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  • What is Order Flow Trading: A Beginners Guide

  • Published By:
  • Category: Finance
  • Published Date: November 11, 2022
  • Modified Date: November 11, 2022
  • Reading Time: 4 Minutes

Featured Image Caption: Trading Graph on Screen

Nothing is as it seems in the financial markets. Prices will rise and fall, but though you’ve been told it’s supply or demand, it’s not quite that simple. Sure, economic and fundamental data matter, but nothing happens against the laws of order flow.

What Is Order Flow?

In order to understand order flow trading you need to know how institutional investors work. Be it due to banks or large Wall Street firms, retail traders have no control over the markets. When prices rise or fall, it’s because someone with tremendous capital has made a decisive move. That move is based on a specific analytical criterion, which has come to be known as order flow. This study of price action is what institutions rely on and what ensures that retailers often lose.

How Does Order Flow Work?

Order flow works due to speculation, for buyers and sellers exist in every transaction. What most find hard to grasp, however, is how these actually cause prices to change. When buyers overpopulate, prices will rise because supply becomes less than its demand. The opposite is true when sellers overpopulate. The vast supply causes prices to fall because scarcity is gone. Supply and demand are fundamental and are at the heart of order flow.

What can’t be seen or determined by technical and fundamental analysis is why buyers or sellers have taken sides. Essentially, the value you believe something to have is arbitrary. Maybe you have some insider info that no one knows about. Maybe you’re just going on a hunch that you believe will reward you in the end. In order flow, even institutions trade contrary to market value.

Then Why Do Prices Change In a Live Market?

Regardless of the number of buyers or sellers, prices only move when orders get canceled out. In a bear market, it takes only one trader with enough capital to cancel out the bears in the market. The same is true in a bull market. Only one person has to sell enough shares, currencies, or coins for prices to then fall. However, making prices fall in this example calls for canceling orders. This happens if, for example, all of the buyers get their orders activated.

After their orders activate, buyers must make a decision regarding what to do with their orders. If the market moves against them, these traders are likely to bail out, which is to close their orders. Being that they’re buyers, their closed orders become sell orders. Thus, by canceling out buyers, prices can then fall with no one to interfere. Rising prices, instead, will clear sellers out.

Now for the Bid and Ask Prices

Without the role of market makers, no one can speculate on the rising or falling of prices. You now have an idea of why prices move, but there’s a specific reason why they go up versus down or vice versa. At every price, buying and selling only occur at premiums and discounts. These prices are called the ask and bid prices. If you bought XYZ at $2.00, it’s only because the other party bought it at a discount. You see, that other party is involved with a profit margin in mind.

This profit motive is why many brokers and institutions work as market makers. Though you bought it at $2.00, someone else acquired it at, for example, $1.99. If they don’t at least get a premium when selling what they bought, prices won’t change, nor are profits earned. The asking price is what sellers are willing to sell at. The bid price is what buyers are willing to buy at.

Since these numbers are never equal, every transaction tallied will result in a higher or lower outcome in prices. This is because if you sell XYZ at $2.01 instead of $2.00, the next person who wants to buy XYZ now has to pay $2.01 to $2.02 to acquire it.

A Better Strategy This Time

If you’re constantly stopped out or missing your profit targets, then you’re overlooking something regarding order flow. The better you grasp how prices move and why the better you’ll anticipate large rallies while knowing who’s making them happen.

Maggie Bloom

By Maggie Bloom
– graduated from Utah Valley University with a degree in communication and writing. In her spare time, she loves to dance, read, and bake. She also enjoys traveling and scouting out new brunch locations.

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