Using order flows for day trading is for those who play in the highest league. Although the concept itself is not as complicated as it may seem, it requires an in-depth knowledge of order types as well as an understanding of how and why financial markets move.
Most beginners tend to use "blind" trading without having the foggiest idea of how the market moves or why the order stopped. The order flow trading strategy comes as a hidden technique that mainly pro traders use. It may come as a stand-alone strategy for day trading. If you use long-term strategies, it will make no sense, as your trading mainly relies on fundamentals, technical analysis, and indicators.
Core reasons to use order flow trading tactics
As stated earlier, understanding the idea of order flow will add more privileges to day-traders. You will get access to a set of additional benefits most beginners do not have. They are as follows:
- Understanding how the market moves.
- Identifying essential support and resistance zones.
- Setting accurate market exit and entry points.
- Making decisions faster if compared to the majority of chart traders.
- Identifying liquidity when the market does not seem to have it.
In this article, we will explain how the order flow trading strategy works and what you will need to start. But first, we need to dive deep into the concept basics.
How order flow trading works
The idea is to use various order types when trading on various types of markets. Each type of order delivers specific information. Using all of them simultaneously will ensure an in-depth market overview from different angles. So, the first thing we need to do is to learn major order types:
- Market Orders – they are divided into two categories: market-buy and market-sell orders. An order is executed when a trader actually buys or sells the asset. The main feature to watch for is the ability of market orders to move the price and affect the limit orders. For instance, if you spot too many market-buy orders, it means that the market is currently operating without sell limits.
- Limit Orders – once again, here we have buy limit and sell limit orders also known as Ask and Bid. They sit and wait until direct market orders will fill them. At the same time, limit orders may last for a very long time or even for good, if no one sells or purchases the asset in the particular market area.
- Stop Orders - unlike the two previous order types, stop-buy and stop-sell orders are not displayed in the order book. This is not surprising, as traders use them to manage risks. So, it would be unfair to share them. On the other hand, they have the ability to convert directly to the market order after they are triggered by the asset price.