Orderflow in FX explained
What is orderflow?
Order flow in any market is the placing of either pending or market orders. Prices may move due to the placement of these orders. What this means is that current value (i.e the spot rate) changes when there is a consumption of liquidity at a particular price level.
Why is this important?
What is occurring with any price movement is that either the longs have exceeded the liquidity of the shorts at the price if there is an increase (in a very simplified world, 10 units bought at 1.000 of X/Y currency when there are only 5 shorts at 1.000 will move price up) and vice versa for if price moves down.
Have you ever asked why you get stopped out?
'Stop hunting' is a legitimate way in which large players move the markets in order to generate liquidity. They do this to place orders with minimal slippage. The big players are not trading with small lots like retail traders. They are moving a huge amount of volume, so if they were to place a large order with limited liquidity, their order would not be able to be filled (remember above, markets move due to an imbalance in liquidity or in simpler terms, demand exceeding supply or vice versa). Therefore, by moving price towards areas of pending orders, they are able to place their large trades with limited slippage and get the best price. They know that they can take out weak longs or weak shorts (which I will explain in the following example) in order to accomplish this.
When you can identify where the bigger players want price to go to be able to place these orders, it is possible to piggyback on the coat tails of these moves.
Example
Note the area identified furthest to the left with the arrow. We see a period of consolidation following quite a bullish move. Sellers have entered here causing the up and down moves (the bulls are fighting the bears). It could be deduced that the sentiment here is bullish due to strong previous up moves and a weak Yen.
Weak longs would have been entered following the bullish candle on the left most side of the box with stops evidently where weak resistance had turned to support from the two candles prior to the bullish move, indicated by the red line. As the big players understand that there will be long positions here, they can identify where many stops and buy orders may be placed (previous resistance turned support - other examples for where stops could be placed may be at a Fib level or Moving Average etc).
Note the green box and more importantly the wick downwards. This is price being driven down to capture pending orders and stops. Once these orders have been captured, there is a liquidity vacuum. The big players now place their long positions now that they have entered a price where there is heightened liquidity. As there are now very few opposing short orders after the stop hunt, price moves very quickly upwards.
If you look at the highlighted areas, you can notice this occurring again and again, however, not necessarily always due to a stop hunt.
This piece is written to provide you with something to think about as opposed to how you can use it. Deduce what you can from it and explore the way in which it can benefit :)
If you have any questions or suggestions, feel free to contact me here or email me at david.belle@admiralmarkets.com
Note: this is the first educational post. We would appreciate feedback on this whether it is good or bad, helpful or absolutely useless.
Form your own opinions.
This is not to be interpreted as investment advice.
Trading leveraged products carries a potentially high level of risk. Losses may exceed deposits.
Order flow in any market is the placing of either pending or market orders. Prices may move due to the placement of these orders. What this means is that current value (i.e the spot rate) changes when there is a consumption of liquidity at a particular price level.
Why is this important?
What is occurring with any price movement is that either the longs have exceeded the liquidity of the shorts at the price if there is an increase (in a very simplified world, 10 units bought at 1.000 of X/Y currency when there are only 5 shorts at 1.000 will move price up) and vice versa for if price moves down.
Have you ever asked why you get stopped out?
'Stop hunting' is a legitimate way in which large players move the markets in order to generate liquidity. They do this to place orders with minimal slippage. The big players are not trading with small lots like retail traders. They are moving a huge amount of volume, so if they were to place a large order with limited liquidity, their order would not be able to be filled (remember above, markets move due to an imbalance in liquidity or in simpler terms, demand exceeding supply or vice versa). Therefore, by moving price towards areas of pending orders, they are able to place their large trades with limited slippage and get the best price. They know that they can take out weak longs or weak shorts (which I will explain in the following example) in order to accomplish this.
When you can identify where the bigger players want price to go to be able to place these orders, it is possible to piggyback on the coat tails of these moves.
Example
Note the area identified furthest to the left with the arrow. We see a period of consolidation following quite a bullish move. Sellers have entered here causing the up and down moves (the bulls are fighting the bears). It could be deduced that the sentiment here is bullish due to strong previous up moves and a weak Yen.
Weak longs would have been entered following the bullish candle on the left most side of the box with stops evidently where weak resistance had turned to support from the two candles prior to the bullish move, indicated by the red line. As the big players understand that there will be long positions here, they can identify where many stops and buy orders may be placed (previous resistance turned support - other examples for where stops could be placed may be at a Fib level or Moving Average etc).
Note the green box and more importantly the wick downwards. This is price being driven down to capture pending orders and stops. Once these orders have been captured, there is a liquidity vacuum. The big players now place their long positions now that they have entered a price where there is heightened liquidity. As there are now very few opposing short orders after the stop hunt, price moves very quickly upwards.
If you look at the highlighted areas, you can notice this occurring again and again, however, not necessarily always due to a stop hunt.
This piece is written to provide you with something to think about as opposed to how you can use it. Deduce what you can from it and explore the way in which it can benefit :)
If you have any questions or suggestions, feel free to contact me here or email me at david.belle@admiralmarkets.com
Note: this is the first educational post. We would appreciate feedback on this whether it is good or bad, helpful or absolutely useless.
Form your own opinions.
This is not to be interpreted as investment advice.
Trading leveraged products carries a potentially high level of risk. Losses may exceed deposits.
Disclaimer
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