retracement into a support/resistance level to get a better entry. Make sure you concentrate on the high probability opportunities. Clear sentiment (i.e. currently negative GBP and JPY bias) will give you the best edge. Technical factors include price action around the specific support/resistance level (i.e. if it bounced several times of a support level, stops below will grow larger).

If you want to fade a stop hunt, the entry should be pretty clear (near the stops). The set up will give you the opportunity to use a tight stop, but here it is even more important to only apply it when sentiment is clear. You don’t want to go against the flow, as it will just take out your stop and move on. A good example is EUR/JPY. There were larger stops above 123, but sentiment was clearly JPY-negative and there was real momentum building in EUR/JPY, not just some stop hunting. Obviously, someone who would have applied the strategy here and went short, would have got stopped out. On the other side, GBP-sentiment was negative and GBP/USD provided a few good opportunities to fade stop hunts.

I hope that helps. Good luck!

I agree that large participants certainly will look to hide their intentions, but the bids/offers mentioned in the feeds that provide flow info are rather levels where a larger amount of different limit orders reside. Sometimes, more detailed flow info can be leaked (i.e. “x” has large offer @ 1.30), but those were mostly from corporations (hedgers). We certainly won’t find info like “Large hedge fund has offers at 1.30”.

I also agree with your 2nd statement and this is why I strongly advised against using such info as trading signals. Sentiment has always priority to order info and traders should wait for a reaction to the reported levels, not acting ahead.

Hi Pippatron,

Thanks for your input.

I didn’t include market makers in my explaination as it would make things a bit complicated. Don’t get me wrong, market makers have obviously a very important role in the market, but their actions & orders will mainly reside closely to current price. While some market participants have characteristics that we can exploit as Order Flow traders (stops of technical traders, barrier option defense/attack from option players), market makers I don’t count in this group. The only part where I mentioned them was why dealers participate in a stop hunt.

Would you like to share what your approach is in the markets? Do you use some of the “Order Flow” methods?

Hi Dali, I guess we have similar concepts but use different terminology. I think of liquidity in terms of market makers and execution of orders, and I think of order flow in terms of clusters of large pending orders.

I do use these concepts in my trading. I try to read price action in terms of order flow and enter at zones where I believe a large cluster of similar orders may be present.

Hello Dali and Pippatron,

I’m following this thread with great interest. Very informative articles so far. Can you guys post charts with the zones? I have very little knowledge about the Order Flow which I learned from babypips and FF. I would like to learn from you. :slight_smile:

Happy Trading.

subscribed …:10: very informative …thx and keep up

awesome. subscribed and eager to read more.

Hi Salim, I will let Dali start with with the charts since this is his thread :slight_smile:

There’s nothing special about my zones; they are just very obvious support and resistance levels that are likely to catch the eye of big players. I posted some charts on my thread in the swing trading section if you are interested.

Thanks for the reply, Gonna check your thread. :slight_smile: