Someone asked me why I was bashing some of the technical indicator strategies. I told him I don’t believe in them. There isn’t anything wrong with them. I just don’t believe they generate order flow and move the market.
There isn’t anything wrong or evil about other forex trading strategies. There are all sorts of strategies you can choose from. There are technical indicators, forex robots, chart patterns, price patterns, astrology, fundamentals etc. Other traders who work in Japanese Banks may believe in RSI and Ichimoku. Who knows, there may be some people who are making money from them and are happy. Bless them! Good for them, I wish them well. They may be happy with their current system and not looking for anything more. They aren’t looking to take the next step up on the trading profit ladder. That is their choice.
Some Traders Struggle
Then, there are other traders who may be struggling and not finding success with the trading methods listed above and are looking for trading success. They are looking for a new way to trade and perceive and analyze the market. They can include traders that are struggling with technical indicators, forex robots, chart and price patterns. They can also include traders who may be successful with their current system, but are looking for a more effective way to filter out bad signals. They may be looking to know when to “go for the jugular.” And knowing when to go for the jugular can only be obtained using order flow analysis. Because adding another technical indicator, or trendline, or fib isn’t going to increase the trade success chances. Various order flow principles actually can.
Traders are generally taught that there are two schools of analysis. Technical and Fundamental. Other people may cite another third type of analysis called “sentiment” analysis. But mostly there are two schools of thought. There are sub niches within each one. For example, the stock market fundamental analysis can include value investing, and looking up various financial ratios. Technical analysis can include technical indicators, chart patterns, price patterns, etc.
The Third Way – The Order Flow Way
But there is a third way. It is called order flow trading. Now, order flow trading can encompass many things. Some people believe that order flow is only ultra short term, like scalping for a few pips or two. Some people believe order flow trading is only tape reading, and that you need access to level 2 and an order book. But those are just a small sliver of order flow trading.
Order flow trading encompasses many things. My definition includes viewing the market with a combination of these principles in mind:
Bids, Offers, Stops, Option Barriers, Liquidity, Liquidity Clusters, News Releases, Economics, Politics, Global Macro, Market Sentiment, Market Sensitivity, Market Expectations, Market Positioning, Market Bias, Fundamental Value.
I probably missed some or many things, but that is what came to mind.
It is all about the order flow. All about the transaction flow. That can be ultra short term scalping. Or it can be long term trends that last for weeks, months or years. It doesn’t matter how short term or long term it is. It always requires order flow. It always requires transaction flow.
I just think it is good idea to know why the market participants are moving the price, and why future market participants can come into the market to move the price in a certain direction.
With trading, you need price to move. You are trying to bet on a rise and fall, whether it is for 5 pips, 50 pips, 500 pips, 5,000 pips. Thus, it stands to reason that your analysis tools should generate order flow and move the market. Your analysis tools, market perceptions, etc should be able to help you know when order flow will be aggressively generated so that it can move the price and take you into profit.
Everyone Needs Order Flow And Liquidity
Everyone requires order flow and liquidity to profit. George Soros requires it. Warren Buffett requires it. The big macro hedge funds need it. The small retail forex traders need it. Everyone needs it. Just because someone is a “value investor” like Buffett doesn’t mean he can escape the very foundations of every market. No one can escape the fact that you need order flow and liquidity to profit. You need someone willing to pay more than what you paid for the financial instrument and execute the transaction in order for you to profit if you are long. You need someone willing to sell you the financial instrument at less than what you shorted it at, if you are to profit from your short. That is a fundamental truth.
Thus, it is extremely helpful if your trading system and analysis, can actually measure whether order flow can be generated or not. It is helpful if our trading system can measure if aggressive orders are going to be executed. Preferably you want it to happen as close to 100% as possible. You can never get to it, but doesn’t mean you can’t find a way to place better trades.
Technical analysis can potentially generate order flow some of the time. Fundamental analysis can potentially generate order flow some of the time. But they are a false dichotomy. You want your trading system to potentially measure when order flow will be generated all of the time. Don’t settle for some of the time. Try to get the best possible analysis. The best possible analysis that can generate transaction flow.
Hence, you should choose order flow trading.
Yes, it does require you to perceive how various market participants interact. It does require you to gain knowledge of order flow generators and scenarios. It does require knowledge of global macro. It does require knowledge of sentiment and how to determine market sensitivity.
But once you figure out, then you have a trading system that can measure when the order flow will be generated as often as possible. It is the very best, because it analyzes the very foundation of every market – order flow and liquidity. It is not perfect. You shouldn’t expect perfection.
However, it doesn’t get much better than analyzing the very foundations of every market. That is the best possible trading. The only missing link is your own skills and perceptions of the market. Order flow and liquidity is always going to be there. It will always be there for small moves, medium sized moves, big moves. Order flow is going to be generated next week, and next month, and next year. The transaction flow never ends.
You just need to figure out how to analyze it and create a model and process for harnessing the order flow power.