Learning Order Flow Trading

There is no book I am aware of that can put together order flow/information flow/market sentiment/liquidity analysis, micro structure analysis in such a way to instantly give you a great leap forward in your trading. Darkstar’s book will probably come close. I could probably write a guide too, but I’ll just stick with making some comments here and there.

The book that helped me a little bit was the Trading and Exchanges book. But even after reading that you still need to slog it out every day for a few months before you can start making sense of things and formulating a good system.

Yes you can establish a framework for judging certain event importance and impact. Will it be 100% mechanical? It isn’t for me, but you can gather some good data watching how the market responds to various news releases, speeches, and other events. Sometimes the market cares about retail sales, other times it doesn’t give a hoot. Sometimes the market cares about home price change from month to month, other times it doesn’t. Sometimes it cares about consumer confidence, other times it doesn’t. Sometimes it cares about CDS spreads, other times it doesn’t.

There is so much information out there, news, analysis, that I start putting the information into various categories. I have a category that states if this happens the market will definitively move immediately. Another category states if this happens it can provide a strong bias for the day. Sometimes I deem the information to be absolutely non market moving, so i disregard it. Sometimes I deem the information to be non market moving, but with potential for moving the market, just not on this particular day. Everything happens in context. But bear in mind that I have read thousands of articles on market sentiment as well as economics, monetary policy, etc so there is a lot of subconscious information in my brain.

If I remember correctly back in March the market was highly sensitive to spreads between Greek and German government bonds, but in today’s market environment the market doesn’t care anymore.

As a general rule I try to assign a certain sensitivity level to pieces of information/news, etc. Sometimes its hard, but look at how the market responds to news, figure out the ‘Why’ of price action can get you a feel for the market sentiment. Eventually there is only so much research you can do and the rest of the analysis falls on what is your ‘feel’, your intuition/subconscious understanding of the market.

What works for everyone is different. Depending on what style of trading you want to do, and if you want to figure out why price is doing what it is doing I would recommend this: Keep a daily list of all the 7 major currencies eur, gbp, jpy, chf, aud, nzd, cad, and write down every day why you think price did what it did. Write down everything that you believed generated order flow on that particular day. I’m not talking about moving average crossovers, or bollinger band bounces. Think about who is providing liquidity to whom at various price levels and time of day.

So for example for the eur/usd some of the factors for bullish for today could be:

1. continued short covering from swing traders/longer term players
2. Real money buyers adjusting their allocation to euros from being underweight to more neutral position. (since they were underweight for so many months)
3. Stops tripped above 1.2355
4. Hunters knocked out the 1.2400 barriers and stops above it

For eur/usd bearish you could say:

1. Any Macro related offers who missed out on the huge down move to 1.19 are getting in late now
2. Profit taking on long trades
3. Barrier protection related offers ahead of 1.2400

Things like that, there are more I can add, but you need to figure out how to mold the information and style of trading to fit your own personality.

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