OrderFlow- Practical usage


Much of how OrderFlow needs to be traded and the need for this great tool is found in an earlier post on this subject in November.

I want to take this opportunity to re-emphasize the importance.

Trend Indicators :

The OrderFlow is the Buying and selling of the market. It is the auction theory playing out though those two lines.We all know that the market is driven by the action of buyers and sellers and their quest for getting the fairest price or value.As traders we need to be trading value and not price. It is through the OrderFlow that we see changes in the control happening.We can see Buying beginning ( start of blue/ green) and we can see it exhausting and the selling happening ( start of pink/ red).The orderFlow is a visual representation of that process.

Need for 2 indicators :

The market place is dominated by different time frames each of who use the same system to buy or sell.So we can have the scalpers, one hour traders, day traders, short term, intermediate term and long term buyers and sellers.Each of them buy or sell at the same prices with different objectives thus causing the market to move or change. Not all of them though are present in the market at the same time. As Intra-day traders we are keen to spot the entry of a longer term player who can move the market in a big way or the presence of the day time trader only.Accordingly we have the green pink line which will function at it's best when the day time frame player is operating and the blue-red line which will work when the larger time frame player is operating. Much like you cannot use a weekly chart to trade 10 point prices, you have to correctly use the right time frame or right orderflow for the buy sell process.

How do we know which one is correct :

The Order Flow charts are provided with value area lines from yesterday.The first thing we note is the open price.If the open is within the value area of the previous day then the action that day will not be very big till one of the value areas break. So in this case the green pink line has to be used.Generally the size of the value area is 25-40 points on an average in the Nifty and about 70-90 in the BankNifty.So we emphasize that you should book for 10-15 points in the Nifty and about 40 points in the BankNifty.
If value breaks then you can change to the higher OrderFlow and ride the position with a stop/ profit booking at the value area or appropriate pivot level or vwap or any other level given in the trading room.
Always begin with the slower orderflow.

What about whipsaws :

To answer this question we need to see why whipsaws happen. Since our indicator is a buy-sell barometer, it will whipsaw at places where both buyers and sellers agree on value.These places would be the Point of control ( developing and previous) , VWAP and occasionally value area lines also.Most of the time these places are within value and hence the green pink indicator would be operating.The other option would be to wait out the period till a resolution happens. The POC is the place where the market finds it best to trade and even if the signal is good one needs to be patient for price to move around it.If one needs to trade, then the better option is to ensure that you get green blue on the same side or pink-red together from this zone.

What about stop losses :

Since the system is a stop n reverse method the actual stop loss is a change of signal.But one can be looking for clues to ensure whether the trade is going your way.
a) When the signal is generated a price is given on the right of the screen for that indicator which is a mental stop ( not a hard stop). The trade will be in danger above/ below this point. As the trade goes in your favor, this price keeps increasing or decreasing.One needs to keep monitoring this price. It will always have the color of the signal you have chosen to trade.
b) Follow the movement of the price candle above or below your signal line.If it's a green-blue signal for buy, then most of the time price will spend above the indicator line.If it manages to go below and stay below, then a reversal is around the corner.The same logic applies for the pink-red signal where a move above the pink or the red line will indicate a reversal.
c) A third method and the one which we use currently is to utilize the prime levels.

Profit Booking :

We are big believers in the risk free second trade. Our advice is to trade in multiples of two lots and book the first half at 10-14 points in the Nifty future for green pink line and 30-40 points in the BankNifty. Ride the second at cost or change of signal.The blue red can be part booked at 25-35 points in the Nifty and 60-80 points in the BankNifty.Look for VWAP, VAH, VAL etc as booking points also.

Another method would be to book profits at each of the Power levels mentioned as PR3 to PS3. Thus a BUY signal can be booked at the closest PR1, PR2, PR3 with every preceding level becoming a stop loss for the existing order. Depending on how the smaller OF reacts , one can re-initiate the booked order

Other Aspects :

Try as much to trade with the Nifty and the Bank Nifty giving similar signals. Same color OrderFlow, above-below vwap together and same position of value area.
The best signals are when all 4 signals are the same in the Nifty and the bankNifty.

Please read a conservative approach to trading OrderFlow in the "Must Read" section.