The goal of an order flow trader is to make predictions about the future market price by thinking about how and when orders are going to come into the market from traders making decisions. This is primarily done via guess-work and from an understanding of how traders trade, but there are also some indicators you can use to aid you in your analysis and decision making. These “order flow indicators” are not the same as the typical trading indicators you can find installed on the MT4 platform.
They’re different, in that their goal isn’t to show you some sort of calculation based off the past price action, (like most standard indicators do), it’s to give you real-time information about what the traders in the market are up to. Information like if they’ve currently got buy or sell trades open, and if they have what the status of these trades are, (i.e are they open at a profit or at a loss). Having access to information like this can make analyzing the market much easier, because instead of having to guess where things like orders are located in the market, you can just use the indicators to find them out for you.
Because these order flow indicators are so useful, I thought that today I’d share with you the three which I feel are the best to use in your trading. These indicators will not only make it easier for you to predict when a large reversal might be about to take place in the market, but will also give you important information about where traders have got their orders placed, which will help you anticipate where and when stop loss hunts may occur.
Lets start by taking a look at what I think is the best order flow trading indicator you can use in the market.
1.Oanda’s Order Book
Oanda’s Order Book tool is an indicator which I’ve spoken about extensively on this site. It’s one of the most informative order flow indicators out there, providing those who know how to use it correctly with a huge amount of accurate information about what the traders using Oanda are doing in the market. Information like what percentage of traders have currently got trades open in the market, and the prices at which these trades have been placed, can all be discovered from reading the two graphs the order book shows.
To the left you can see a small image of what the Order Book tool looks like. You’ll notice the graph is split into two parts; the Open Orders graph on the left, and the Open Positions graph on the right.
The Open Positions graph shows you information about the Oanda traders who currently have trades open in the market. It gives you an idea of the prices at which these trades have been placed, the amount of traders who have got trades placed at these prices, and whether the trades are currently open at a profit or loss.
The Open Orders graph you can see to the left of the image gives y0u information on all the orders Oanda traders currently have open in the market. An open order is an order which has not yet been executed by the market. It may be an order to have a buy or sell trade placed at a specific price, or it could be a stop loss or take profit order placed by someone who has already got a trade open.
Oanda never actually specifies which orders the graph shows, but by understanding how retail traders trade, you can determine that the blue bars represent the stop loss orders placed by traders who already have trades open in the market.
Although it has its limitations, the Order Book is definitely one order flow indicator you should invest some of your time learning how to use, not only because the information it shows can help you understand what’s going on in the market, but because studying how the open orders and positions change over time, can give you important insights as to how retail traders on the whole trade and make decisions.
These insights will make it easier for you to predict when orders are going to enter the market, which in turn will help you determine when and where the price is likely going to move.
I’ve written a few articles about Oanda’s Order Book and it’s uses. I’ll leave the links to them below just in case you want to read them to learn more.
Here’s a link you can use to access the order book itself.
2. Oanda’s Historical Positions Ratio
The next order flow indicator I want to show you is Oanda’s Historical Positions Ratio. The Historical Positions Ratio is an indicator which allows you to see what percentage of Oanda traders had long and short trades open at a point in the past. For example, using the indicators graph I could go back and see what percentage of Oanda traders had long trades open at the end of last Friday.
This information on its own is not that useful, but the fact that the Positions Ratio allows you to see how the percentage of open positions have changed overtime, means you can use it to spot when an overly large number of traders have got long or short trades open in the market, giving you an idea of when a large reversal might be about to take place.
Here’s an image of what the Historical Positions Graph looks like.
The black line you can see running through the graph shows you what the market price was over X number of days. In this image I’ve got it set to a 1 year, so the black line is basically showing you 1 years worth of price action on USD/JPY. You can change it to a different timescale if you want, but I’ve found that keeping it set to 1 year is the best option, as it makes it easier to see when an extreme number of Oanda traders have got long or short trades open. Now you can also see that there two different sections of the graph, one colored blue and one colored orange. The blue section shows the percentage of buy trades Oanda traders had open at that time in the market, and the orange section shows how many short trades they had open.
Although these two sections make it easy to visually see how many long and short trades traders had open, it’s not very good for seeing how the open positions have actually changed over time, which is what you really need to see in order to determine if an overly large number of traders have got trades open in the market.
The best way to see how many traders had trades open is move your cursor over the black line market price line itself.
When you move your cursor over the line a small box will appear, and show you what percentage of Oanda traders were long and short at that time in the market. In this instance you can see that on July 8th 2016 around 71% of traders were long, whilst only 28% were short. This doesn’t really tell us anything about the market, so lets go back and see how the July 8th reading has changed from an earlier reading to see if more traders are going long or short in the market.
You can see that at this time 66% of Oanda traders had long trades open, whilst around 33% had short trades open. That’s about 5% less than what they had opened by the time July 8th rolled around a couple of weeks later. The fact that the number of traders with open long trades is increasing the further the market falls, tells you that traders are becoming more and more certain the market is soon going to reverse, which is what ends up doing a couple of days later on July 11th.
Now when it reverses the traders who were going long during the move down don’t suddenly make a large amount of money. The majority actually end up closing their buy trade at a loss, because when they initially got their buy trade placed the market was falling, and it continued to fall for a significant length of time after their trade had been executed. Which means by the time the market reverses, most of the traders with long trades open have already spent an extended amount of time holding onto a losing trade.
Holding onto a losing trade is a psychologically demanding experience. It makes traders highly fearful of having to actually close the trade and realize the loss, so what the majority of traders do, is just hold on and hope the market returns to the point where they’ve got their trade placed, so they can exit with a small loss or even a profit. When the traders stuck in losing longs in our example see the market reverse, they feel a sense of relief, because now it looks like they’re going to be able to exit their losing buy trades with either a profit or a small loss.
The problem is if the traders see any price action which suggests to them the market is going to reverse back to the downside again they’ll close their losing trade straight away. For them, the pain of having to potentially endure another draw down is just too much to bear, especially after the reversal itself has caused the size of the loss on their losing trades to decreased dramatically (depending on where they actually got their trade placed).
If you go onto the graph and move your cursor along the up-move which began on the 11th of July, you’ll see how the number of open long trades decreases as the price rises. It decreases because the traders who placed long trades during the move down are now closing their trades at a loss, due to what I’ve explained above.
All in all, Oanda’s Historical Open Positions Ratio is a great order flow indicator. It may not be as useful of an indicator as the order book we just looked at, but it does still contain important insights about the market which can help you with your trading. To be honest, I only just came across this indicator a couple of months ago, so I haven’t really conducted much research into how to best use it yet.
The only advice I can give you a the moment, is to watch for signs of a reversal taking place when there is an extreme percentage of traders with long or short trades open in the market. An extreme number is anything over 70%, so if you see that 70% or more traders have got long or short trades open, begin watching for a reversal structure to form, especially if the reading coincides with the point where a daily supply or demand zone has formed or where a big round number price is found.
Here’s a link to the Open Positions Ratio
3. Oanda’s Historical Open Orders Graph
The final indicator I want to show you today is Oanda’s Historical Open Orders Graph. The Historical Open Orders Graph is an order flow indicator which works in a very similar way to the Historical Open Positions indicator we’ve just looked at, there’s only one key difference between the two. Instead of showing you what percentage of traders had buy or sell trades open in the past, it shows you the prices at which they had placed their buy and sell orders at in the past (and the present), and also gives you an idea of how many buy and sell orders had been placed at a particular price in the market.
You can see that there are four graphs in total. The two which you need to be concentrating on are the two seen at the top, titled Buy Orders and Sell Orders. These two graphs show you where all the buy and sell orders have currently been placed in the market and where they have been placed in the past. The gradient of the color you can see on each graph gives you an indication of amount of orders that was placed at that price. The deep red colour you can see in the sell orders graph, indicates that a high percentage of sell orders had been placed around this point, whilst the deep green colour you can see in the buy orders graph shows you where a large number of buy orders had been placed.
I only found out about Historical Open Orders indicator a couple of weeks ago, so like the Historical Open Positions indicator I haven’t really had the chance to study it in-depth just yet. Something which I have found the indicator to be pretty useful for, is finding out the big round number prices which have a high probability of causing the market to reverse.
In one of my articles on support and resistance levels, I mention how large reversals usually tend to begin near big round number prices, as traders tend to put their orders around these prices to enter trades and set stop losses. The problem with knowing this, is that you couldn’t figure which of the big round numbers the market was likely going to reverse at, because you didn’t know how many orders had actually been placed around the price.
With these graphs, you can now easily see which of the big round number prices hold the highest concentration of orders, allowing you to find the prices that have a high probability of causing the market to reverse.
If you want to check out the Historical Open Orders Graph for yourself use the link below.
I will be doing some articles in the near future on the Historical Open Orders and Open Positions indicators to show you how to better use them, so check the site in a few weeks time to see if their complete. The last thing I want to say, is that if you’ve managed to come across any order flow indicators which I haven’t mentioned here, let me know in the comment section below, because I’m always on the lookout for new tools and sources of information to use in my trading, so you might have found something I haven’t come across yet which could be really useful.