Order Flow, Liquidity and Volatility

The three words you need to know and understand masterfully:  Order Flow, liquidity and volatility.  Whether you trade forex, commodities, stocks, bonds.  Those are the three principles that you need to master to be a successful order flow trader.  Those are the three pillars of successful trading.  Never forget those words.  Order flow, liquidity, and volatility are the foundations of every market.

You can trade any market you want, so long as the market or financial instrument is liquid and has some volatility.   You need order flow to come into the market to validate your trade.  Then you need volatility so that the market can actually make a decent move and not just chop around.  Then you need sufficient liquidity so you can exit your trade at a profit.  That is the harmonious wheel to profit.  When you place a trade you need there to be liquidity to execute your order.  Then you need there to be order flow to come in and push the market into your favor.  Then you want there to be volatility so the market makes a huge move in your favor.  Then you need liquidity again to exit your trade.  Sounds simple, but most people don’t know what it means to truly understand the order flow, liquidity, and volatility.  They like to complicate things with moving averages, macd, stochastics, forex robots, etc.

Different traders fail for many different reasons.  Usually there is a link somewhere to a order flow, liquidity and volatility problem.

For example, take the trader who is trading a moving average crossover in the EUR/USD.  Assuming normal market conditions, they don’t have a liquidity problem.  But they can definitely have an order flow and volatility problem.  The moving average crossover will not generate sufficient order flow to move the market.  And chances are the moving average crossover is not going to cause volatility.  So those traders have a double whammy of order flow and volatility problem.

The person trading penny stocks can have a liquidity problem.  There may be crazy volatility, but that crazy volatility can be caused by the illiquidity of the stock.  They can’t get in and out with a decent trade size.  They will never be able to grow an account and compound it, because there just not enough liquidity to do so.

The person who has an order flow system that is only able to capture 20 pips from the market has a volatility problem.  They know the order flow generators for a 20 pip move.  They just need to figure out what is going to cause an explosion in volatility.  Then they can go from making a small profit to a huge profit and very nice risk reward ratio trades.

It doesn’t matter what market you ultimately decide to trade.  Just make sure it is liquid and has volatility.  There are plenty of markets that are liquid but lack volatility.  USD/JPY is very liquid, but it just doesn’t have a lot of volatility right now due to the global macro environment.  You can scalp if you want to.  Just be careful you are not trying to pick up pennies in front of a steamroller.

Remember these three concepts:  Order Flow, Liquidity and Volatility for they will serve you well for the rest of your life.

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