OrderFlow Strategy is the key to many of our successful trades here at GZT. OrderFlow Trading, sometimes known as “Directional Trading”, is tied to the directional movement of the markets. By examining patterns in price and volume of orders being placed, you can predict which way the markets are trending. We often suggest executing an order going in this same direction, as it is easier for most traders. Supply & Demand drive price direction and dictate orders in the market. By looking at a few key factors and with a bit of practice, you can use this information to your advantage. So, what are those factors to focus on?
#1. Price – Supply & Demand imbalances will cause prices to fluctuate. By using basic economics lessons, you may already know a bit about how supply & demand drive our economy. If supply is low, demand tends to increase along with the price. If supply is high, demand tends to decrease and the price will drop.
#2. Volume – Volume is simply the amount of contracts or shares of a security or market that are being traded in a specified period of time. This ties back into our supply and demand order flow, to help you figure out if supply is low or high. Look at a number of orders in relation to the movement of price. Are they moving together or in different directions? If you start to see an imbalance between supply & demand, you are working towards a directional move, which means an opportunity to enter into a trade.
#3. Bid/Ask Imbalances – In addition to Price & Volume, another factor to look at is the bid and ask imbalances. By looking at what orders other traders and institutions are placing, you can tell if buyers or sellers are influencing price movement. By seeing real time orders with the other factors, you can make predictions on the direction of future orders.
#4. Delta Divergence – Delta refers to the ratio of change in price between the security and its underlying asset. Delta Divergence can be positive or negative. This value predicts how much an option may be influenced by movement in the markets. Divergence occurs when there is an imbalance of which direction price is moving when compared to buy and sell signals in the order-flow. By catching divergent movement, you can avoid becoming trapped by a false move or fake-out.
In conclusion, these are just a few of the factors we evaluate when trading with OrderFlow strategy. As always, only you can choose what will work best for your trading style and risk tolerance. We hope this explanation has given you the drive to learn more about order-flow and how you can use it in your future trades!