We have certain rules when we trade Order Flow and these rules have been taught to us by Market Profile.
Following these rules keep you on the right side of the auction process, in itself a parameter for successful intra day trading.
Just To Recap :
1) Buyers will always buy every dip above value area high(VAH), as long as it holds.
2) Sellers will sell every rise below Value area Low (VAL), as long as it holds.
3) Buyers are stronger above day's vwap.
4) Sellers are stronger below day's vwap.
5) Reversals can happen at/ near known Market Profile reference points/ Pivot Levels.
We know that above or below value we have to trade the Blue-Red Indicator and in Between value a dependence of the smaller green-pink will give us better results.
But the question which arises is whether the green-pink can still be used to trade the region away from value.
The answer is in the affirmative if you follow the 5 rules above.
You would get better results only if you trade the right side of the auction process as indicated by the blue-red line.
Let's look at the action from the session dated 25th Jan, where the market traded above and below value 95 % of the time.
An open above value would have alerted you to the prospect of trading the larger OF as opposed to the smaller one.
The easiest thing to do on this day was to keep trading the blue-red indicator.
But there were good possibilities on the smaller OF as well.
I've marked rectangles on the chart for all failed smaller Order Flow trades.
The main reason why these trades failed were because they go against our basic rule which says that one should trade the larger OF only above value.
But the other fundamental reason why each of those trades failed was that they were trades taken against the stronger trend ( Blue-red Indicator ), against VWAP ( orange line ) and against value ( brown dashed lines).
Notice that on the way up from the open, it is the pink trade which has failed and on the way down it is the green trade which has failed.
Also above value and above vwap the green is stronger than the pink and below value and vwap, the pink is stronger than the green in terms of the length of trend.
As a conservative trader, if you can trade the Smaller Order Flow on the right side you would still have a lot of winning trades.
When you enter your trade, just ask your self these 3 questions :
1 ) Are you on the right side of the trend ( Blue-Red Indicator)
2 ) Are you on the right side of vwap ( above for buy/ below for sell)
3) Are you on the right side of value ( above for buy/ below for sell)
Most of the time, trading one side of the market ( right side), makes a lot more sense than both sides.
