Best Order Flow Trading Strategy for MT4

When new traders hear about order flow trading for the first time, it’s like a light goes on. I’ve been trading order flow for 20 years. Some of the setups and strategies have changed, but my main philosophy hasn’t.

This guide is for people who want to try order flow trading but don’t know where to start. You’re about to learn a new way to think about and look at the market, as well as where to put your attention if you want to get serious.

Order Flow Trading: What Is It?

Order Flow Trading is a type of trading strategy in which trading edges are found by looking at orders that are advertised and/or orders that have already been filled. Order flow traders try to make money by taking advantage of imbalances in the market.

This is how I would describe order flow trading. It has become a buzzword among online trading experts, but no one seems to understand or be able to explain what it is.

When it comes to order flow trading, there are two different ways to look at the market. On one end of the spectrum is the analysis of orders that have been carried out, and on the other end are orders that have been advertised.

Executed orders are trades that really happened between a buyer and a seller, while advertised or resting orders are the bids and offers that were advertised (resting orders).

We use different tools and measures to look at the data that we will look at in a moment.

Order flow trading has changed over the years, along with how technology has changed. Let’s take a quick look at the history of trading order flow because I think it will help you see day trading from a different angle and give you some facts about it.

History of Order Flow

Order Flow Trading began in the bucket shops and pits of the exchanges when they were first established.

Pit traders tell market makers what orders they want to buy or sell with hand signals and an “open outcry.”

Interesting fact: The brightly colored coats that people wore on the floor helped traders and the exchange members for whom they worked to be identified. The standard color for traders and brokers on the floor, who are also called “locals,” was red, but many chose to have their own unique jacket designs that everyone in their group wore.

I still remember the year 1998, when I went to the Chicago Board of Trade for the first time. I was a junior in high school, and the experience was very exciting for me. It also set me on a path that I would follow for the rest of my career.

To be a successful trader in the pits, you had to be an expert at reading the crowd and the moves of the bigger players, all while keeping your cool and controlling your emotions in a very chaotic environment.

The traders in the pit were right in the middle of the order flow. People in the area would decide whether to buy or sell based on how the crowd felt.

As technology got better, more and more volume moved from the exchange floors to computers. As volume dropped, the development of algorithms was pretty much the last straw for floor traders.

A lot of floor traders never made the switch to trading online. The good ones had figured out how to use psychology to their advantage, but the rules had changed.

With the advancement of technology came a significant advancement in the analysis of trade data. One of the first big changes was when Level II quotes were added.

Level II quotes showed all the bids and offers from every ECN for each price level (electronic communication network). I started trading for a living as a level II trader in 2003.

At that time, order flow trading moved to Level II. This was similar to how traders in the pit would display their bids and offers to the market maker. It made the demand and supply of the market come to life.

When I first started trading, that gave me enough of a head start to make a lot of money on its own. But, like all industries that are competitive, technology led to fast progress.

In 2008, trading algorithms tipped the balance and started doing most of the trading. This made it hard to read level II because orders were always being taken out and added. It became hard to get an edge just by having a level II.

Like the traders on the floor, I had reached a point where I had to change and find new ways to stand out, or I would become extinct like the dinosaurs.

At that point in my career, I started to learn a lot about volume analysis, which led me to where I am as a trader today.

One thing to learn from this is that progress is quick in any competitive field. If you want to stay in this business for a long time, you have to always look for ways to get better and better define your edges.

Order Flow Trading wouldn’t be complete if we didn’t talk about AMT, which is at the heart of it.

The Auction Market

Auction Market Theory is a way of thinking that says financial markets go up and down because of imbalances between buyer and seller aggression, which are caused by market events, until the price finds a level where buyer and seller aggression are equal and the most trade can happen (fair value).

Order flow trading is based on auction market theory.

When you start to incorporate AMT into your core trading principles and strategies, you will start to feel more confident as a trader. I think you get better at reacting to market data and events rather than trying to predict them in the traditional technical way.

Order Flow Trading Strategies

The end goal of any order flow strategy is to figure out if the market is balanced to make money from ranges or if it is out of balance to make money from trends.

This is done by focusing on data from orders that have been filled or orders that have been advertised. Let’s take a look at some of the tools and order flow indicators that are used to analyze various types of data.