So What Is Orderflow?

What does Orderflow even mean?

The term Orderflow has become so overused, it's quickly catching up to 'Price Action' with the potential of conveying absolutely zero information about the actual techniques and tools used to analyse and trade markets by the user of either.

However to those who do really trade using either of these techniques, they do involve some specific ways of interpreting price movement and viewing information other than price to gain further insight into the way price might move as it continues it’s random walk (*irony) on the bleeding right edge of the chart.

Most of us start our journey learning about standard time based price charts with the occasional moving average or some such indicator thrown on. We marvel at the ability of our latest Fintwit guru to accurately call out levels to which price actually seems to react… what is this sorcery!? If we survive these early years (yes sorry, plural) we come to know the various reference levels in the market and have occasional success trading against these.

This evolution of understanding is fundamental, but must continue on with other key pieces of the puzzle such as Volume, Market Structure and Liquidity. The truth is that even once armed with such a breadth of knowledge, it is still incredibly difficult for most people to apply it in a way which makes them a consistently profitable trader. Even if markets themselves weren't continually evolving, we always have to win the fight against our own worst instincts and desires (‘psychology’).

So, what is Orderflow? For me personally at least, it is the realisation and understanding that there is a huge amount of information besides price which can give insight into what's going on behind the scenes and under the surface of the previously learned view. It’s a bit like watching a duck moving smoothly along the surface of a pond and then realising if you look beneath the surface, you can see it's legs moving frantically and can even see it starting to change direction before it's visible on the surface!

Liquidity Providers

The extra information with Orderflow comes from the way trades actually happen.
Each and every trade:

  • Involves 2 parties
  • Is not a symmetrical transaction
  • Has an active initiator
  • Has a passive participant

It may initially seem like the active initiators of trades in the market would be in control from moment to moment. While this is certainly true at particular times, a major constant in the market is Liquidity Provision / Market Making. These parties control the Limit Order Book and while they may be ‘passive’, they essentially profit from fulfilling the needs of the demanding trade initiators. By altering the density of the Order Book, they eventually pacify fast moves and return price to zones which neutralize the imbalances they had to endure.

They can apply strong pressure against movement in a particular direction by increasing the density of the order book in a given zone and can also release this pressure. Since they as a group have almost unlimited funds and are willing to carry inventory over multiple days / weeks / months, they usually get their way.

Being able to see the density of these zones build and alter in real-time and view how price reacted previously is enormously useful. As with everything in the market, orderflow is not ‘The Truth’, but it is a useful step in the evolution of a trader.

For a more in depth discussion of Delta and Liquidity Providers, see All About Delta

If you're interested in seeing these zones in action check out our modernised, evolved, reimagined Orderflow software