AN INTRODUCTION TO ORDER FLOW CHARTS

The following article provides and introduction to the various types of order flow charts and how to use them. The general purpose of order flow charts is to visualise the huge amounts of data generated by exchanges in trading. Order flow charts provide traders a visual opportunity to gain more insights and transparency into the trading process in real time. This significantly increases the availability of essential information such as volume and order flow which is crucial for day traders.

 

What are Order Flow Charts?

Order flow charts provide the opportunity to look into the candles. This essential additional information enables historical and current market events to be analysed transparently and in real time. The order flow chart can be displayed in various time frames but is usually used in time frames from one minute (M1) to five minutes (M5).

 

The most common illustrations of an order flow candle are volume order flow, bid x ask order flow and delta order flow. In addition, these representations can be visually individualised with filters that, depending on the strategy, corresponding parameters can be more easily recognised.

Comparison of Candle Stick Chart to Order Flow Chart

The illustration shows a candlestick and a bid x ask order flow bar. Both candles show the candle`s open, close, high and low. In addition, the order flow candle shows the contract volume traded on the seller side (left) and contract volume on the buyer side (right) on each single price level.

Candle High

Candle Close

Candle Open

Candle Low

Bid Side

Ask Side

Imbalance

Having those additional information available, the trader ..

 

  • .. is closer to the actual market happenings

  • .. gets an insight to the candle

  • .. receives in depth market information in real-time

  • .. can see the volume on each price level separated in buyers and sellers

  • .. can discover price and volume patterns that cannot be seen with a regular candle chart

  • .. can see how the buy and sell orders affect the price

  • .. better assessment of whether the market will continue its trend

 

Overall it leads to more self-confidence when trading since the market is understood more in detail.

 

The most common Order Flow Chart Types

  • Volume Order Flow Chart

  • Bid x Ask Order Flow Chart

  • Delta Order Flow Chart

 

Volume Order Flow Chart

The volume order flow chart illustrates the total volume that was traded at each price level. This happens regardless of whether the respective volume was traded on the bid or ask. This chart type helps in recognising large volumes at specific levels.

Extract from a volume order flow chart via trading platform Sierra Chart.

Formula

Bid traded volume + ask traded volume = total volume

Sample

700 + 350 = 1050.

 

The volume order flow chart can be equipped with a profile illustrated in horizontal bars and becomes, therewith, somewhat similar to the volume profile. The visualisation represents an additional way of illustrating the volume and can help the trader in making reasonable trading decisions.

Bid x Ask Order Flow Chart

This order flow chart type splits the total volume into the seller and buyer side. It illustrates the volume traded on each side a certain price level.

Extract from a bid x ask order flow chart via trading platform Sierra Chart.

Formula

Bid traded volume x ask traded volume

Sample

700 x 350

 

Note: The x does not represent the mathematical multiplier but serves as a spacer.

 

The bid x ask order flow chart provides an overview of how the volume is traded at a certain price and whether it has been traded more on the buyer or seller side. This chart type helps in identifying a change in momentum respectively order flow. Also, this chart type only illustrates market orders providing a further advantage to identify market pressure and order absorption.

Additionally, this order flow chart type can illustrate imbalances on the respective trading side. An imbalance is defined as a significant difference between buyers and sellers and is read diagonally. The imbalance factor can be set individually and is usually between 3 and 4 respectively 300% to 400%. The inequalities are marked automatically with regards to the individual settings.

 

Formula

Bid x Ask (min. 3x larger than bid) = imbalance (factor 3)

Sample

50 x 160 = buyer imbalance

 

Imbalances help to identify inequalities in the buying versus selling behaviour and, consequently, provide a detailed view of the actual market happenings.

See a sample imbalance illustration in the order flow candle above.

 

 

Delta Order Flow Chart

The Delta order flow chart illustrates the difference between buy and sell market orders. The delta is shown in positive or negative numbers – a positive delta illustrates that there are were more aggressive buyers active and, in contrast, a negative delta illustrates that more aggressive sellers were active.

Extract from a delta order flow chart via trading platform Sierra Chart.

Formula

Ask traded volume - bid traded volume = delta

Sample

350 - 750 = -350

 

The delta here is -350 or in other words there were 350 more contracts traded on the bid side than on the ask side.

 

This order flow chart type provides an opportunity to measure the aggressive buying and selling pressure at a price level and indicates which side is more aggressive - buyers or sellers.

 

 

Order Flow Chart Combinations

Order flow charts can also be combined in various ways to have multiple order flow information in one chart. Combinations of the order flow charts may be:

  • Bid x Ask Order Flow + Volume Combo

  • Bid x Ask Order Flow + Profile Combo

  • Bid x Ask Order Flow + Delta

 

See more order flow variations to create a clean day trading template with Sierra Chart.

Order Flow Charts Platforms

Among other platforms, Sierra Chart and ATAS are high quality trading platforms that can illustrates the market’s order flow data. Sierra Chart is available at comparably low subscription fees but recommends an IT affinity to set up the charts correctly. Alternatively, it requires to look for an already created template. The platform provides almost infinite options to individualise the trading platform to the individual’s needs.

 

On the other hand, ATAS is more intuitive in its handling but also charges higher subscription fees and is less individualizable than Sierra Chart.

 

Use of the Order Flow Charts

Due to the large number of possible applications and the different order flow chart types, there are numerous ways to use it.

Examples

Identify levels protected by big players.

Identify levels of significant market order absorption.

Identify levels of increased trading interest.

Conclusion

Order flow charts have an essential advantage over the classic charts. In addition to the price, the trader can also see the respective volume and the order flow in real time.

The data are logically illustrated, so that the information regarding volume and order flow can also be used without having to read the order book.

The large selection of order flow types also provides the opportunity to adapt those chart types to the trader’s individual preferences and trading approach.

 

Despite the named advantages, the use of order flow charts, like any other tool, is limited and its successful use depends to the trader’s skill and experience. The order flow chart separately will not provide a competitive advantage. However, when used correctly and in combination with supplementary tools it represents an essential tool for successful trading.

Feel free to contact us in case of any questions.

 

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