One of the many misconceptions about order flow trading is that it is only tape reading. Many people believe that you can only trade order flow if you do tape reading, or ultra short scalping, or some form of statistical arbitrage, or high frequency trading.
Tape reading can definitely be one form of order flow trading. You can read the tape in stocks and other markets where there is a time and sales window with accurate transaction sizes. You can look at the level 2 and the time and sales window when the market is approaching key levels or when it is breaking out to potentially gauge whether the market is fundamentally sound and will sustain the breakout, or if the market is just making a false breakout.
Centralized Exchange vs Decentralized Exchange
And that is the difference between stocks and all the centralized exchanges vs forex. The centralized exchanges have time and sales. They have level 2. You have the ability to do tape reading there.
But with forex, you do not have those options. There is no centralized exchange. There are a few big electronic exchanges such as EBS, Reuters, etc. Then you go on to the lesser tiers of the forex markets such Currenex and Hotspot, etx. There is no centralized exchange, and thus no consolidated time and sales, and volume information for the forex markets.
Order Flow Inefficiencies
But do not despair, this just forces you to view the market through a different way. It forces you to understand order flow trading and market sentiment without using tape reading. And it most certainly can be done. And once you learn how to do it, you gain a huge advantage over other traders that purely use only tape reading because you can take advantage of other inefficiencies that the tape readers are oblivious to. Inefficiencies such as news trading, larger intraday moves, sentiment arbitrage, global macro.
The people who are focused on tape reading have a very limited view of the market and limited view of what order flow trading is. I used to be in their camp as well. When I first started order flow trading I used to believe that you could not order flow trade without some sort of level 2 information, time and sales, etc. I thought it was impossible. I thought that the banks had an edge with the order flow and front running the orders.
Banks Have A Small Edge
And that is true. The banks do have an edge for ultra short term order flow trading and scalping the market for 5-30 pips or so. You can’t compete with them on that field. But eventually I figured out that there are a lot more profitable trades than attempting to scalp the market for 5-30 pips. Thus, opening up a whole new world of order flow analysis.
The longer the trade duration, the less of an edge the banks have. Because the advantage isn’t about short term order flow or front running. The longer you hold a trade, the more the interpretation advantage comes into play. The banks lose their information flow advantage and the order flow traders that have an interpretation advantage of the information attain the advantage.
You see, if an aspiring order flow trader believes that they can use tape reading, time and sales, and level 2, to spot order flow trades of 5-30 ticks or so, then they just need to adjust their mindset, order flow generators and triggers to catch the bigger moves.
Order Flow For Scalping And Big Moves
After all, if order flow can move the market 5-30 ticks for quick scalps, then it can most certainly move the market much much more. You just need to gather the knowledge, develop the mindset, and establish the critical connections between the order flow generators, triggers, liquidity and how they can interact in the short term, medium term, and long term.
It is just that many traders are unwilling to learn about and assimilate some of the other information that exists outside of the chart. They may be stuck in their tape reading, time and sales, and level 2, and expect to catch huge moves because of them.
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