O r d er

Flow
Analysis

REVEALING MARKET SENTIMENT LIKE NEVER BEFORE

PROVIDED COURTESY OF

Order Flow Analysis: Revealing Market Sentiment Like Never Before

Welcome to the visionary charting practice known as order flow analysis. The purpose of this primer is to deliver an "a-ha" moment
that can start you on a path to trading success. It is intended to explain why traditional time-based indicators put retail traders like
you at a disadvantage, and why reading order flow and volume build at price improves the probability of a winning trade. Whether
you trade futures, currencies, stocks or other instruments, order flow analysis is used to determine which side buyers or sellers
is winning the market auction, based upon the volume and flow of orders being executed (the "print"). Knowing this information is
critical for determining whether price will move in the direction you anticipate.
The primer provides a first step into discovering how this remarkable shift in trading approach can change your trading outcomes.
We'll explain the following:

The problem with stationary, time-based data indicators

How order flow data provides context for price movement
Why reading volume at price is critical to trading success
You may never need to look at traditional indicators again.

Part 1: Order Flow

The Problem With Time-Based Indicators
For the first century of market trading, participants had limited information from which
to base trade decisions. Only price, time and historical volume data were provided
for each trading session. Price action was depicted by the open, high, low and close
(OHLC) price levels from the previous session. Traders were left without the ability to
see what was going on in the trading pits (the market auction) by the moment. They
traded using a historical perspective.
Over the years, this limited information has been used to create hundreds of
technical indicators that attempt to inform brokers and retail traders of what may
happen to price in the future. Because of their dependence upon past behavior,
these indicators provide only a snapshot, a stationary view, of market activity.
Unfortunately, the snapshot view has become an antiquated approach to trading.
Retail traders have been missing out on critical information.
Rather than aggregating the millions of data points that reveal the underlying truth
behind the price movement, the trading industry has accepted this restricted
approach for three reasons: (1) OHLC has until recently been the only data that
could be efficiently delivered to the retail traders; (2) there is an obvious simplicity to
using less data (data sets would have to be organized into a logical set of variables,
and that can be an overwhelming task); (3) historically, markets were location- and
participant-specific domestic rather than global so a day or time series report of
domestic participants' activity was sufficient for most traders.
Before trading moved into the 21 century, the reliance upon the OHLC for the development of charting indicators was appropriate
because it provided a logical view of the best data one could access at the time. However, the four-point rendering is now like using
a 64kb modem to connect to the Internet. It is insufficient. Just as a low resolution image doesn't print clearly on paper with too few
data points to give you a clear picture, utilizing four data points of a trading series to forecast future movement is blurry at best.
Critical contextual information is missing.
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Order Flow Analysis Provides Context

As electronic trading became available, it changed the market auction forever in three significant ways. First, the digital systems put
an "electronic veil" between traders. Second, it drove higher levels of data collection. Third, the transition connected global traders
with direct access to markets and better tools for analysis.
Rapid advances in data transmission and collection over the past eight years now makes every tick of data available in real time to
all traders. But despite advances in electronic trading technology, many traders have still experienced obvious disadvantages. The
electronic veil has limited retail traders to only price action and time-based volume. Consequently, because they were still missing
the rich, contextual data beneath price movement, those traders have been forced to be the laggards in price movement.
In order to provide a vastly more effective approach for trading, order flow analysis was developed by D.B. Vaello. As a result of
years practicing this visionary trading style, he engineered a software solution that depicts time and sales data (delivered in real

Order Flow Analysis: Revealing Market Sentiment Like Never Before

time) in customizable visualizations. How does an order flow analytic solution make a difference? By focusing on the observation of
actual market auction orders and the volume distribution at price levels the contextual information that underpins price movement.
Without this information, a trader is left to speculate whether a price level will be hit based upon price data from previous periods.
There is too much real-time data available to rely on such an antiquated, limited data-point system. Every auction is different;
therefore, in order to gain context for a movement in price, and to have more conviction about whether price will move to an
anticipated level, you should view the auction in real time.
The Market Auction at a Glance
The market auction is the mechanism that represents what buyers and
sellers are trying to accomplish (which price action alone does not fully
reveal). How committed are buyers to moving price higher? When will sellers
relent and allow buyers to do so? Or will sellers be successful in moving
prices lower? Market auction data reveals the volume of orders flowing in
from buyers and sellers, which can then indicate the level of conviction to
move price that each side has at a specific point in time at specific price
levels.
This is an important piece of information to have because it gives a trader an
indication of how the market feels about current price levels. Market
sentiment cannot clearly be determined with the use of a stationary price
indicator; it is best revealed through order flow analysis.
Keep in mind that there are only two ways a trade can happen at every
market auction:
Either a buyer moves to accept a seller's offer or a seller moves to accept a buyer's bid.
Trades will be either struck into the bid or into the offer; consequently, price movement flows in the desired direction of the buyers or
the sellers. Price doesn't move without enough conviction by one side or the other.
If one side has sufficient conviction and is able to move price then a market bias
appears and a trend may develop. Alternatively, if one side is showing conviction but
cannot move price then the other side is likely to assemble greater conviction and
take prices in the opposite direction. The beauty of order flow analysis is that it
reveals market conviction prior to price movement.
Looking at the image at left, you can see the depth of market around 12.00.The
auction has resting orders on both sides. Based upon DOM, buyers and sellers are
split relatively equally as to whether they think price will go up or down. In order for
price to move to 13.00, 1734 contracts must be struck at the offer. Conversely, 1619
trades at the bid must be triggered to move price to 11.00. By focusing on the way
orders are struck as time moves forward, traders get a better sense of whether price
will move to 13.00 or 11.00. This is the kind of context that order flow analysis
provides which price-based charting alone does not.
But even the DOM only tells part of the auction story. The only orders that will be
most important to you are the trades that get triggered the print. Those orders are
what indicate which side is winning. And it is that data which provides the basis for
order flow analytics visualizations.
The key takeaway here is that the market activity not simply market price reveals
the sentiment and, more notably, the conviction of traders. Knowing this helps to inform you of whether the market will move price in
the direction you anticipate. Unfortunately, trader conviction cannot be revealed through traditional stationary indicators. Effectively
trading into the right side of the bias can only be accomplished with real-time order flow data and advanced tools like the Order Flow
Analytics charting solution.
Read more about the market auction
Find out about the history of order flow analytics
Learn about how Game Theory applies to the market auction

Order Flow Analysis: Revealing Market Sentiment Like Never Before

Part 2: Volume
Profiling Trade Volume
In addition to analyzing order flow to confirm market moves, there is another important component for order flow traders to follow:
volume at price. Traditionally, traders have used time-based aggregations of volume to identify active instruments (liquid markets).
But typical volume histograms tell nothing about where volume is being traded.
Wouldn't it be more effective to use the volume of trades struck at each price level
to make trade decisions? The truth is volume at price rendered through a volume
profile tells you much more about current market sentiment.
Either buyers or sellers will often be in control, and volume will rise and retreat as
price moves through different price levels. Some participants will trade at a certain
price level and others who will prefer to hold on to inventory until price moves in an
anticipated direction. A volume profile is used to identify areas that traders see as
fair value and will therefore look to trade at those levels.
Institutional traders use a volume profile as a means of determining entry and exit
points. They are seeking higher liquidity opportunities, so as trading moves away
from fair value, volume tends to dry up. Fewer institutional trades are executed.
When trade volume dries up, experienced traders are sitting on the sidelines looking
for the next rise in volume. Knowing where this is happening can be crucial to
making an effective trade decision.
A volume profile can be thought of as a depiction of trader emotions like fear, greed, optimism and pessimism along with behavioral
attributes such as herd mentality. Support and resistance, for instance, are zones which form essentially because of human
emotions. Fear and greed have a strong impact on support and resistance levels. For example, as price falls back to a support level,
traders who are already long will often add to positions; traders who are short will frequently buy to cover because they are afraid of
losing money. Herd mentality is revealed because traders tend to congregate near support and resistance levels, increasing volume
at nearby levels and creating high volume areas.
Learn about the OFA volume profile.
Volume Profile and Trade Decisions
So, how does analyzing volume structure help in making trade decisions? Well, auction activity is often under a kind of gravitational
pull toward high volume areas (HVA). Traders tend to gravitate toward HVAs over and over
throughout the trading session, whether prices are rising or falling. The market often
bounces right over low volume areas because theres not much gravitational pull at those
price levels. Instead, price moves to where the volume is more robust. Using a volume
profile, you are better able to target your trades for HVAs.
Volume can be tricky to decipher. Algorithm trading and high-frequency trades executed
over microseconds have an impact on trade volume throughout a session. Instead of
seeking fair price, some institutional traders may be on a stop run, where they unwind
inventory through multiple levels of limit orders that are waiting to be filled. But analyzing
volume at price is critical to targeting, risk management and profit taking because you are
looking at more accurate representation of market liquidity for an instrument. Higher volume
at price means greater liquidity and better order execution. Therefore, HVAs provide
greater opportunities to enter or exit a position successfully; conversely, low volume areas
(LVA) provide limited opportunities.
Price levels where HVAs (or "high-volume nodes") have formed reflect levels where the
smart money is trading, and often represent key levels of support and resistance. Support
and resistance zones are areas where the market tends to probe and rotate price before
breaking out to form a new support or resistance level. These levels may provide an
excellent opportunity to make a trade.
Conversely, LVAs show price levels where the market is not interested. Therefore, if buyers or sellers aren't willing to engage at a
certain level, volume will have to push price in one direction or another before they will jump in. This creates the probe-and-rotation
cycles that provide great trading opportunities.

Order Flow Analysis: Revealing Market Sentiment Like Never Before

OFA Toolkit Visualizes Fluid Market Movement

The Order Flow Analytics chart visualization solution was designed and built to reveal the modern tick-by-tick electronic auction
and provide you with the tools to interpret where volume is coming into the market and from which side. If you are not learning how
to leverage this incredible data through this visualization toolkit, you are not seeing what is actually happening between buyers and
sellers before price moves, and you are trading with superficial information (price). You are at an unfair disadvantage against
professional traders.
Will sellers relent and allow buyers to push prices higher? Will buyers soften and allow sellers to drive prices down? Without Order
Flow Analytics, there is no way of knowing before price moves which side might be expected to win or whether a trend or reversal is
coming. The visualizations delivered through the OFA toolkit allow a trader to become more patient and more successful by
improving targeting, risk management and profit-taking tactics.

Conclusion
Hopefully, this primer has given you an "a-ha" moment and will lead you to adopting order flow analysis as part of your trading
strategy. The good news is: order flow analysis is no more complicated than traditional chart interpretation. There is a learning
curve, but help is available.
One popular way traders are using order flow is to confirm that a price-based decision is supported by the auction activity and
market bias. Are you in need of a better price confirmation tool? As with any endeavor, greater success comes from greater clarity in
trading. This can only be offered through an order flow analytics solution. We hope you now have a clearer understanding of order
flow analysis and why it can improve your trading results.
Click here for more information about getting ahead of the market. Stop relying on antiquated, stationary trading tools of yesterday.
Join order flow analytics pioneer D.B. Vaello and become an order flow trader.
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