Order Flow Charts: The Key to Understanding Market Dynamics in Day Trading
- UC Trading
- Oct 11, 2021
- 10 min read
Updated: Jun 29, 2023
Welcome to our comprehensive guide on order flow charts, an indispensable tool for day traders looking to gain a deeper understanding of market dynamics and make well-informed trading decisions. In this article, we will delve into the intricacies of various types of order flow charts, specifically focusing on the total volume order flow chart, bid x ask chart, and delta order flow chart. By the end of this guide, you will have a solid grasp of how to interpret these charts and effectively incorporate them into your trading strategy. So, let's dive in and demystify the world of order flow charts!
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1. What are Order Flow Charts?
Order flow charts are powerful tools that allow traders to gain deeper insights into market events by providing additional transparency and real-time analysis of historical and current data. These charts can be displayed in various time frames, typically ranging from one minute (M1) to five minutes (M5), and offer valuable information for traders.
The three most common types of order flow charts are total volume order flow, bid x ask order flow (footprint), and delta order flow. These charts can be customised with filters to enhance visibility and make it easier to identify relevant parameters based on individual trading strategies.
2. Comparison Candle Stick Chart VS Order Flow Chart
When comparing a traditional candlestick chart with an order flow chart, both display the open, close, high, and low prices. However, the order flow chart goes a step further by providing additional details. It showcases the contract volume traded by sellers and buyers at each individual price level, allowing traders to analyse the distribution of trading activity more comprehensively.
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
.. can see how the buy and sell orders affect the price
.. better assessment of whether the market will continue its trend
By utilising order flow charts, traders can gain a deeper understanding of market dynamics and make more informed trading decisions based on the precise information provided by these charts.
3. THE MOST COMMON ORDER FLOW CHART TYPES​
Total Volume Order Flow Chart
Bid x Ask Order Flow Chart
Delta Order Flow Chart
3.1 Total Volume Order Flow Chart
The total volume order flow chart is a powerful tool that provides valuable insights into the trading activity within a given market. By analysing this chart, traders can gain a better understanding of volume concentration at different price levels and identify areas of significant interest. Here's a breakdown of the key aspects related to the total volume order flow chart:
Explanation of the Total Volume Order Flow Chart
The total volume order flow chart visually represents the total volume of buy and sell orders executed at various price levels over a specific time period. It displays the distribution of trading activity throughout the market.
Extract from a volume order flow Sierra Chart template.
Formula
Bid traded volume + ask traded volume = total volume
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Sample
700 + 350 = 1050.
Benefits and Insights Gained from Analysing the Total Volume Order Flow Chart
By studying the total volume order flow chart, traders can identify key support and resistance levels. High volume clusters indicate areas where significant trading activity has occurred, suggesting strong interest or price levels where buyers or sellers are active.
How to Identify Areas of Significant Volume Concentration
Traders can identify areas of significant volume concentration on the total volume order flow chart by looking for clusters or peaks in the volume histogram. These areas often represent levels where buying or selling pressure has been substantial and can serve as important reference points for future price movements.
The volume order flow chart can be enhanced with a horizontal bar profile, resembling the volume profile. This visual representation offers an alternative method of illustrating volume, providing traders with valuable insights to make informed trading decisions based on the observed patterns and trends.
Extract from a volume order flow Sierra Chart template.
By understanding the nuances of the total volume order flow chart, traders can gain valuable insights into market sentiment, identify key price levels, and anticipate potential trading opportunities. In the next section, we will explore the delta order flow chart, another powerful tool that complements order flow analysis.
3.2 Bid x Ask Order Flow Chart
The bid x ask chart, also known as the footprint chart, provides traders with valuable insights into order flow imbalances and the dynamics between buyers and sellers in the market. By analysing this chart, traders can identify areas of significant buying or selling pressure, as well as potential supply or demand imbalances. Here's a breakdown of the key aspects related to the bid x ask chart:
Introduction to the Bid x Ask Chart (Footprint Chart)
The bid x ask chart visually represents the volume traded at each price level on both the bid (buying) and ask (selling) sides of the market. It displays the footprint of market activity, allowing traders to assess the distribution of buying and selling pressure.
Extract from a bid x ask order flow Sierra Chart template.
Formula
Bid traded volume x ask traded volume
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Sample
700 x 350
Note: The x does not represent the mathematical multiplier but serves as a spacer.
Analysing Order Flow Imbalances and Supply/Demand Dynamics
By studying the bid x ask chart, traders can identify areas where buying or selling volume significantly outweighs the other. These imbalances can indicate potential price movements or areas where supply and demand are out of equilibrium.
The bid x ask order flow chart offers a comprehensive view of volume traded at specific prices, indicating whether it has been predominantly traded by buyers or sellers. This chart type is instrumental in detecting changes in momentum or order flow. Moreover, the bid x ask chart exclusively focuses on market orders, providing an additional advantage in identifying market pressure and order absorption.
Spotting Areas of Significant Buying or Selling Pressure
Traders can pinpoint areas of significant buying or selling pressure on the bid x ask chart by looking for clusters or spikes in volume at specific price levels. These areas suggest high market activity and can act as support or resistance zones.
Furthermore, this type of order flow chart has the ability to visually represent imbalances on the respective buying and selling sides. An imbalance refers to a notable disparity between buyers and sellers and is displayed diagonally on the chart. Traders have the flexibility to set their own imbalance factor, typically ranging from 3 to 4 respectively 300% to 400%. The chart automatically highlights the imbalances based on the user-defined 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. ​
By incorporating the bid x ask chart into their analysis, traders can gain valuable insights into order flow imbalances, spot areas of significant buying or selling pressure, and identify potential supply or demand imbalances. In the next section, we will provide tips for effectively interpreting order flow charts, combining them with other technical indicators, and integrating them into your trading strategy.
3.3 Delta Order Flow Chart
The delta order flow chart is a valuable tool that allows traders to gauge the strength of buying or selling pressure in the market. By analysing the net difference between buying and selling volume at each price level, traders can identify shifts in market sentiment and potential trend reversals. Here's a closer look at the key aspects of the delta order flow chart:
Understanding the Delta Order Flow Chart and Its Significance
The delta order flow chart focuses on the difference between the volume of buying and selling orders at each price level. It provides insights into the balance of power between buyers and sellers in the market. Positive delta values indicate bullish sentiment, suggesting more buying volume, while negative delta values indicate bearish sentiment, suggesting more selling volume.
Extract from a delta order flow Sierra Chart template.
Formula Ask traded volume - bid traded volume = delta ​ Sample 350 - 750 = -400 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.
Interpreting Positive and Negative Delta Values
Positive delta values suggest that buyers are in control, potentially indicating upward price momentum. Conversely, negative delta values suggest that sellers have the upper hand, potentially signalling downward price pressure. Traders analyse changes in delta values to identify potential trend reversals, confirm breakouts, or spot market exhaustion.
Using Delta Analysis to Identify Trend Reversals and Breakouts
Traders can utilise delta analysis to identify potential trend reversals. Divergences between price and delta can provide early indications of a possible change in market direction. Additionally, confirming breakouts with delta analysis can help validate the strength of the breakout and provide confidence in the trading decision.
By incorporating the delta order flow chart into their analysis, traders can gain insights into the buying and selling pressure in the market, identify potential trend reversals, and validate breakout opportunities. In the next section, we will explore the bid x ask chart, also known as the footprint chart, which offers valuable information about order flow imbalances and supply/demand dynamics.
4. ORDER FLOW CHART COMBINATIONS
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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
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5. Tips for Interpreting Order Flow Charts
Successfully interpreting order flow charts requires a combination of price action analysis skills and an understanding of market dynamics. To effectively utilise order flow charts in your trading strategy, consider the following tips:
Considerations for Volume Clusters and Support/Resistance Levels
Analyse the volume clusters on order flow charts to identify areas of significant buying or selling activity. These clusters often indicate important support or resistance levels where price may react or consolidate. Pay attention to volume spikes or areas of accumulation/distribution to gauge market sentiment.
Identifying Delta Divergences and Their Implications
Monitor changes in delta values on delta order flow charts to identify potential divergences with price. Divergences occur when price moves in one direction while delta moves in the opposite direction. These divergences can signal a potential trend reversal or continuation, providing valuable insights into market sentiment.
Recognising Absorption Patterns and Market Sentiment Shifts
Watch for absorption patterns on order flow charts, where large volume trades are absorbed without causing significant price movement. Sudden absorption of buying or selling pressure suggests a potential shift in market sentiment. This can be an indication of impending reversals or consolidation before a continuation of the trend.
Evaluating Order Flow Imbalances and Potential Price Movements
Pay attention to order flow imbalances on bid x ask charts, as they reveal areas where buying or selling pressure is significantly higher. Such imbalances can precede price movements and offer trading opportunities. Look for areas where supply or demand is out of equilibrium and consider potential price reactions.
By incorporating these tips into your order flow analysis, you can enhance your understanding of market dynamics, identify potential trading opportunities, and make more informed trading decisions. Remember, practice and experience are key to mastering the interpretation of order flow charts. In the next section, we will discuss how to integrate order flow charts into your overall trading strategy.
6. Integrating Order Flow Charts into Your Trading Strategy
Incorporating order flow charts into your trading strategy can provide valuable insights and enhance your decision-making process. To effectively integrate order flow analysis into your trading approach, consider the following strategies:
How to Incorporate Order Flow Analysis Alongside Other Technical Indicators
Combine order flow charts with other day trading tools, such as the candle stick chart, market profile or volume profile. By incorporating multiple tools, you can gain a more comprehensive view of market conditions and increase the reliability of your trading signals.
Adjusting Chart Settings and Timeframes for Optimal Results
Experiment with different chart settings and timeframes to find what works best for your trading style and preferred market analysis. Shorter timeframes, such as intraday charts, can provide more detailed order flow information, while longer timeframes may offer a broader perspective of market trends and significant levels.
Developing a Systematic Approach to Utilising Order Flow Charts
Create a systematic approach for incorporating order flow analysis into your trading routine. Define specific criteria for interpreting order flow charts and establish rules for entry, exit, and risk management. Consistency and being a disciplined trader are crucial in maximising the benefits of order flow analysis.
By integrating order flow charts into your trading strategy, you can gain a competitive edge in the financial markets. However, it is essential to remember that order flow analysis is just one component of a comprehensive trading approach. Continuously refine your strategy through practice, observation, and adaptation to market conditions.
7. Conclusion
In conclusion, order flow charts, such as the total volume order flow chart, delta order flow chart, and bid x ask chart, offer invaluable insights into market dynamics and can greatly enhance your day trading activities. By mastering the interpretation of these charts, you can gain a competitive edge and make more informed trading decisions.
Throughout this comprehensive guide, we have explored the intricacies of order flow charts and provided practical tips for analysing and interpreting them effectively. From identifying volume clusters and support/resistance levels to recognising delta divergences and absorption patterns, each aspect of order flow analysis adds to your understanding of market sentiment and potential price movements.
Integrating order flow charts into your trading strategy requires a systematic approach, combining them with other trading tools and adjusting chart settings and timeframes as needed. It is through consistent practice, continuous learning, and disciplined execution that you can truly harness the power of order flow analysis.
Remember, order flow analysis is just one piece of the puzzle in your overall trading approach. It should be complemented by sound risk management, thorough research, and an understanding of market fundamentals. As you progress in your trading journey, refine your strategy, adapt to changing market conditions, and remain committed to improving your skills as a trader.
To truly master the art of trading with order flow charts, consider enrolling in a comprehensive order flow trading course. These courses offer in-depth training on how to effectively interpret and utilise order flow charts as part of your trading strategy. By joining a futures trading course, you will gain access to expert guidance, practical examples, and hands-on exercises that will help you develop a deep understanding of order flow analysis and its application in real-world trading scenarios.
So, armed with the knowledge and insights gained from this guide, embrace the world of order flow charts, immerse yourself in their analysis, and embark on a path to becoming a more successful and confident day trader. With practice, patience, and perseverance, you can navigate the complexities of the financial markets and achieve your trading goals.
Happy trading!