Transcription
In this video, I will teach you from scratch what is orderflow and how you can use it in your trading. Orderflow, unlike price action, uses a deeper level of information. It uses charts that show you real interaction between buyers and sellers and the battle between big traders and institutions that happens in the market every single day. This is a trading style that is widely known and used in the institutional trading space and that I've used to trade live in front of millions of people all over the internet and to trade profitably my personal account over the last decade.
In this complete guide, we will start from what orderflow actually is, how orderflow creates price movements, and how you can read orderflow in real time to find the best trading setups. And I will show you my favorite orderflow tool that allows me to filter out only the big traders to truly follow the footprint of the smart money in the market. Let's get started.
By the way, I will share with you this entire map on my Telegram channel. Let's start by understanding what the market is. So, the market is made by the interaction of two forces. The intent to buy and the intent to sell rooted through a central exchange for regulated markets and represented as volume.
Now, let's see how this interaction unfold. We have two type of forces in the markets: the aggressive participants and the passive participants. And in this example, you can see on the right side the order book and on the left side the market orders. Now, let's assume that a market order by 25 contracts, it's about to hit the book. And these aggressive buyers are accepting the prices by the best ask, the so-called passive sellers, the passive forces that we saw before that are providing 33 units at a price level of 101. Now the 33 units of passive sell orders are sufficient to satisfy the 25 buy market orders that are the aggressive forces and after execution, only eight sell orders remain in the best ask and the price moves up to 101.
Price is now here. Here we can see a new candle with the orderflow tool that represented the executed order called the footprint and a record, a detailed record of what occurred on both the bid on the left side and the ask on the right and it provides a list of all the aggressive sellers who entered the market and on the right of all the aggressive buyers that joined the action. Now the 41 passive buy orders are sufficient to satisfy the interaction of the 25 sell market orders and after the execution, there are 16 contracts here buy orders that remain in best bid and the price moves down to 99. The footprint now has recorded both the 25 execution that we saw before and the sell order that we see executed on the horizontal level 99.
In the previous case, we have seen how the price moves and interacts when the best bid and ask are able to satisfy the market orders that are coming. Now we need to see what happens when the best bid and ask are insufficient to fulfill the demand. So when we see 75 aggressive participants market order that enters here, what happens to the market? And in this case, the 75 buy market order found only eight contracts on the 101 level. So the best ask and they move directly to 102 to fill the remaining 67 contracts. And you have a reflection on this on the footprint that shows you the executed order of 25 on the 99 and 32 on the 101. So we move to the 102 level with 67 contracts of aggressive market participants. The 102 level doesn't have enough sell limit orders to be able to satisfy the buy market demand. So considering the order matching execution, moved to the next level available that is 103. So we have in the end on the footprint, we have 32 executions on the 101 level and 42 contracts executed on the 102 level and we are moving to the next level that is 103. In this case, the 75 aggressive orders that we saw in the beginning received and experienced a slippage of three ticks, going to be filled completely at the 103 level with 31 remaining contracts available.
So to summarize, we have two forces that have different features. We start with the passive forces, the limit orders that have pricing authority and price certainty because they choose the level where they want to be filled, but they experience execution uncertainty. So they don't have the guarantee to be filled because to be filled, someone else needs to accept this level. The market orders have execution authority and execution certainty because when you press buy market, it's a guarantee that you will be executed, but you don't know where. You don't have price certainty because you can be filled, for example, you can press buy market on the 101 and be filled at 102 because maybe your order experiences execution. That's the reason they have different features. The market orders have price uncertainty and the limit orders have execution uncertainty.
So now we are on the orderflow platform, deep charts, and we will watch some live interaction between execution. So aggressive orders and passive liquidity. As you can see now, we have 13 executed sell market orders at this horizontal level 6,841. And now the price is rejecting. You can see that the level of the price is getting lower. This means that aggressive sellers are executing orders at 6,841 and they are meeting the liquidity on the downside and they are pushing the passive liquidity down. They are eating levels on the book on the downside. And this is the reason you are watching this interaction and price going down because as we saw before in the example, and you can see this also from the closure of the candle in the footprint. The candle is in the majority controlled by aggressive sell orders and is showing you also the level where these sell aggressive market orders are concentrated. That is the horizontal level where you see the yellow box and the 53 aggressive orders executed. And on the book, we can see on the left side that the liquidity is more thick on the upside. As you can see, there are 28, 33 here and only 10. And this is the reason we saw exactly in real time the sweeping of the book. So the aggressive orders entering on the sell side and eating three different levels on the book. So the, uh, the aggressive orders, the sell aggressive orders are pushing and eating levels of the book.
Now you are seeing an interaction where we have a maximum level of aggression that is the 6,840 where the buyers are in complete control and now the auction is changing. Now the aggressive market orders are pushing the passive liquidity up. As you can see, sellers again protecting and we are watching the live interaction of the market. So every time we go to this level, the 6,841.5, you can see that the aggressive sell order enters back and pushes the liquidity level down. Now we are back to 6,840.5. So you can expect that now the buyers protect this level and these aggressive sellers get absorbed completely on this level. Let's see how it goes. As you can see, we have only five and 16 here and we have 23, 25, 18, 14. So the path of least resistance is on the upside. This is what I call the path of least resistance and this is exactly what happened. As you can see, the price reached this level, rejected, and now it's going back to the fair value of this range.
Now we are watching this interaction in London session. So there is not a huge amount of volatility and, um, interaction between participants, but as you can see, we saw the horizontal level of control of the sellers that is the 6,841.5 and the horizontal point of control of the buyers that is the 6,840 and this is the range where they interact and this is the range where you see that the interaction between aggressive and passive orders shifts.
From the example that we saw before, we understood the two forces and we understood their role. The role of aggressive market forces is creating pressure, okay, moving the market, and the role of passive orders is creating resistance, and you can see this by observing the book. Let's make this example. Okay, we have 122 total contracts on this block here on the book and we have a total of 273 on this part. Okay, which part do you think will be more difficult to pierce from the side of aggressive market participants? Of course, this one is the easier side to pierce. This one is the more difficult. Why? Because this one holds more resistance from passive market participants. So you need a lot more aggression to pierce through this.
Let's go on and let's understand in this example that from the concept of path of least resistance, it's easier for the market to continue higher here and pierce through this passive orders instead of breaching through this level. The concept of probability and the concept of what's easier doesn't mean that it's always like this. But it's an information that we can use.
In this example that we have here, we have a breakdown of forces. We have buyers on the right side, the sellers on the left side. And here we can see a huge effort on the top from the buyers to break this level that got completely absorbed by passive forces. The sellers on the other side received a lot of result, more because they did less effort to achieve more results. The candle closed sell here. So we have a short candle with less, less effort from the sellers and a lot of effort from the buyers that received zero reward. This is the perfect case of absorption. Why? Because you have no reward for buyers and you have a lot of buy pressure. Probably this candle will have positive delta but negative closure. This is the textbook example for absorption.
Let's see now an example of aggression. So high effort and high results. You have the same breakdown. So on the right of the candle, you can see the aggressive market participants on the buy side and you can see that this strong move on the upside had a lot of effort backing it and they got also rewarded. Probably here we see a lot of levels from the book that got swept and we managed to close with a full green candle. It means that in this case, the big buy effort got rewarded and you have what we call an initiative auction and a confirmation of the aggression of the buyers. So in this case, you can probably guess that in the balance of forces, buyers won the battle and it's higher probability to see a continuation on the next candles.
Now let's go through an example of book sweeping. So low effort and high result. In this case, we see a lot of executed orders on the bottom side of the candle and then we see a candle that closes with an amazing reward. So there is movement of the candle but there is an absence of participants. So we can see that there are no sell limit players in all these areas. There are, but they are few and price moves, but not the money. So in this case, we saw an example where the effort is low and the result is high because in this case, in this area that I'm lining up for you, there were no sell limit players. So a small aggression from the buyers swept multiple levels of the book.
Now let's introduce a new concept that is called delta. Delta is the difference between aggressive market participants on the buy side and aggressive market participants on the sell side. So it's the difference on the horizontal level from aggressive sell and aggressive buy market participants. And we can have two different representations of this information. We can have a horizontal visualization and we can have a vertical reference for the delta on the left side. What we are seeing here is a delta footprint profile and we can see, for example, that the delta is really high from the point of view of the sellers on the downside, but the candle closed by. This is the perfect absorption example that you can see from the delta footprint profile on the right side. If you want to use the vertical delta information, we have a market that is in a consolidation phase here and we can spot that all these aggressive market participants here got absorbed and the candle closed green. This is a potential continuation of the move and an absorption pattern that you can spot using the delta per candle in a vertical pack of data that is available on deep charts. And this one needs to be set because usually you will find the footprint on the left side that is showing you the bid and ask. You can set by choosing the difference between them and it's called specifically delta footprint.
Now let's see an example of initiative auction. So a concept that is usually representing follow-through and reward. In this case, we can see from the executed orders a constant aggression of the buyer. So there is consistent pressure on the upside, one side print that is also called imbalance, and you can use as a really strong point to join the trend when it's developing and you have a strong delta. So you have coherence of information, a strong delta, and a candle that closes on the upside and in this case, you can see that it's the delta that is leading the price on the upside. This is the best example that you can have of aggressive momentum and it's represented by what we call initiative auction that can also be spotted when you have an outline from the vertical volume with a reward from the close of the candle. So the market is telling you the price is closing on the upside. So you have an actual result and the volume is supporting this movement, closing above the average. This is aggressive market participants putting the feet on the gas and joining the trend on the upside and it's usually an amazing signal if you are a trend-following trader.
Now let's go through an example of absorption and we can see here that we have an absorption in the middle of the candle. Okay. And we have a value, so an efficiency, and the price is the white line that we can see here. And we have a sudden drop in the delta when this big aggression arrived from the market order. So the aggressive participant on the sell side and it got completely absorbed, got run through, and, uh, this market order got completely absorbed on this horizontal level and the price continued to push it down and close the candle long. So you have the price going up like ignoring this small inefficiency in delta and the delta follow-through the price and the candle closed long. This example here is the reason I always watch the matching of value and the matching of volume here. So what the volume is doing, what the aggressive market participants are doing, and what is the result. So the correlation between the effort and the results of the player.
If we go on the right, this one can be seen as a general absorption because from the horizontal volume, you can see a lot of effort here, but the candle closed green. So what is telling us that all this input of volume delta got absorbed and probably this absorption happened here and we will continue on the upside. The next example that we can have is an exhaustion. In this case, we can see that there is a decreasing volume. So the aggression of the market participants from the volume standpoint is getting lower and lower. And we have also a contrarian imbalance. So we have an imbalance at the top from the sellers. So you have the price going up, up, up, not being followed by the volume. So you have this divergence and the price snaps back to the value, to the efficiency of the market, and you can see that you have a rejection here. These signals are usually amazing opportunities to, uh, capitalize on a reversal trade. And from the concept of vertical volume, you can find an exhaustion where you can see that the market is pushing really strong, printing another green candle, but the volume is getting lower and lower. This is a dry-up in volume. And usually what you see this in a pattern order flow is that you have a sudden reversal in price.
Now let's go through the volume profile. Every time a limit order is matched with a market order, we have a transaction. Every successful transaction, we can visualize in a way that is distributed for each tick. And what comes out from this point of view is this distribution. This distribution is the volume profile. Now, when we are watching the volume profile, we are not extracting from the market information related to imbalance, not information related to aggression, but we are watching how market participants are interacting from a horizontal point of view.
If we go on the right, we can see that what the volume profile gave us, it's a Gaussian distribution where we have the majority of the volume being exchanged in this 68% and as we move from the mean, we have a condition that is called imbalance market, and if we manage to go out from the value area, usually it's where trends start.
Now going on the concept of value area. Value area is where the majority of the volume for the volume profile that you are visualizing is exchanged. And the value area is clearly defined by value area high and value area low. That are the points where the 68% of the volume of the distribution took place. The point where you can see the maximum level of transaction. For example, if we take this level here, we can see 90 transactions happening in this level. This one takes the name of the POC, the so-called point of control. Why point of control? Because from a fair value standpoint and from a concept related to single transaction, this one is the level that holds the most amount of transactions of the day. If we are talking about the daily volume profile distribution.
Now we can see that the highest density of executed transactions takes place here between the value area high and the value area low, and high execution means strong price acceptance. So institutions are really happy to transact in this area and big players can find a counterparty. This is the so-called balance market condition. Now going on this type of market can be traded with multiple strategies. Usually strategies that fade the top and the bottom using orderflow, and this market takes the name of range-bound or compression or consolidation, and is the driver of the trend that is coming after. Why you need to understand this? Because if you want to join the trend early in its development, you need to understand that when the price accepts and the volume accepts below the value area low or the value area high, the market participants are telling you that we are in a situation of out of balance. So the accumulation or the distribution is finished, and you are ready for the real move of the price.
Now let's go through the concept of low volume node. In our distribution of the profile, we will have some points where you can see that the price is really low. So on this level, the transaction was not so efficient. Okay, the delivery was not so efficient. So the price probably jumped from one level to the other with really low volume. And this is the levels where the interaction is inefficient. You have poor fills. You have dissatisfied market participants and you have low execution, no price acceptance. In this case, there is an absence of transactions. These levels are usually the most important levels. If you want to hop in in an imbalance level that is acting as a rejection. So let's say that we are balancing inside this condition and we manage to break and we create an imbalance here in the profile. Usually the market likes to rebalance the low volume node before continuing in the direction of the trend. So this area is a really important area from a volume point of view because it's an area where you don't have high density of executed transactions. So you don't have price acceptance and big players cannot find counterparties there. So it's areas where you usually see a ceiling or a bottom before resuming to the direction of the auction.
Now price discovery, bullish move, buy side intent, unfilled buyers due to low volume. Now let's go through an example of what I was telling you here. When you have a low volume node and the market goes in price discovery, you can clearly see a lot of days the price coming back to rebalance in this low volume node and using this as a pivot before resuming the direction of the auction. In this case, you have a lot of unfilled buyers due to the low volume node. This one is where you can use confluence and order flow patterns to join the market direction.
Now going to the auction market theory and market structure. How can you define where institutions, hedge funds, banks are building value? So big market participants by watching what for them is accepted as value. You can see from here the value accepted was this. When they go in a situation of out of balance, they come back and they go in price discovery on the downside, and we can mark the low volume node of this previous distribution. And this is exactly where the price likes to come back in the future. We are stationary here. So we accepted value on the downside. So this value area high becomes for us a strong rejection point that paired with the low volume node gives us all the market conditions to join the trend using order flow patterns on this level. After this, we can see that we have also a continuation setup. So when the price goes above the fair value that is this horizontal line, and you can use also the merge of this profile, the market slides back inside the value area, and you have the setup that brings the price from one side of the value area to the other side. You can also try to go in price discovery if the price is strongly directional. After this, we go aggressively down and we created another value area on the downside, and the market starts to accumulate. After this, we have an acceptance day. So we have a market shift in value and we print multiple levels of low volume node here. That is where the price will likely come to rebalance because these levels are inefficient price and volume delivery from institutions. We accept the value area here and we have our setup below the value area low joined with low volume node. And here is where we want to see what the market is telling us. After this, we continue the price delivery on the upside. We have horizontal value being built. And when we go back to the value area low and down, we do what we call the hook. So they do a failed auction, they try to break, they get rejected. So all this is a rejection area. And when you go back inside, you have your continuation trade and so on.
Now let's see how institutions are accepting this delivery of volume. We have the value building on the upside. This is what we call the P shapes where the buyers are really aggressive and you close the cash session on the upside. So you can expect a directional move also on the day after, and we see another acceptance of the value. We have the profile closing on the upside. So we expect another fading of the value area low to go high or a continuation trade where we break the value area high of the previous day. And when the day closes, as you can see, we continue to accept value. So we only consider long positions here after price having a hard time breaking the previous value area low. You can see that it also hooked the value area high from the downside. And this is what we like to call a fake out, a failed auction trap traders. And you can use all the tools of order flow to understand this in real time. And when you have this, usually the price slices through the value area to go to seek orders on the value area low. This is one really profitable setup with a high win rate. And when you shift the auction again, you have the shift here. You continue to search for positions lining with the general direction of the market when the market gives you a premium. This is the real concept of premium discount. When you are going lower with the value and the market gives you the opportunity to join the trend from a point that is considered expensive in the distribution of the volume. You have a trade that you can join, bringing it to the value area low or projecting it for additional price discovery on the downside. This is the institutional reference on how to analyze the bias using volume. So actual executed orders, not theory, and this should be your starting point to build your bias to confirm with all the order flow tools.
So now let's go in the chart of NASDAQ. We are using a template of deep charts that is representing the volume profile, specifically the cash session of the volume profile because it's giving us the majority of the volume of the day, and I only trade in the New York session for US indices because it's where the majority of the volume gets traded, and I find it from statistical validation the London session to be usually for US indices not so valuable to add to the profile. So I only use the cash session profile.
Now going through a single example, I want to break down for you everything that we saw live with the students of deep charts from a profile framing approach, and we will go through the last two months of volume and price. So from the 20th of November to the actual price action of the full two months from the point of view of profile, and we will see what information this volume distribution was giving us in terms of bias. We'll start from here and we can see that we will take this as the first reference. Okay, we have a value area here. So the majority of the volume gets traded here, and we will treat this as a neutral information. Okay, now after this, the market tells us they accept value. We have a strong move up. This is a P shape. So the buyers from a daily point of view are in control of the movement. You can see that also the POC is higher. It's located above the 50%. This means that this movement is really aggressive, and you have a clearly defined value area low with all these rejections on the downside. The gray area is all the rejection. So where the price never accepted, and this part is below the value area low. This usually acts as support. So we want to mark it in green. The bias is long. It's clear. We have a clear rejection area that is the value area low and all this absorption that happened during the cash session of this day. Okay. The day after, the market tried to break from the downside but rejected exactly below the value area low in their rejection point. So the gray area where they accumulated and absorbed the movement the day before, closing exactly at the same level. So these two profiles can be merged. You can merge them and you can see one piece of information because when they are overlapping on the same level, they are just telling you that they stayed in this balance area for two days.
After this, we have an acceptance the day after. Okay. We have a higher POC, value area high, and we have a really strong movement. As you can see, this is a double distribution profile where you have a really thin low. The first point that is interesting is where the value area low is located, and then you have a big profile on the upside where the majority of the volume got traded. So you can mark all this rejection area from the downside, and as you can see, the price stays stationary the day after, it stays inside. So what you can do, you can do from here, merge and do a double day profile on a single level, and you can have a really precise value area low point. The day after, the market accepts higher and comes to rebalance from the horizontal level here, exactly on this level, the 25,500, that is a psychological level, and these two profiles that you can see here are on the horizontal level, so you can also merge both of them. Okay. And as you can see, the auction is really clear. This was an amazing long trade. After this, you have three profiles on a horizontal level, also we can merge them, and you can identify how beautiful the rejection was that we saw from the value area low. All this information can be paired with order flow patterns to take precision trades.
After this, we have an acceptance, and then we start to notice something interesting. For two days, they reject the top here and they go lower in the P and the value area. So they don't have the value area matching, but they go down. So they are starting to distribute. So what you can do is noticing and putting this as a warning because you already rejected for today on the same level. This one could be a market shift. Okay. So you can put orange because you want to monitor this properly. The market tries to go back up again and fails. This stays still inside the same area. So you can decide to merge these two profiles and you can see that again, the third day, you have an amazing rejection. So the market is telling you that this is a strong wall, and you have a breakout of the previous value area low. So this day here is telling you, look, they are rejecting again. When you exit from this whole area of balance, you will have a trend, and this is our confirmation day. Look how much it was clear that they are continuing to push the low without accepting the high. You have a rejection, an amazing rejection here that gives us a clear trend. And as you can see from here, another test of the value area, amazing short here. Another test of the value area, amazing short here. Another test of the value area, amazing short. And another test and an amazing short.
After this, what we have? We have the market shifting the auction. So from a down profile, you go in an up profile. It's not a P shape. So it's still balance. You can use this as indecision. You can put blue instead of green. And then you have our P shape. Low volume on the downside, completely absorbed. And we have a strong P. What can we expect? That we will have the following days of strong trend up, and we have 1, 2, 3, and four days of strong trend up. Notice also how precise the value area low is as a rejection in the cash session. Also here, after this, you have a clear shift here. You can see up and down, and again from here, you want to start noticing the rejection area. Okay? Okay. So you want to start noticing the market joining the trend on the downside because you are going down with the auction. So you have one trade, you have down, you have all these rejections. You see they try to break the value area low. These two value area lows and all this was a fake out. They got rejected, and the market goes back down after this shift. So this one is an indecision day. Okay. Where the market changed the auction. Sorry, not an indecision day, a change of the auction here. And here you can see how they sustained this movement for three following days. After this, they try to shift down, they failed because this one, if you try a short, would have been a stop loss. The first stop loss in all these days, and they bring the auction up, and this is a setup that we saw in the live community together. This long. Okay. Also this long was a setup that we saw till the moment we shifted. And when we shift, we start to see the rejection on the upside, and the market collapsed. As you can see here, I took this short from here. Then it shifted again, and then you go down. Okay. So here, if you try to short this value area, you would have taken a stop loss. You have a shift again, and these two trades would pay you out. But why the market, when it reaches this sensitive level, is having a stronger rejection? Because we are on the upper part of the distribution. So this one was completely predictable, and this is the level that I gave to the community multiple times to try the long. Also this one, this long was anticipated. I explained to them that they will see a rejection from the 25,200, 180, 200 that will be really strong to go on the upside, and this is exactly what happened again. Now we are going back to the fair value of the distribution.
Now that we saw all the logic related to the profile framing, we can go to the execution part and the order flow patterns. So we saw the absorption, we saw the exhaustion, we saw the initiative auction, and for my first year of order flow trading, I was using the full profile footprint. Then after I became a scalper, so I have the necessity to visualize information in a fast and efficient way to take fast decisions, I created this template. This is the deep trades view, and it's giving you a filter on executed orders based on the size. So I only want to see big market participants. And in this case, for example, this was an area qualified for the short that you can qualify as I showed you previously using the profile, using your technical analysis strategies, using everything. What I watch is the interaction between my levels and the market participants, the big market participants. In this case here, I can see that all this effort, 72, 61, 60, 62, so a total of 300 contracts on this horizontal level where also the aggressive sellers already showed their strong aggression with results, showing me that all this effort is being absorbed. So this is a perfect example of absorption. This is a confirmation for me to start building my position on the downside. And the information for me that I can put my position at risk-free comes immediately three minutes after when the market is telling me, look, that they are adding short positions and the result of the candle is really strong. So I can capitalize on this movement. Here you can see what we saw in the example before. So an absorption mid-candle. So buyers tried to enter aggressively here but got completely absorbed, and the candle closed sell.
Now let's go on the app example that I took on the long side on my account. That was a qualified area to search for longs, and the market comes back to this area the first time. It comes back, and you can see 105 executed orders on NASDAQ on this horizontal level on the week. So it means that these aggressive orders got rejected. They didn't add a result. They got completely absorbed. The market tried again, failed. The market tried again another time, and the last time that it tried, it tried with 101 contracts, always on the same horizontal level. So let's do a summary. You have a method of qualifying important areas that it can be volume profile, it can be VWAP, it can be anything you like to use, supply and demand. And then you have information from the execution point of view of the market participants. And you can see here that also the buyers had a hard time having a result because they got completely absorbed. So now we are stuck here. You can do this ping pong till here, and when you break this level, you can decide to put your stop loss to break even. So if you decide to enter here like this with a target here, okay, you can decide to go from 1 to two to 1 to 5 and put your stop loss to break even.
What happened yesterday was the following. So you have another attempt after breaking out of the sellers of breaking complete absorption, and you have an amazing explosion on the upside where you can trail, and this for example is my momentum model that you saw live for 1,000 times. You can trail your position following the aggression of the market. So this one prints a new one. You bring your stop loss here, and you continue. Okay. And yesterday was an amazing move on the market, was really aggressive. And this is how I merge the information that I get from volume analysis, the information that I get from order flow analysis, and the information that I get from results. So from price.
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