COM 104 Lecture Notes - Lecture 8: Foreign Exchange Market, Microstructure, Currency Pair

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Order Flow
Order flow trading has a very wide definition and it is not necessarily
exclusive to other methods of trading. The cornerstone of order flow trading
is anticipating the prices where other traders have pending orders set,
particularly important market participants with very large orders.
Obviously, order flow cannot be traded without "picking levels." This is a big
reason why many traders find order flow trading too frightening or
intimidating to trade: traditionally, trading gurus warn their students against
picking levels, admonishing them to "trade what you see, not what you think."
This seems to be good advice when you watch a chart, mentally pick levels
and watch them all get blown away by the price. However, it does not have to
be this way, not if you think a little more about the levels that you pick, and
equally importantly, if you use tight stop losses.
Many gurus teach trading methods based upon identifying likely support and
resistance levels, and watching for confirming price action when the price
arrives at these levels. In a sense, this is also order flow trading, as the
method is based upon expecting there to be a lot of orders at these levels.
However "true" order flow traders would take it one step further and not wait
for the price action confirmation before entering the trade. This seems more
dangerous than waiting for price action confirmation, but think about it. I f you
are waiting for the close of an hourly or four hourly candle before entering,
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