Core Execution
Introduction to
Order Flow
IntroDUCTION to Order Flow
Order flow is absolutely the most important market-
generated information available to active traders, and the
ability to read order flow is an essential skill for any
professional trader in today’s trading environment.
!
It’s our final level of analysis that will allow us to execute
trades in the market with confidence.
Technical Analysis helps
you analyze the past,
while Order Flow helps
you analyze the present.
IntroDUCTION to Order Flow
Order Flow is simply the flow of orders that are being
transacted in the market at the present. Order flow
analysis is reading the flow of transactions and future
orders to reveal the unfolding story of the market.
This analysis allows you to understand where market
participants are positioned right now, so that you may
more accurately predict future price movement.
In essence, order flow analysis offers the most accurate
way to read what’s happening in the market right now.
IntroDUCTION to Order Flow
Reading order flow is what gave floor traders such a huge
advantage in the trading pits for decades. Floor traders were
able to see the flow of large orders, from institutions and
traders alike, and were able to lean on these orders to bid with
the bidders, offer with the offerers, and squeeze the losing side.
!
This is also the reason why most floor traders failed to make
money when they moved off the floor. A way to read order flow
had not yet been invented for screen traders off the floor.
However, this all changed over the last 8 to 10 years, as trading
platforms became more advanced and began offering tools
specifically designed to read order flow.
IntroDUCTION to Order Flow
1. Order flow is all the orders being transacted right now
2. Order flow is the present
3. Order flow analysis is reading the flow of transactions
and future orders to predict future price movement
4. Order flow analysis allows you to see inside the auction
5. Order flow is the most important market-generated
information available to traders
6. Order flow is what moves price
IntroDUCTION to Order Flow
The Benefits of Order Flow Analysis:
!
1. Helps you see the auction at its most accurate level
2. Helps you identify the market’s current bias
3. Helps you see where market participants are positioned
4. Helps you spot and confirm exact reversals
5. Helps you identify confirmed retest entries
6. Helps with real-time trade management
IntroDUCTION to Order Flow
Order Flow Components
The two components that make up Order Flow are
aggressive and passive market participants. Understanding
how aggressive and passive market participants make up
the order flow, and reading the story of the auction through
these participants, is the key to unlocking future price
direction.
An aggressive market participant is one who uses a Market
order to transact a trade. A passive market participant is
one who uses a Limit order to transact a trade.
IntroDUCTION to Order Flow
Aggressive Market Participants
An aggressive buyer will “lift the offer” by transacting a
market order to buy on the best offer, while an aggressive
seller will “hit the bid” by transacting a market order to sell
on the best bid.
These market participants are considered aggressive
because they are willing to pay the 1-tick spread to enter
the market immediately
IntroDUCTION to Order Flow
Passive Market Participants
A passive buyer places a limit order to buy below last price
(“resting bid”) and allows the market to approach the limit
in order to execute the trade, while a passive seller places
a limit order to sell above last price (“resting offer”) and
allows the market to approach the limit in order to execute
the trade.
These market participants are considered passive because
they are not eager to enter the market at the current
price, but are willing to allow price to come to their
location for a better entry.
IntroDUCTION to Order Flow
Order flow analysis is reading the developing storyline
between aggressive and passive market participants.
At its core, the auction is a constant battle between
passive and aggressive market participants. Passive
market participants use Limits orders to absorb aggressive
market participants, while aggressive participants looks to
sweep Limit orders to influence price.
!
This battle between passive and aggressive market
participants is what moves price each and every time,
unlike any other form of market analysis. If you become
an expert at reading order flow, you’ll have a long and
prosperous trading career.
IntroDUCTION to Order Flow
The Order Flow Playbook
1. If passive buyers absorb aggressive supply at a price level,
price will reverse higher
2. If passive sellers absorb aggressive demand at a price level,
price will reverse lower
3. If aggressive sellers sweep the bids of passive buyers, price will
tick lower
4. If aggressive buyers sweep the offers of passive sellers, price
will tick higher
5. Trapped aggressive sellers become buyers and fuel price higher
6. Trapped aggressive buyers become sellers and fuel price lower
IntroDUCTION to Order Flow
Order Flow Analysis is King
1. Order Flow is orders being
transacted right now
2. Order Flow is the present
3. Order Flow allows you to see inside
the auction
4. Order Flow is the most accurate
form of analysis
5. Order Flow is what moves price -
every time
6. Traders who are experts at reading
order flow will have trading longevity
Core Execution
Introduction to
Order Flow
