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Order Flow Trader With Technical Analysis

Time For Techs

The main advantage of developing a solid understanding of technical analysis is that it helps traders to build a context for understanding the movements of price on the charts. Once traders have learned to properly identify elements such as trend lines, support & resistance and basic chart patterns it can seem as though as light has been switched on as a whole new landscape is illuminated.

However, despite becoming very adept at identifying the various elements of technical analysis on their charts, many traders lack the ability to define a trade based on their work and are even less confident in pulling the trigger as it were. This is where it can really help to build a filter into your trading arsenal.

Order Flow trader can work as a great filter in these scenarios whereby technical analysis highlights the likely path of price, but the trader lacks a clear entry point. As Order Flow trader highlights when the underlying market flows has turned bullish or bearish it can help to give traders a specific entry point based on their technical analysis.

Using Order Flow Trader

Lets look at some examples of Order Flow trader at work with classic technical analysis.

In the example above we can see that after breaking down through the rising trend line, GBPNZD started to grind lower in quite a clear bearish channel formation. Upon breaking down through the last key support level in the move up, price then retraced to retest the underside of this broken support level. Price failed to reclaim this level and started to roll over once more and as it did we can see that Order Flow trader gave a sell signal.

So what we have here is price retesting a key resistance level (first broken support as the trend changes) and as price fails to climb back above, Order Flow Trader tells us that the underlying market flow has gone negative, giving us our entry.

Tracking the movement of price we can see that each time we bounce and form a new support level on the way down, we then break down through the level and come back up to retest the underside of the broken support (now resistance) and as we roll-over from the retest we get an Order Flow sell signal confirming that the underlying flow is negative taking price lower.

Order FLow 2

In the example above we have a typical rising wedge channel formation. The upper line is in place after we join the first two highs and similarly the lower line is in place after we join tow lows. We then look to fade moves into the channel lines using Order Flow Trader to confirm our entries.

We can see that as price tests the upper channel line for the 3rd time, we get an Order Flow sell signal allowing us to trade price back down into the range. Again, as price retests the upper line for the 4th time we get another Order Flow sell signal as price again falls back into the range.

Now crucially, look what happens as price tests the lower line for the 3rd time, we actually break down through the line (overshoot) before price bounces and trades higher into the range once again. Notice that we don’t get an Order Flow sell signal until after price bounced having first broken through the lower line. If we had simply traded a touch of the level we likely would have been stopped out, but using Order Flow Trader for confirmation not only kept us out of a losing trade but actually gave us entry to the bounce once it materialised.

Finally we see price makes a 6th touch of the upper trend line and again we get an Order Flow Trader sell signal allowing us to profit from the move lower.

Now as you can see, the 5th touch of the upper trend line hasn’t been included. The reason for this is simple risk reward: if our strategy is looking to fade moves into the channel trend lines then we want to take Order Flow signals as close to the trend lines as possible to allow us the most room for profit as price trades back to the opposite trend line. Notice that on the 5th touch of the upper line, price had sold off more than half the range before we got an Order Flow signal, so this is a signal we would avoid taking as the risk:reward is not in our favour.

In the above example we can see a classic double bottom formation. As price bounces from a test of the double bottom support level we get an Order Flow buy signal confirming the move higher and indeed, as price travels higher from the level we can see that we get further Order Flow buy signals offering opportunities to re-enter or to add to existing positions.

Keys To Using Order Flow With Technical Analysis

The problem that a lot of traders have with a system or method of trading is 1) in looking for a 100% hit rate “holy grail” type system and 2) in looking to trade every set-up identified.

There will be times when Order Flow signals in line with technical analysis set-ups fail, as with all systems. The key is to manage risk and ensure that no one loss creates any meaningful disruption to your P&L. This links in with the second point. There will be times when a set-up, although valid, is not ideal and shouldn’t be taken. We saw in second example above a trade I highlighted that I would not have taken because although similar to the other trades that set up in that series of trades, the risk:reward was not as favourable. We also saw highlighted how using Order Flow signals can help keep you out of losing trades, even where the analysis is good.

The best way to use Order Flow signals in combination with technical analysis is to take only the best set-ups where the signals are perfectly in sync with the levels and the risk:reward is favourable. There is plenty of opportunity in the markets on a daily basis and learning to restrict yourself to taking only the best set-ups will hugely benefit your trading.