Introduction to ORDER FLOW (+How to Read DOM)

Introduction

This tutorial serves as an introduction to order flow trading, a method that allows traders to anticipate price changes by observing market orders and liquidity. By understanding order flow, traders can make more informed decisions based on real-time market conditions rather than relying solely on historical data. This guide will also cover how to read the Depth of Market (DOM), a crucial tool for effective order flow trading.

Step 1: Understand Order Flow Trading

• Order flow trading focuses on the current orders in the market rather than past price movements.
• It involves analyzing the flow of transactions to observe the balance between buying and selling.
• Key characteristics of order flow trading:
  • It is reactionary, focusing on what is happening right now.
  • It relies on facts and real-time data, not predictions based on historical patterns.

Practical Tips

• Avoid relying on candlestick patterns or historical indicators; they do not provide insights into order flow.
• Be aware that order flow trading is more about the current market dynamics than about predicting future movements.

Step 2: Learn What Order Flow Is Not

• Order flow is not based on:
  • Candlestick patterns
  • Arbitrary time frames (e.g., 1-minute, 5-minute charts)
  • Lagging indicators or historical data
• Order flow involves real-time data such as:
  • Depth of Market (DOM)
  • Current order book
  • Liquidity charts and time and sales volume

Step 3: Familiarize Yourself with the Depth of Market (DOM)

• The DOM displays real-time orders and shows the current bid and ask prices.
• Key components of the DOM:
  • Bid Column: Represents passive buyers and their limit orders.
  • Ask Column: Represents passive sellers and their limit orders.
  • Last Traded Quantity: Indicates market executions, showing active trades that cross the spread.

How to Read the DOM

• The numbers in the bid and ask columns represent the number of contracts waiting to be executed.
• Price movement occurs when market aggressors (buyers or sellers) execute trades that consume these limit orders.
• Understand that:
  • A large number of market orders crossing the spread can cause significant price movements.
  • The balance of orders on both sides of the market affects price consolidation and impulse movements.

Step 4: Recognize Market Dynamics

• Price movements are influenced by the balance of buyers and sellers:
  • If sellers withdraw their limit orders, prices can rise as buyers consume available contracts.
  • Conversely, if buyers withdraw, prices can fall as sellers consume orders.
• Consolidation occurs when there is an equal presence of limit orders, restricting price movements.

Conclusion

Order flow trading offers a valuable perspective for traders looking to understand real-time market dynamics. By focusing on the current orders and their implications, traders can make better-informed decisions. The DOM is an essential tool for visualizing and interpreting this data. To further develop your skills, consider practicing order flow analysis and participating in live trading sessions to enhance your understanding of market mechanics.