In today’s article, I thought I’d share with you what I feel to be the top 3 books written on order flow trading. There hasn’t actually been that many books written on order flow trading, so it was quite difficult for me to find some which I think you should read, but after some searching around I’ve managed to find 3 really good ones I downloaded a while ago which I think all current or aspiring order flow traders should take the time to read if they get chance.
1. Beat The Forex Dealer By Agustin Silvani
In my opinion Beat The Forex Dealer is not only one of the best order flow trading books out there, but possibly one of the best forex trading books ever written, although it’s definitely not one for beginner traders. It’s a book which really talks in-depth about how the forex market works and how the dealers/market makers operate in the market. Agustin spends the first part of the book giving some background on the actual structure of the market, like who the different market participants are i.e dealers – market makers – hedge funds – banks etc and what objectives they have in the market.
He then moves on to talking about how retail trading brokers operate in the market. This may sound like a boring section of the book but the insights revealed in this chapter are huge. For example, a lot of retail trading brokers state they are a non-dealing desk broker which retail traders believe is supposed to mean they don’t take the other side of your trades and essentially trade against you. But Agustin says that a non-dealing desk broker is simply a trading broker who takes the other side of your trades using a machine controlled algorithm instead of a human, they are still trading against you albeit just without human input.
Silvani spends a big part of the book talking about stop hunting and how the dealers in the trading brokers both retail and on the inter-bank market will actively hunt the stops of their clients during illiquid and highly volatile times in the market. One thing Agustin says about stop losses which I found to be quite interesting, is that although professional traders and money managers often use stops when trading, they don’t actually place their stop orders into the market. This is done on purpose so the inter-bank dealers can’t see where they’ve got their stops placed and thus hunt them when trading.
There is loads more information contained in the book. I obviously can’t list everything here because it would take too long, but if you get chance I really do recommend you give it a read, because the insights it will give you about the forex market will change your trading completely.
“The point in trading is therefore not to forecast the future events themselves. but rather to predict and profit from their consequences instead”
2. Trading And Exchanges By Larry Harris
Trading And Exchanges By Larry Harris is one of the few trading books which goes into great detail about the inner working’s of the forex market. It’s not a book that will teach you any new techniques or strategies to use in the market, but the information contained within will give you a greater understanding of various different market concepts, which will help improve your trading anyway.
The sections in which Larry talks about liquidity and volatility are some of the most interesting in the book, as are the chapters where he talks about the different market participants and what their goals in the market are. Liquidity and volatility are two market concepts which I really don’t think get talked about enough in the typical forex education, so it’s nice to see them explained in such detail in this book. Larry also spends a large part of the book talking about the structure of the trading industry and the process one has to got through to actually get a trade placed. Whilst it’s not the most important information you’ll ever hear about the market it’s still interesting nonetheless.
If there is one downside to Trading And Exchanges it’s the amount of jargon that gets used throughout the book. Although everything is explained really well I think the book would’ve benefited greatly from having a glossary of some sort featured at the end, so if there was a term which the reader didn’t understand they would be able to quickly flick to the end and find out what out what it means.
“You must understand market structure, and how it affects trader behavior, to understand the origins of market liquidity, price efficiency, volatility, and trading profits. These variables all depend on trader behavior. Since market structure affects trader behavior, it helps determine whether markets will be liquid, whether prices will be informative, and which traders will trade profitably”
3. Time Compression Trading By Jason Alan Jankovsky
Time Compression Trading is the first trading book which really got me thinking about how other traders in the market trade and make decisions. Before I read this book I never used to think about how the other traders in the market affect the market price, but by the end I had realized that it was one of the most important things which needs to be studied, due to the fact the forex market is a zero sum game ( something else I first learned from the book ) a game in which one persons losses equate exactly to another persons gains.
This basically means that the only way you are going to make a profit from the market is if other traders lose money. The more money they lose the higher the profit you make, because the market will move further in the direction to which you’ve got your trade placed. So understanding how other traders lose money is obviously really important because our profits literally depend on it. Luckily Jason goes into great detail in the book about how traders end up losing money and closing out their losing trades.
He speaks about how most traders will end up closing their losing trades through forced liquidation. Forced liquidation is where a trader will close a losing trade after experiencing a large unexpected movement against their position. The unexpected move forces the trader to close the trade because it makes him feel as though a continuation of the move is going to take place, he doesn’t want to lose any more money on the trade so he’s forced to liquidate to save himself money.
“If losing traders perceive that something is happening so fast they cannot understand it, they will liquidate quickly to protect themselves. When this happens to enough losing traders at roughly the same time, their liquidation orders will create a large move in price as they temporarily create a large order ﬂow imbalance from one side”
Order flow trading and the concepts it encompasses are definitely not the easiest things to understand, but by reading the books I’ve listed above I can guarantee they will become much easier for you to grasp. Thanks for reading, if you have any questions about the books listed in this article please leave them in the comment section below.