Order flow trading is a type of trading whose goal is to move the market. When trader place market orders, the market moves based on those purchases or sales. The purpose of order flow trading is to predict the large market orders and therefore gain from the movement in the market that they cause. Order flow is usually determined by the major traders like banks. The banks make up about 50% of the Forex market so when a bank executes a trade, it moves the market.
This type of trading does not have to be exclusive of other types of trading. The idea of order flow trading is to position yourself to take advantage of the movement based on the orders of others. There are so many factors that create this movement that you can implement other trading strategies to determine which way you think the movement is going to be. What is somewhat different with order flow trading is that your ultimate goal is predicting movement based on the market orders of others, not necessarily foreseeing the movement itself.
One of the core differences between order flow trading and technical analysis or chart trading is that they are based on predictions of movement and order flow trading is based on predictions of orders. It is a subtle difference but it is significant because technical analysis does not always move the market, market orders do.
An important thing to remember when using an order flow trading strategy for Forex trading is to have tight stop losses in place. There are many experienced traders who recommend not trading based on what you think will happen. They advise trading based on what you see happening.
Order flow trading suggests that you trade based on the understanding and prediction that orders are about to change the price, rather than waiting to see if the orders happen. This is called picking levels. When you pick levels, and put in your orders at those levels, you can use the tight stop losses to mitigate your risk.
Following order flow will help you to see when movement is going to happen. From keeping an order flow book, a broker can see the price where a trade will take place and the volume of that trade. Brokers can use the plans of all of their customers to their benefit and to the benefit of the customers because they can advise when a large volume of orders are going in and can suggest their customers all capitalize on those orders.
Order flow traders sometimes benefit from trading against the trend. This is a very unsettling thing to do but it can be extremely profitable if it works. Order flow trading is best suited to very experienced traders and Forex dealers or brokers. Financial institutions are in a unique position when it comes to order flow trading and it can be extremely profitable for them.
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