Master ORDER FLOW TRADING in Less than ONE HOUR! — Transcript

Learn order flow trading fundamentals, auction market theory, and key tools to master price formation and market microstructure in under one hour.

Key Takeaways

Order flow trading reveals real-time market dynamics beyond traditional price action analysis.
Auction market theory provides a theoretical framework to understand market microstructure and price formation.
Balanced markets indicate acceptance and sideways movement, while imbalanced markets indicate trending and price discovery.
Volume and time spent at price levels help identify areas of acceptance and rejection.
Knowing different order types and their visibility is crucial for understanding market behavior.

Summary

Introduction to order flow trading as a deeper method than traditional technical analysis.
Explanation of market microstructure and how buy and sell orders are placed, matched, and executed.
Overview of auction market theory as the foundation for understanding order flow and market dynamics.
Discussion of supply and demand principles and the concept of fair value or equilibrium price.
Introduction to key order types: market orders, limit orders, and stop orders, and their roles in trading.
Explanation of balanced (sideways) vs. imbalanced (trending) markets and their impact on price discovery.
Use of volume and time as indicators of acceptance or rejection of price levels.
Concept of value area and point of control based on traded volume distribution.
Importance of understanding which order flow tools to focus on and which to avoid as a retail trader.
Emphasis on order flow as a complement to price action for superior market analysis.

Full Transcript — Download SRT & Markdown

Speaker A

Welcome to the ultimate beginner's guide to order flow trading. In this course, you will gain superior knowledge about the tools of order flow analysis in record time. Technical analysis focuses on analyzing historical data to predict future price movements based on known patterns.

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patterns in contrast order flow delves deeper into the Dynamics of how prices are formed by Shining Light on Market micr structure meaning how buy and sell orders are placed matched and ex uted in the market orderflow analysis possesses

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In contrast, order flow delves deeper into the dynamics of how prices are formed by shining light on market microstructure, meaning how buy and sell orders are placed, matched, and executed in the market. Order flow analysis possesses tools for assessing price formation in real time, as well as tools to analyze how price was formed in the past.

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order flow is a great Ally for Price action reading as you'll see throughout the course this course is constructed in a top-down manner first we're going to quickly study the auction market theory which provides the necessary theoretical framework to understand Market micro

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In short, order flow has the capacity to unveil information that cannot be seen with price action reading by itself. So, order flow is a great ally for price action reading, as you'll see throughout the course. This course is constructed in a top-down manner.

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order flow tools and strategies that are worth paying attention to as a retail Trader you learn what tools to avoid and what tools to focus on without further Ado let's begin by talking about auction Market Theory the auction market theory

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First, we're going to quickly study the auction market theory, which provides the necessary theoretical framework to understand market microstructure in order flow trading. Market microstructure is what allows us to understand the intricacies, pitfalls, and opportunities that exist in the way buy and sell orders are placed, matched, and executed in the market.

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profile tool the auction market theory is based on the idea that the financial Market serves as a place to facilitate trading between buyers and sellers in a way that is like the bidding and offering process of an auction to keep things simple

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Next, we're going to delve into the various actionable order flow tools and strategies that are worth paying attention to as a retail trader. You learn what tools to avoid and what tools to focus on. Without further ado, let's begin by talking about auction market theory.

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fair value notice that auction market theory is based on the fundamental principle of supply and demand in economics pric is the point where supply and demand curves intersect meaning the point where buyers and sellers agree the search for efficiency equilibrium

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The auction market theory was developed by Peter Steidlmayer, who was a trader at the Chicago Board of Trade in the 1980s. Steidlmayer also created the market profile method, which I'm going to talk about in future courses and is similar to the volume profile tool.

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information emerges that changes the perception of buyers and sellers related to the fair value of a market in other words it creates an imbalance an imbalanced Market starts the process of price Discovery meaning the discovery for the new fair value

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The auction market theory is based on the idea that the financial market serves as a place to facilitate trading between buyers and sellers in a way that is like the bidding and offering process of an auction. To keep things simple, buyers always want to buy at the lowest price, and sellers always want to sell at the highest price.

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markets respond to previous areas of balance and imbalance balanced markets which are sideways are recognized as areas of acceptance imbalanced markets which are trending are recognized as areas of rejection price tends to be attracted to areas of acceptance and repelled from

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The point where these two opposing forces meet is what is known as the point of equilibrium. It's also referred to as efficiency, balance, or fair value. Notice that auction market theory is based on the fundamental principle of supply and demand in economics.

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balances the forces of supply and demand in the Market at all times time serves as an indicator of acceptance or rejection like it can be seen in the market profile methodology the amount of time price spends in a price level shows whether

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Price is the point where supply and demand curves intersect, meaning the point where buyers and sellers agree. The search for efficiency, equilibrium, balance, or fair value of a market is not static. Buyers and sellers are always changing their perception about the market due to many factors.

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simply represents the price range where 70% of the traded volume occurred within a specific time period the price level where the highest volume occurred is called point of control this value of 70% is based on the empirical rule in statistics meaning

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Such factors include major macroeconomic forces, news events, overall market sentiment, and technical factors, to name a few. When a new piece of information emerges that changes the perception of buyers and sellers related to the fair value of a market, in other words, it creates an imbalance.

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in mind it's time now to move on to the subject of Market micr structure so that we understand the nuts and bolts of how price action is formed in the charts this might seem confusing and unnecessary at first but it's it's

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An imbalanced market starts the process of price discovery, meaning the discovery of the new fair value. When markets are balanced, they trade in the range. There is no motive for price discovery since buyers and sellers are relatively comfortable with the perception of value of the market.

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orders a market order is an order to buy or sell immediately for example if you want to buy at whatever price is being traded right now you will use a market order the same is true of course for a

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When markets become imbalanced, we have trends. One fundamental idea here is that markets respond to previous areas of balance and imbalance. Balanced markets, which are sideways, are recognized as areas of acceptance. Imbalanced markets, which are trending, are recognized as areas of rejection.

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limit order is a pending order to buy or sell at a better price than what is being traded right now for example a buy limit order is always below the current price since buyers always want to buy low a sell limit order is always above

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Price tends to be attracted to areas of acceptance and repelled from areas of rejection. All of this, of course, assumes that no new information has affected the perception of buyers and sellers. In auction market theory, we have three main components: price, time, and volume.

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stop orders are always above the current price and sell stop orders are always below the current price one key difference between stop and limit orders is that limit orders are active meaning that they are directly placed in the

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Price acts like an auctioneer that balances the forces of supply and demand in the market at all times. Time serves as an indicator of acceptance or rejection, like it can be seen in the market profile methodology. The amount of time price spends in a price level shows whether price accepts or rejects that level.

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broker can see your stop orders the limit orders are visible to the entire market so to make this absolutely clear let's analyze the types of orders involved in a simple trade with stop- loss and takeprofit orders let's begin

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Volume helps confirm acceptance or rejection. Areas of acceptance are marked by higher volume, and areas of rejection are marked by lower volume. In auction market theory, we also have the concept of value area, which simply represents the price range where 70% of the traded volume occurred within a specific time period.

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size so both the stop- loss and take-profit Target orders of a long trade are sell orders the stop- loss of a long trade is a sell order that is below the price you open the trade so it's a sell stop order in a worst price

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The price level where the highest volume occurred is called the point of control. This value of 70% is based on the empirical rule in statistics, meaning that in a Gaussian distribution, we have 68% of the data falling within one standard deviation away from the mean. Traders round that up to 70%.

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trade was opened with a sell order to close the trade you need to execute a buy order of the same size so both the stop- loss and take-profit Target orders of a short trade are buy orders the stop- loss of a short trade is a buy

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We'll talk more about this when we look at the volume profile. Keeping these basic principles in mind, it's time now to move on to the subject of market microstructure so that we understand the nuts and bolts of how price action is formed in the charts.

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limit order in a better price one easy way of remembering all of this is that market orders get you filled at the current price limit orders get you filled at a better price and stop orders get you filled at a worse price keeping

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This might seem confusing and unnecessary at first, but it's extremely important to understand; otherwise, you'll be completely lost later. Let's begin first by talking about the different kinds of orders that exist in trading. To keep things simple, we can summarize order types in two categories.

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they are Place directly in the market while stop orders are inactive meaning that they are held by the broker until the market reaches the level where they are triggered this is one of the reasons you need to choose a reliable broker

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We have market orders, and we have pending orders. A market order is an order to buy or sell immediately. For example, if you want to buy at whatever price is being traded right now, you will use a market order. The same is true, of course, for a sell order.

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leads us to different types of Market players there are basically two types the aggressive and the passive players aggressive players are the ones that initiate price movements and they do so through the use of Market orders passive players don't initiate

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A pending order is an order to buy or sell at a price different than what is being traded right now. In that sense, we have two main types of pending orders: the limit and the stop order. The limit order is a pending order to buy or sell at a better price than what is being traded right now.

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aggressive players take liquidity from passive players and passive players provide liquidity to the aggressive players it's important that you acknowledge a few basic rules about the interaction of Market players a buy order must always match a sell order in

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For example, a buy limit order is always below the current price since buyers always want to buy low. A sell limit order is always above the current price since sellers always want to sell high. The stop order is a pending order that becomes a market order once price reaches a predetermined level.

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scenarios in one of the order flow tools called the order book the order book shows the buy limit orders below the current price in the bid column on the left and the sell limit orders above the current price in the as column on the

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Notice that stop orders allow traders to trade at a worse price. Buy stop orders are always above the current price, and sell stop orders are always below the current price. One key difference between stop and limit orders is that limit orders are active, meaning that they are directly placed in the market.

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size of bars in the bid and S columns are proportional to the number of limit orders giving an instant perception of Market depth to the trader however they basically show the same information this is a good moment to

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While stop orders are inactive, meaning that they are held by the broker. If the market reaches the level where the stop order was placed, the broker immediately transforms it into a market order. That means that only the broker can see your stop orders. The limit orders are visible to the entire market.

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means that more trading activity can occur without causing significant changes in price by the same token a shallow Market means that significant changes in price can occur with low levels of trading activity let's take a hypothetical scenario where buyers for whatever

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So, to make this absolutely clear, let's analyze the types of orders involved in a simple trade with stop-loss and take-profit orders. Let's begin with the long trade. Imagine that you opened the long trade using a market order.

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to rise from 50 to 51 one aggressive buyers must take the liquidity provided by the passive sellers in the 50 price level first in this example there are 23 sell limit orders in that level to go from the 51 to the 52 price level the

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If the trade was opened with a buy order, in order to close the trade, you need to execute a sell order of the same size. So, both the stop-loss and take-profit target orders of a long trade are sell orders. The stop-loss of a long trade is a sell order that is below the price you open the trade, so it's a sell stop order at a worse price.

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market depth begins to rise price and the aggressive buyers require more power to produce the same change in price the same mechanics of course happen in the bid column that is how prices effectively rise and fall like I said previously the order

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The take profit of a long trade is a sell order that is above the price you open the trade, so it's a sell limit order at a better price. Imagine now that you open the short trade using a market order. If the trade was opened with a sell order, to close the trade, you need to execute a buy order of the same size.

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significant buy limit orders in a specific price level with the intention of attracting the market to that area but with no intention of getting filled they can cancel the orders just before they are hit this problem became significant especially after the rise of

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So, both the stop-loss and take-profit target orders of a short trade are buy orders. The stop-loss of a short trade is a buy order that is above the price you open the trade, so it's a buy stop order at a worse price. The take profit of a short trade is a buy order that is below the price you open the trade, so it's a buy limit order at a better price.

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manipulation Maneuvers that can occur in the order book or D spoofing this maneuver involves the placement of large limit orders with no intent of having them filled in other words passive players can Place Large orders that will appear in the order

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One easy way of remembering all of this is that market orders get you filled at the current price. Limit orders get y

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liquidity or supply and demand on other Market players such orders can be quickly cancelled just before price hits them for example the problem of course is that there is no way to tell if the large orders exist for a legitimate intent or

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if they are result from spoofing Iceberg orders institutional Traders have access to trading platforms that allow them to place what are called Iceberg orders which are limit orders that appear partially in the order book or Dum when the visible portion of the

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order is executed another portion of the order emerges and gets executed the reason behind this is to hide the intent of having a very large order appear in the order book a retail Trader has no way to tell if the ordered

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book or Dum is hiding an iceberg ordered so a price that appears to have shallow depth might be hiding an iceberg order which would obviously be misleading there are other types of manipulation Maneuvers like painting the tape and layering but the understanding

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of spoofing and Iceberg orders is enough to understand the misleading nature of real-time order flow analysis in conclusion when observing the order book or the Dom shallow price levels might actually be deep and deep price levels might actually be shallow

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there is of course no way of telling the intention of passive players just by looking at these real-time tools as retail Traders there is a very high probability of being misled by more astute institutional Traders manipulating the order flow all this

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talk about algorithms manipulating price is related to real-time order flow not historical order flow this information might seem inoffensive but it's importance will grow as we progress so this deceptive mechanics of the real-time order flow is one problem but

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it doesn't stop there another problem here is that Traders tend to assume that buying and selling always have directional content that's not true certain kinds of Market participants don't buy necessarily expecting that price will rise or sell expecting that

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price will fall the key to understanding that is that there are mainly three types of Market participants speculators arbitres and hedgers speculators are what most retail Traders expect every Market participant to be speculators want to capitalize on the directionality of price movements

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meaning buying low and selling High if the market was made only of speculators the order book would be less misleading although the manipulative tactics we just saw would still be a problem we also have arbitragers this kind of Market

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participant is not worried about Market Direction they want to capitalize on the difference between two markets which often involves buying one market and selling another simultaneously in other words when arbitragers buy or sell a market they don't necessarily expect this Market to

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rise or fall statistical Arbitrage is a good example these kinds of Traders don't trade market Direction They trade the statistical relationship between two or more markets for example if an arbitrager buys Market a and sells Market B he doesn't care if Market a

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Falls as long as Market B Falls more than a that is a simplistic example but it illustrates how buy and sell orders don't necessarily have directional intent behind them if you want to learn more about Arbitrage I have an ebook

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about it called statistical Arbitrage by Co integration Co integration is an idea that won the Nobel prize in economics and it lays the foundation for Arbitrage strategies in the institutional trading World it can also be used by retail

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Traders the third type of market player is the hedger this kind of Market participant aims to reduce or eliminate some kind of Risk by using the financial markets the classic example here is Delta hedging used by Banks which

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involves buy and call options at the same time that they sell the underlying Financial instrument following a certain proportion the aim is to eliminate Delta or directional risk that's useful to mitigate some of the credit risk associated with Landing operations in

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summary just because they sold the market doesn't mean they want it to go down because they are not trading Market Direction they are trading Market volatility I have a video here in the channel demonstrating how Del the hedging occurs I'll leave it in the

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video description or card the term Delta here is completely unrelated to the Delta we'll study later the first relates to the delta or directional risk of the market given by the black sches formula and the latter relates to volume

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Delta which is the difference between bid and ask volume in conclusion not every Market participant buying or selling has directional intent like most retail Traders expect that is a problem because it obfuscates the order flow process in real-time tools like the

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order book or D the situation is even worse because there are different ways of manipulating the perception of intent through limit orders as we saw if you're still not depressed let me try again beyond the problem of manipulation in

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the order book and the problem of ambiguity due to the diverse nature of Market participants we also have the problem of hidden volume hidden volume occurs primarily due to OTC or over thecount Trading and dark pools OTC trading is when

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trades happen between certain parties without going through a centralized exchange this is a problem of course because it can obfuscate the real level of Market activity to the general public this is not a small matter since OTC trading is usually done by large players

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such as pensions funds hedge funds Sovereign wealth funds and very large companies just so you can have some perspective the volume traded in the OTC markets is a few times larger than the global GDP in 2023 it is estimated that the global GDP

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was around1 trillion the volume traded in the OTC derivatives Market alone was 600 trillion according to the bank of international settlements dark pools are private off exchange training venues where large institutional investors can execute trades without publicly revealing their

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orders until after the trade is completed dark tools are primarily used to minimize the market impact of large transactions the lack of pre-trade transparency is clearly a problem if Traders are looking to analyze the real-time order flow of a market in

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summary the manipulation in the order book with the tactics such as Iceberg orders and spoofing the ambiguity generated by different kinds of Market participants such as speculators arbitragers and hedgers and the lack of transparency due to OTC and dark pools

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hidden volume Le lead us to conclude that the real-time analysis of order flow done by retail Traders is mostly a vain exercise given that trading is a game of asymmetric information and Retail Traders are always on the weaker side we

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need ways to analyze order flow in a more concrete way in other words we cannot rely on tools that show realtime intent we need to rely on tools that tell us what in fact happened with the order flow one of these tools is what is

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called time and sales also referred to as the tape however things happen too quickly in the tape it's a difficult tool to use and there are better options for analyzing the historical order flow the conclusion here is that we should

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focus on tools that highlight important aspects of historical order flow that solve the problem of dealing with manipulation tactics in the order book or D such as layering spoofing and Iceberg orders historical order flow tools will show us what in fact happened

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not the misleading intention of various mark Mark players however by using historical order flow tools we still have the problem of ambiguity and the problem of lack of transparency or hidden volume the problem of ambiguity can be mitigated by changing our perspective

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instead of looking at order flow as a tool to identify directional movement we look at it to identify levels of activity the problem of lack of transparency Still Remains one way of dealing with this problem is to focus on

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Futures Trading because future Futures are traded on centralized exchanges unlike Forex for example which is decentralized you can rate order flow in currency Futures to obtain more transparent information and trade on Forex charts for example in conclusion use historical

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order flow tools focus on identifying levels of activity instead of identifying directional intent and focus on Futures Trading if you want to obtain more reliable order flow data there are many historical order flow tools but we'll focus on three of them for

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Simplicity sake the footprint the volume profile and the cumulative volume Delta let's begin with the footprint the footprint shows the same information given by the time in sales or tape but it displays it in a useful and relatively easy way to

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observe once again the idea is not to identify directionality but to quantify the activity of buyers and sellers in the price levels within a candlestick recall that when we looked at the order book we were analyzing limit orders

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limit buy orders in the bid and limit sell orders in the ask those were the real-time orders of the market the footprint is a historical order flow tool meaning that it shows the orders that got executed not the orders that

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might be executed in this sense the bin and ass Columns of the footprint demonstrate aggressiveness meaning that the bid column shows selling aggression and the S column shows Buy buying aggression that might seem confusing but you must remember that an aggressive

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order always matches a passive order in summary the bid column shows passive buying intent in the order book but in the footprint it shows the aggressive selling that actually took place the US column shows passive selling intent in

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the order book but in the footprint it shows the aggressive buying that actually took place When Buyers attack sell limit orders this activity is represented in the S column when sellers attack by limit orders that activity is represented in the bid

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column make sure you understand this perfectly before we move on to the features of the footprint chart and how to use it let's make sure we clarify a problem related to the matching of orders let's go back to the simple

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example of a long trade with a stop- loss and take-profit Target orders and analyze where each of these three orders will appear in the footprint imagine that you open a long trade with a buy Market order that is an aggressive buy

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order so it matches a sell limit and therefore it will appear on the S column of the footprint if your trade gets stopped out a sell stop order will be triggered a sell stop order is a sell Market order that matches a buy limit

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order and therefore it will appear on the bid column of the footprint the takeprofit is a sell limit order that if triggered will match a buy Market order and it will appear on the S column of the footprint imagine now that you open

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a short trade with a sell Market order that is an aggressive sell order so it matches a buy limit and therefore it will appear on the bid column of the footprint if your trade gets stopped out a buy stop order will be triggered a buy

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stop order is a buy Market order that matches a sell limit order and therefore it will appear on the as column of the footprint the takeprofit is a buy limit order that if triggered will match a sell Market order and it will appear on

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the bid column of the footprint it's key to remember that not all aggressive orders have intent of adding buying or selling pressure to the market for example the stop loss of a sell which is a buy Market order can match a take

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profit from a buy which is a sell limit order this will appear on the as both Traders are leaving the market and yet the footprint would reflect aggressive buying in the ask the stop- loss of a buy which is a sell Market order can

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match a takeprofit from a sell which is a buy limit order this would appear in the bid both Traders are leaving the market and yet the footprint would reflect aggressive selling in the bid with that in mind let's begin understanding the features

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of the footprint chart the footprint chart shows two columns one in each side of the Candlestick in question you can change the level of resolution of the price levels according to your liking the column on the left shows the

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bit volume across different price levels of the Candlestick recall ing that on the footprint the bid column shows selling aggression not by intention like in the order book the column on the right shows thees volume across different price levels of the

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Candlestick recalling that on the footprints the S column shows buying aggression not selling intention like in the order book it's a mistake to associate red cells with directional selling only and green cells with directional buying only as we saw

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previously the cells with lighter colors show price levels with lower volumes and logically the cells with darker colors show price levels with higher volumes the cells in Black demonstrate the price level with the highest level of activity this is known as hvn or high volume node

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this can be useful when trying to judge which price level within a Candlestick future price action can react to if this was the price level with the highest volume is the price where buyers and sellers found fair value for the most

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part and it can be used later support or resistance another feature of the footprint is called the value area as a default the value area is the range of prices where 70% of the volume occurred this level of 70% is not arbitrary if we

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recall the empirical rule in statistics we see that 68% of the data occurs within one standard deviation from the mean in a gussian distribution Traders simply round that number up to 70% this is therefore the range of fair

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value value within the Candlestick the high volume node is simply the peak of the distribution within the value area the limits of the value area are displayed as V which means value area high and V which means value area low this is the

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same idea of the volume profile but instead of measuring the volume distribution in a series of candlesticks the footprint shows the volume distribution within the Candlestick another important feature of the footprint is called imbalance which is highlighted by green or red thin bars on

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the side of the price levels where the imbalance occurred it's important to knowe that we don't compare price levels horizontally in the footprint We compare them diagonally like so that's because When Buyers attack passive sellers they do that one price level above when

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sellers attack passive buyers they do that one price level below as a standard the imbalance occurs when there is a 300% discrepancy between price levels meaning when one price level has at least three times more volume than the

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price level immediately above or below when the discrepancy occurs in the bid there is a bid imbalance when the discrepancy occurs in the ask there is an Ask imbalance the terms buy or sell imbalance are not really appropriate

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because not every selling aggression comes from sellers willing to add selling pressure not every buying aggression comes from buyers willing to add buying pressure as we saw before in the this Candlestick we have three imbalances in the ask and one in the bid

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let's analyze the highest one in the ask we see that in the imbalance level there's a volume of 24,000 in the ask one level Below in the bid we see that the volume was 6.9 th000 if we measure

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the ratio here we see that the ask volume was 3.46 times larger that is why this is marked as an imbalance if we look at the bid imbalance at the top we'll see that the bid volume was around

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7 15,000 in comparison to 2.6 th000 in the ask that's 6.5 times larger imbalances can also be stacked for example when there is more than one imbalance in successive price levels we have stacked imbalances another important feature of

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the footprint is the volume Delta the Delta is nothing more than the difference between ask volume and bid volume generally speaking bullish candles have positive Delta and bearish candles have negative Delta but not always as we'll see in a moment the

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footprint basically serves two different purposes we can use it to identify support and resistance levels in different ways and we can use it to validate any other type of support and resistance we find in a Candlestick chart let's begin with the ways of

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identifying support and resistance levels with the footprint itself there are mainly two ways of using the footprint to identify support and resistance levels consecutive high volume nodes and stacked imbalances let's see an example of both single high volume nodes are usually not strong

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enough to provide meaningful support and resistance levels but when high volume nodes happen consecutively in the same price level there's a higher chance that they will act as support or resistance in this image you can see an example of

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that we can see three different price levels with multiple high volume nodes the first has two the second has three and the third has two we see price returning to this high volume area later and then resuming the

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movement to the upside in this other image you can see an example of stacked imbalances working as support the low of the large bearish Candlestick is formed by four stacked imbalances in the ass colum denoting buying aggression near

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the low when price returns to that area later it reacts to the upside these are the two main ways of observing support and resistance levels with the footprint but in my point of view the best value we can get from the foot footprint is

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using it to confirm support and resistance levels we would normally find in a Candlestick chart this requires a contextual reading of the footprint chart in light of the support or resistance level in question before we observe examples of that we need to be

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aware of two important aspects of the footprint the price and balance relationship and the price Delta relationship price and balance relationship is observing the position of the closing price of a Candlestick in relation to the bid and ask imbalances

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that occur in the footprint this is important to identify potential absortion or initiative of Market players which are important features of Market reversals let's observe the absortion pattern if you see price closing below an Ask imbalance the interpretation is that buyers are being

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absorbed by sellers since an Ask imbalance generally means buying aggression price action should confirm that by closing above it when it doesn't we can infer that sellers are absorbing the buyers if you see price closing above a bid in Balance the

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interpretation is that sellers are being absorbed by buyers since a bid imbalance generally means selling aggression price action should confirm that by closing below it when it doesn't we can infer that buyers are absorbing the sellers the absorption pattern is sometimes not

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enough to spot a reversal we need to confirm it with the initiation pattern right after the initiation pattern is nothing more than the agreement between imbalances in price the buying initiation pattern occurs when we see price closing above imbalances in the

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ask the interpretation is that in the imbalances in the ask indeed represent buying aggression with directional intent the selling initiation pattern occurs when we see price closing below imbalances in the bid the interpretation is that the imbalances in the bid indeed

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represent selling aggression with directional intent one possible way that prices will reverse is by the combination of absortion and initiation for example imagine that we observe price approaching a support line as price moves toward the line we see

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price closing below imbalances in the bid which agrees with the idea of selling pressure once price hits the line we see an absorption pattern meaning price closing above bid imbalances right after that the market switches to an initiation pattern we see

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price closing above imbalances in the ask in a clear bullish candle the same logic of course applies to a bearish reversal like you can see here the important point is that you can use this pattern to help in the confirmation of

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any type of support and resistance line it can be standard support and resistance channels pitchforks Dynamic lines like moving averages and Ballinger bends Fibonacci levels and so on another important information we can find in the footprint is the relationship between

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price and volume Delta volume Delta is nothing more than the difference between ask and bid volume as we saw earlier a bullish candle usually has positive Delta and a barish candle usually has negative Delta positive Delta means more

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volume in the ask which agrees with the idea of buying aggression negative Delta means more volume in the bid which agrees with the idea of selling aggression however bullish candles don't always have positive Delta and bearish candles don't always have negative Delta

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this is known as Delta Divergence this is important because if all that happened in the ask was related to trading activity directed to adding buying pressure in the market and all that happened in the bid was related to

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trading activity directed to adding selling pressure in the market Delta Divergence would not exist but it certainly does Delta Divergence is a sign of absortion so it complements the patterns we saw earlier when a bullish candle shows negative Delta it is a sign

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that buyers are being absorbed when a bearish candle shows positive Delta it is a sign that sellers are being absorbed for example in this image you can see that the candle highlighted is bearish and it has positive Delta that

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perfectly complements the fact that we see price close above imbalances in the as column which would be a sign of buying initiation another detail here is that these are stacked imbalances notice how price continues going up afterwards confirming the notion that sellers got

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absorbed by more powerful buyers the footprint showed the volume Delta in each candle but we can also observe it cumulatively over time in what's called cumulative volume Delta or cvd the advantage here is spotting exhaustion and absortion signals this

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works similarly to spotting Divergence signals in oscillators in the sense that we compare the evolution of price extremes with the corresponding Extremes in the cumulative volume Delta let's study the exhaustion and absortion patterns if price is creating higher

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Highs but the CBD is making lower lower highs it means that buyers are losing Steam and price might reverse to the downside soon that is the buying exhaustion if price is making lower highs and then CBD is making higher

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highs it means that buyers are trying to go up but sellers are absorbing them so this movement is not being represented in price action this is also an indication that price will go down this is the buying absortion

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pattern if price is creating lower lows but the cvd is making higher lows it means that sellers are losing Steam and price might reverse to the upside soon this is the selling exhaustion if price is making higher lows and the cvd is making lower lows it

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means that sellers are trying to go down but buyers are absorbing them so this movement is not being represented in price action this is also an indication that price will go up this is the selling absortion pattern we can of

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course use the cumulative volume Delta Divergence patterns to Conta visualize what happens with price imbalance and price Delta relationships in the footprint another important tool of orderflow analysis is the volume profile the volume profile is a variation of

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style Meers Market profile it simply displays the activity across different price levels over a series of candles so it's a volume at price too Market profile is similar but it shows the level of activity in each price level

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based on time instead of volume let's learn the main features of the volume profile and then we'll learn how to use it for market analysis the volume profile is a horizontal histogram that displays the level of activity in each price level

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based on volume the footprint shows the volume action inside the Candlestick but the volume profile shows the volume action across a series of candlesticks these two tools are actually very similar just like in the footprint in the volume profile we have

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the value area which which represents 70% of the traded volume in What's called the PC or point of control which is the price level with the largest volume or the peak of the histogram some Traders choose to use a

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value area setting of 40% to get more precise readings since the 70% can be too wide sometimes in the volume profile areas of high volume show areas of price acceptance or balance meaning areas where buyers and sellers relatively

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agreed about the fair value of the market recall that these areas can act as magnets for Price areas of fair value are also areas of high liquidity areas of low volume in the profile show areas of price rejection or

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imbalance meaning areas where buyers and sellers disagreed about fair value areas of imbalance shown by low volume in the profile have low liquidity recall that in areas of low liquidity price action can travel greater distances with less Market AC ity areas of low volume can

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repel price all of this of course assumes that no new significant information has changed the perception of buyers and sellers in summary areas of fair value shown by higher volumes in the profile tend to attract price action areas of

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imbalance given by lower volumes in the profile tend to repel price action this is very useful to judge the quality of support and resistance levels and the power of supply and demand Zone in the chart there are many details about the

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volume profile but for the context of this course this tool is very useful to identify previous areas of fair value where price might get attracted to in the future and reverse for example in this chart you can see that I plotted

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the volume profile in the Upper price movement from A to B the idea here is to understand where in this trend was the fair value area which is highlighted by the space between blue lines price comes back to the fair value area later on and

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resumes direction to the upside from this example it's clear that the areas of fair value are relative to where we plot the profile for example if we change the profile to this upward price movement the fair value area changes and we end

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up catching another demand Zone price does react to this demand Zone as well in summary different profiles will point to different fair value areas so it's important to contextualize the volume profile with other tools in order to extract the greatest value from it let's

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look at some examples of how these different order flow techniques can work in combination in this chart we have the minis SMP 1H hour time frame observe that I have marked Market extremes from 1 to 3 in the Candlestick chart we can

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see a small volume profile plotted on the downward movement from 1 to two the idea here is to detect the fair value area of that particular movement and its point of control which is represented as the red line the indicator at the bottom

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is the cumulative volume Delta in this example between lows 2 and three we have a selling absortion example meaning that the CBD is producing lower lows showing an accumulation of negative Delta but at the same time price action is not being

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able to go down this means that sellers are being absorbed by buyers which is of course a bullish signal in this case price is reaching the point of control as support in number three and that is happening in the context of a selling

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absortion in the cumulative volume Delta indicator this is a good moment to employ the footprint chart in order to understand what's happening with the candlesticks that are touching the point of control as support that will give us further Insight onto why price reacted

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so violently after the point of control here we have the footprint chart of those two candles in the first candle we have price closing below two stacked imbalances and one single imbalance in the bid which is a sign of selling

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initiation however we do see price closing above an imbalance in the ask which is a sign of buying initiation the story here is that for the most part this candle had a lot of selling power until it met the support

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Outline by the point of control we just talked about after touching the line we can indeed see buyers emerging at the bottom notice also that we do see a high volume node occur below the close of the candle

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that means that the greatest point of battle between buyers and sellers happened there in the area where the buying initiation began to take place with that said price closed within the fair value area which is an indication that buyers and sellers relatively agree

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about the fair value at least in this Candlestick in isolation in terms of price Delta relationship we can see that there is no Divergence we have a clearly bearish candle with a negative Delta a positive Delta in this scenario would have been a

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stronger piece of evidence to the upside in the next candle we see a strong bullish move the first thing that draws attention here is the absence of imbalances in the bid and price closing above multiple imbalances in thees

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suggesting a strong buying initiation other than that we see price closing above the high volume node and the whole fair value area indicating that now there is an imbalance buyers and sellers are not agreeing about the fair value like in

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the previous Candlestick Delta is positive confirming everything we just just saw the story given by the footprint can be summarized as follows price encountered a support while it was going down with violence and a small degree of buying initiation began to

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take place in the next scandle we see very strong buyers initiating a movement with very clear signs that scenario ended up in a very large bullish move afterwards let's also now forget about the origin of the support line given by

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the point of control of the volume profile and the fact that all of the this was happening within a selling absortion in the cumulative volume Delta indicator let's now look at what happened in the same time but now in the

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imin Dow Jones futures recall that the S&P and the Dow Jones are highly correlated so it's not uncommon for relatively the same opportunities to emerge in different ways in these markets in this chart you can see that I

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plotted an endro Pitchfork in Market extremes one 2 and three the Pitchfork then gives us a projection about the end of four at the median line orderflow analysis would enter the scene here to Aid in the confirmation of the median

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line as a support level so let's observe the footprint of the candles that interacted with the median line in this case in the first candle we have ambiguous readings in relation to imbalances in the bid and ask columns we

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have price closing above and below both imbalances in the bid and ask let's contextualize that with other elements of the footprint in the scandle it's pretty clear that most of the volume happened in the lower Shadow judging by

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the darker colors in there two important details here are that price seems to be moving away from the fair value area notice how it closes almost at the value area high that gives the impression that buyers and sellers started to disagree

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about the fair value here the second detail is that we have Delta Divergence meaning that we have a bearish candle with positive Delta and that is a sign of selling absortion this is confirmed in a way by price closing above the

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stack bid in balance at the very bottom of the candle in the next candle this notion is confirmed the ambiguity in the imbalances disappears we have price closing above a series of imbalances in the ask and one imbalance in the

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bid we also have price closing above the fair value area and notice also how the fair value in this candle is higher than the fair value area from the previous candle Delta Divergence also disappears and we now have a Delta that agrees with

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Buyers when you combine all these elements in a context we can see price turning at the medium line of the Pitchfork and the result is already obvious a massive upper movement just like we saw in the S&P as you can see in

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these examples order flow analysis gives a more granular view of what's happening between buyers and sellers it's almost like putting candlesticks on an X-ray machine some people claim you should stop using candlesticks and focus on the footprint instead that's misleading

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recall that candlesticks are the best representation of price the footprint is about volume activity price and volume are the two types of information generated by the market but price is at the top of the hierarchy volume only helps contextualize what happens the

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greatest power comes when we combine these tools not when we choose one over the other we can go a lot deeper into order flow analysis but this serves as an introduction let's now move on to the advantages and disadvantages of using

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orderflow starting with the advantages number one order flow is an effective way of analyzing volume action which in combination with price action forms a reliable framework of analysis two it provides multiple ways of seeing Market information in ways that might not be

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obvious by looking at Price action in isolation three it allows traders to put an x-ray on price reversals four it provides granular Market Insight while analyzing the real-time reliab ility of support and resistance levels which is fundamental in any serious training

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strategy five it can also provide new ways of seeing support and resistance levels that might not be obvious just by looking at Price action there are of course a few disadvantages too number one orderflow analysis can be overwhelming to learn in the beginning

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due to the way the tools work and the intricate nature of Market micr structure two like we saw order flow analysis is not the void of problems there is the problem of ambiguity the problem of manipulation and the problem

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of lack of transparency even though there are ways of dealing with these issues they cannot be completely eliminated three orderflow tools can generate confusion if the trader lacks the ability to put these tools under the appropriate perspective four the

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real-time analysis of orderflow tools to validate support and resistance levels requires Great familiarity with the contextual analysis of footprint Elements which can be a challenge especially in lower time frames since market analysis requires greater speed this is it for this course I hope you

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have found value in it if you wish to go deeper into price action reading please check out my course called fractal trading mastering price action and Beyond in the video description for more information visit my website fractal flowpro

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docomo at support froff flowpro docomo the video please help support the channel by clicking the like button subscribing to the channel activating the notifications leaving your feedback Below in the comment section and sharing this video with your trading Community

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thank you very much for watching and I hope to see you in the next videos take care

Topics:order flow tradingauction market theorymarket microstructureprice discoverymarket profilevolume profilelimit ordersstop ordersfair valueprice action

Frequently Asked Questions

What is order flow trading and how does it differ from technical analysis?

Order flow trading analyzes the real-time dynamics of how buy and sell orders are placed, matched, and executed, providing insights into price formation beyond historical pattern analysis used in technical analysis.

What is the auction market theory?

Auction market theory views the financial market as an auction where buyers and sellers interact to find a fair value price, balancing supply and demand through a bidding and offering process.

How do balanced and imbalanced markets affect price movement?

Balanced markets are sideways and represent areas of acceptance where buyers and sellers agree on price, while imbalanced markets are trending and represent areas of rejection that initiate price discovery for a new fair value.

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