Managing Your Trades By Understanding Order Flow

Running with the bulls while others get gored.

What Is Order Flow Trading?

It had been on your bucket list and seemed like such a great idea to you and your friends. Yet standing there in Pamplona, Spain, you now realize the danger is very real. Someone is going to get trampled, or worse yet — gored.

Running of the bulls in Pamplona, Spain

Avoid getting trampled by running with the driving force in your market!

Sitting in the relative safety of their office, most retail traders come to this realization about price — only after it’s all too late. Buyers or sellers have taken over — they’re on the wrong end of a trade that’s already been trampled.

For, as exciting and profitable as it may seem, when price goes on the run — it’s deadly for most. Using stacked imbalance alerts within Order Flow Trading Sequence Tracking can keep you from getting run over — and instead put you in a position to profit. You just need to know what to watch for — and you should probably avoid wearing red.

You’re probably thinking now, ‘What is Order Flow Trading’?

Analysis in the financial markets comes in two folds:

− Momentum analysis involves using indicators to try and understand price action and predict the direction it is likely to move. On the other hand…

− Fundamental analysis relies on economic data release analysis to try and ascertain the true value of the underlying asset.

While important, the two lack in explaining why price behaves a certain way at a specific price level.

Whenever price approaches a critical support or resistance level, two things are bound to happen. First, it might break through the level or get rejected and reverse direction. Order flow trading tools ascertain the key levels and, most importantly, provide insight on how price is likely to behave at this level in the future.

Why Most Retail Traders Get Trampled By Running Bars

If you’ve seen the pictures, then you know the insanity that is the running of the bulls. It’s the kind of death-defying event that could only be found in a proud, glorious Spanish town. Twelve-hundred-pound bulls are tearing through the streets, leveling everything in their path. Get in their way — and you too are going to get leveled. With any luck, you’ll live to tell the tale.

Yet every day, retail traders get leveled. They unknowingly stand directly in the path of not just one bull — but the equivalent of a thousand bulls in the form of institutional traders. When they go on a stampede, price goes on the run — and retail investors unknowingly making entries get trampled in the process.

Lack of visibility is the primary reason most retail traders get gored. They simply don’t know when institutional traders are getting ready to run. As a result, they have no idea what’s driving price, or how powerful the force really is. It’s like running with the bulls blindfolded and with earplugs in.

Signs There’s Going To Be A Run

It’s the second rocket you need to watch for. When the clock on the church of San Cernin strikes eight in the morning — keep your head on a swivel. The bulls are coming. Hey, look at it this way — the run only lasts three or four minutes… unless one of the bulls has been isolated from his companions.

Instead of watching for rockets and charging bulls, you only need to watch the imbalances — thanks to NinjaTrader®’s Order Flow Trading Sequence Tracking. These alerts tell you not only whether there’s a run underway, but what direction it’s headed. This will give you an idea of what order flow trading is and how you can work with it.

But do you know how Order Flow Trading works?

Order flow trading is simply the supply and demand analysis that relies on identifying areas where there could be an imbalance in the future. It works by identifying areas in the past where a major decision was made, resulting in price exploding or tanking. Therefore, it entails areas that are likely to register strong price movement.

You can spot imbalances easily, not just because they’re bold — but because they’re big. Big in that they enjoy a 300% size advantage over their counterpart on the other side. They are created when institutions assume buy or sell positions en masse. Check out the bar to the right. The blue bold imbalances on the right — those are buyers running over sellers. Check out those margins (also called deltas).  

View inside a candlestick of imbalance summary

Don’t wait on rocketing bars - get a look inside to see the imbalances driving price!

It’s no coincidence that 4 buy imbalances (captured in the imbalance summary) drove price up. Something you’d want to know if you wanted to keep a sell entry from getting gored.

Opportunities For Profitable Continuation Entries

If you happen to be standing just outside the gate before the bulls are set loose — be prepared to sing the chant. It’s in Spanish, and you don’t need to know the words to understand what’s being said. You’ll be asking the patron saint, San Fermin, for a little help with the bull run. Not a bad idea.

No need to tap San Fermin for a hand when you have imbalance alerts handy.  When you see one imbalance — it should have your attention. The bar is stomping a hoof and lowering its horns. When you see two or more — price is going to run. You can either get on board, or get the heck out of the way.

These moments can present opportunities when looking for continuation trades.  Watch for big runs followed by brief pauses in the action — usually at an Institutional Trading Level or a long-term Volume Rejection Level. Once price revs back up, with more imbalances — you can get back on board.  

Check out the impact the imbalances had in creating the continuation opportunity in the ES. Note the initial acceleration — followed by the pause — and then the run. With each big push the imbalances fueled the run, as the green arrows point out.  

Order flow trading chart showing continuation pause and institutional trading level

Run with the bulls driving price using imbalances.

Better to run with the bulls — or institutions — that are driving price... than get trampled in the process.

Avoid Getting Gored By Using Long-Term Levels

Plenty of proud bullfighters have been gored, meeting their fate in front of thousands of horrified spectators. Those who have been gored by a charging market would tell you that there’s no safe way to run with price.

If you’re doing it blind, yes — it’s a great way for your account to meet its fate.  This is where macro levels like Institutional Trading Levels and/or Volume Rejection Levels come into play. When price is on the run, you should mark these places as your opportunity to enter the fray with institutional cover.So, if you wanna know how to trade order flow the process is pretty simple and straightforward, as it involves identifying levels in the past where strong price movement occurred.

Price, no matter how hard it’s charging, respects these moments because they’re grounded in long-term performance and the truth of volume. Note our NinjaTrader® order flow ES example. Our run heads straight into another Institutional Trading Level — and stops dead in its tracks — either for a pause or a reversal.

Don’t run with the bulls unless you have institutional cover.

Experience The Thrill Of Profits By Safely Running With Price

Last year an American was gored in the leg, while five other runners were injured, during the Pamplona San Fermin festival. It was a horn through the thigh after one of six running bulls crashed into a group of runners. They were lucky to get out alive.

Don’t suffer a similar, uninformed fate when dealing with raging price levels.  Instead, run with price as it makes its move by spotting stacked imbalances. Any time buyers or sellers outpace their counterparts by a margin of 300% it’s something to pay attention to. When they do it in successive price levels, you should be ready to make your move.

Keep an eye on imbalances with the imbalance summary at the top of each candle. When they stack, note the highlight — and be prepared to make your move. Ease into the stampede by monitoring the COT and making your move at the start of the next bar. As price accelerates, keep an eye out for any shifting directions — specifically Sequential Decline or Responsive Activity — on the other side. Those are your clues that an exit is imminent.

Run with bulls and bears alike, taking your profits along the way from a place of safety — while everyone else gets gored.

If you already know the basics but want to dive deep into what is Order Flow Trading, shop our Order Flow Indicator for NinjaTrader®! You’re not alone!

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