Originally posted at forexfactory on March 22, 2011:
Whether someone has placed an “order flow” trade or not kind of depends on the reasons for why you believe the trade went in your favor.
Every time the market makes a 50 pip move, 100 pip move, 500 pip move, 1000 pip move, chances are there is a pretty good order flow reason for the move. The difference lies in how the trader interprets ‘why’ the market moved in his favor.
So if you place a trade and make 200 pips on that trade, and your system stated to buy on this and this moving average crossover. You diligently follow your system and it eventually rewards you with a 200 pip win on one trade. You are just following your system and believe it has positive expectancy.
Now I don’t believe the moving average crossover “caused” price to move 200 pips in your favor. I don’t believe the moving average crossover generated order flow worth 200 pips to take you into profit. But everyone has a different interpretation of “why” the market moved.
On the other hand lets assume another trader had a 200 pip profit on that same exact trade. But instead of attributing it to the moving average crossover. That trader has figured out “why” the market moved. That trader has figured out what caused the market to move. That trader figured out what will generate enough order flow to really move the market. That trader is an “order flow” trader in my opinion. Why? Because that trader knows the real reason why the trade succeeded. That trader knows what really caused traders to enter the market to move price.
Now what is the difference between those two traders? Well here is the difference.
The trader that traded with moving average crossover (or any other system that does not generate order flow)thinks he has an edge, and thinks that he has positive expectancy. In reality since the moving average did not cause price to move, then that trader has no edge at all. If the reasons for you entering the trade do not generate order flow, then you do not have an edge.
Now the next time that trader trades the moving average crossover, that trader hopes the probabilities will be in their favor for the trade succeeding. Keyword is probabilities. He knows that some moving average crossovers will fail miserably and others will succeed gloriously.
The difference with the order flow trader is that the order flow trader knows the real reason why price moved. Since he knows the real reason why price moved, if they can break down those reasons into a system and figure out the next time that system will generate a signal, then that trader has a huge edge. So next time the order flow traders system signals something, that trader does not have to play the probability game, or hope to win some and lose some. The order flow trader knows why price moved, so their trades have high winrates 70-100%. They know that if they can correctly find the reasons that move the market, and find the next time those reasons will happen, then market WILL HAVE TO MOVE, it has no other choice.
On the other hand the moving average crossover trader, is just hoping that over the long run, some sort of profit develops. The order flow trader does not have to worry about such things because he/she has a gigantic edge in each and every trade that they place, because they know the real reason why the market will move. They know the true order flow generators.