The Ultimate Guide to Order Flow Indicators

Order flow indicator is powerful trading tool that provide insights into market dynamics by analyzing the flow of buy and sell orders. This guide will explore what order flow indicators are, how they work, the most popular types, and how traders can use them to make better trading decisions.

Order Flow Indicator

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What is Order Flow Analysis?

Order flow analysis involves studying the real-time stream of buy and sell orders entering the market to understand supply and demand dynamics. It moves beyond just price action to see the forces driving price action.

Some key aspects order flow analysis reveals:

  • Buying and selling pressure at different price levels
  • Market participation and trade size of key players
  • Changes in supply/demand ahead of price movements
  • Confirmation for chart patterns and indicators

By interpreting the constant flow of orders, traders gain an edge in predicting future price action.

Why Use Order Flow Indicators?

Order flow indicators help traders understand market sentiment, spot imbalances, and anticipate potential breakouts. Reasons traders use them include:

Confirm trading ideas – Order flow can validate or invalidate chart patterns, trends, and other technical analysis techniques. If indicators agree, it strengthens the trading case.

Understand market moves – Order flow shows the market forces driving price action. Traders can see if a move is fuelled by aggressive buying or selling.

Spot momentum early – Imbalances in order flow often precede price breakouts. Analysing orders entering the market provides an early warning.

Improve timing – Combining order flow with technical indicators helps fine-tune entry and exit timing. Traders can pinpoint market turns as sentiment shifts.

Trade market inefficiencies – Illiquid markets with large players can produce order flow imbalances to exploit. Traders hunt these liquidity gaps.

The insights order flow indicators add helps traders understand market psychology, improve timing, and spot trading opportunities earlier.

Many order flow indicators exist to suit different analysis needs. Some of the most popular include:

1. Volume Profile

The volume profile indicator shows the traded volume at different price levels for a defined period. It identifies value areas, high volume nodes, and poor liquidity zones.

Volume profile example

Traders use volume profile to:

  • Understand value areas and fair value prices
  • Spot liquidity gaps to target with limit orders
  • Gauge bullish/bearish conviction with profile shape
  • Highlight support and resistance zones

Volume nodes with high trading activity attract further price action. Volume profile compresses complex order flow data into an easy to interpret indicator.

2. Footprint Charts

Footprint charts display traded volume and order flow in an intuitive candlestick-style chart. Each candle shows the buy/sell volume and orders at multiple price levels.

Footprint Charts

Key uses of footprint charts include:

  • Spotting order flow imbalances between buyers and sellers
  • Identifying high volume trade clusters to mark support/resistance
  • Analysing market participant type through trade size
  • Tracking development of trends with easing volume

Footprint charts simplify order flow for discretionary trading decisions on market conditions.

3. Cumulative Delta

Cumulative delta measures the total net order flow by subtracting sell orders from buy orders. The cumulative indicator visualises the rising or falling pressure.

Cumulative delta example

How traders utilise cumulative delta:

  • Spot divergences with price to signal reversals
  • Identify building momentum with strong delta spikes
  • Interpret sentiment through rising or falling delta
  • Gauge commitment behind trends from delta speed

Cumulative delta quantifies order flow into an oscillator-style indicator revealing shifting momentum.

4. Order Book Imbalance

The order book imbalance indicator checks the ratio between buy and sell limit orders waiting for execution. An imbalance suggests pending orders to drive price action.

Order Book Imbalance

Download Free Order Book Imbalance Indicator

Order book imbalance assists traders to:

  • Find liquidity gaps indicating potential breakout moves
  • Avoid trading into areas with stacked orders to fade price
  • Time entries for highest probability of filling limit orders
  • Spot trapped traders about to get run over by momentum

It highlights hidden pending orders not visible on the price chart. Order book data feeds the imbalance indicator.

5. Volume Weighted Average Price (VWAP)

VWAP calculates the average price weighted by volume traded at each price. It shows value relative to volume profile to identify opportunities.

Volume Weighted Average Price

Traders check VWAP to:

  • Understand fair value relative to traded volume
  • Spot under/overvalued price action to trade back to VWAP
  • Combine with order flow for mean reversion strategies
  • See acceptance above/below VWAP indicating trends

Intraday traders widely use VWAP as a key order flow indicator for facilitating trading decisions.

How Traders Use Order Flow Strategies

Many order flow trading strategies exist. Some examples include:

Order flow reversal – Trading pullbacks by combining order flow and technical indicators to pick market bottoms. Relying on order flow confirms exhaustion.

Order flow breakout – Using spike analysis and volume surges to trade breakouts. Order flow indicates committed market orders driving momentum.

Order flow scalping – Exploiting liquidity gaps found through volume profiling and order book imbalances. Quick trades target filling limit orders.

Order flow mean reversion – Combining VWAP crossovers, volume profile, and cumulative delta to structure counter-trend trades.

These strategies use different order flow indicators to confirm trading setups. Order flow adds evidence to make higher probability decisions. It works for discretionary traders through to automated algos.

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Order Flow Suite Platform

Sophisticated order flow analytics requires advanced charting tools. The Order Flow Suite platform provides a feature-rich solution for analysing order flow.

Order Flow Suite platform

The platform includes:

  • Customisable and automated footprint charts
  • VWAP, volume profile, market depth tools
  • Cumulative delta, order book imbalance indicators
  • Excel integration and chart pattern recognition
  • Optimised order flow data feeds

With data aggregated from 60+ markets, Order Flow Suite provides leading-edge functionality for order flow traders. From discretionary trading up to building automated strategies, the platform delivers the ultimate order flow analytics environment.

The Future of Order Flow Trading

Understanding order flow looks set to become an essential component of trading strategies in coming years. Markets generate vast amounts of actionable data beyond price charts. Interpreting this data using order flow indicators gives traders an edge.

We are likely to see:

  • More traders adopt order flow analysis
  • Evolution of smarter order flow indicators
  • Growth in application to automated trading
  • Mainstream charting tools integrate order flow
  • Lower costs to access order flow data feeds

As technology progresses and markets become more electronic, expect order flow analytics to become standard practice. Just like technical indicators, order flow provides quantifiable trading advantages to those that master it.

Start Using Order Flow Yourself

If you want to learn more about order flow trading, check out the following resources:

  • Order Flow Suite Platform – Leading order flow analytics software with a 7-day free trial
  • Order Flow Course – Online video course teaching order flow strategies
  • Trading With Order Flow Book – Highly rated introduction to order flow trading

Order flow indicators open up trade opportunities unseen on normal price charts. Why not learn this powerful trading technique and stay ahead of the market?

Author: Dominic Walsh

I am a highly regarded trader, author & coach with over 16 years of experience trading financial markets. Today I am recognized by many as a forex strategy developer. After starting blogging in 2014, I became one of the world's most widely followed forex trading coaches, with a monthly readership of more than 40,000 traders! Make sure to follow me on social media: Instagram | Facebook | Youtube| Twitter | Pinterest | Medium | Quora | Reddit | Telegram Channel

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