Abstract: The technical and fundamental analyses usually reflect the price movement in the Order Flow. In order for the Market Price to move, for a certain trading instrument, at a certain moment, the participants (buyers and sellers) have to execute enough orders to consume the liquidity at the best Bid or Ask offer.

The behaviour of the market participants can be determined by the Order Flow (market orders, limit and stop orders) generated by the other traders.

In the first part of this article I will present some general aspects of the order flow and how it can be used in trading with the help of the existing tools from Dukascopy. In the second part I will make a few order flow book tool proposals for Dukascopy Bank.

Part 1 - General aspects of the Orders Flow Analysis.

Definition 1: An open order is an order to a broker to buy or sell a currency at a certain price whenever that price becomes available. Theoretically, such an order is standing indefinitely until either the currency is bought or sold at the specified price or the investor cancels the order. (source Financial Dictionary)

Definition 2: An order book is the list of orders (manually and electronically) that a trading venue uses to record the interest of buyers and sellers in a particular financial instrument. (source Wikipedia)

The Order Flow is the continuous buying and selling as it happens. Each trade has both a buyer and a seller.

Order-flow analysis is typically referred to as “microstructure” analysis, and it starts from the meeting between demand and supply. It helps traders to spot potential reversal, continuation, indecision of market participants sentiment regarding the price action in the constant battle between the buyers and sellers.

There are two types of trading orders:

  1. - Market Orders – open positions directly at the bid or ask availeble at the moment.
  2. - Limit / Stop orders – fresh positions waiting to be triggered at a different price, or take profits and stop losses for the open positions. This orders can be also canceled by the market participant.

Limit orders provide liquidity to the market while market orders consume liquidity.

A limit order cannot cause the price to move until it is executed at the fixed price, while a market order absorbs the liquidity and presses the price up or down.

There are two Levels of market information:

  1. - Level 1 – the bid and ask prices at the present moment,
  2. - Level 2 – also known as the Order Flow Book, Transaction Flow, Market Depth, or Depth of Market (DOM) which provides additional market data and information:
  • - Highest bid price that buyers are willing ot pay,
  • - Lowest ask price that sellers are willing to accept
  • - Long orders size (ammount availeble for each price),
  • - Short orders size (ammount availeble for each price).

The Order Flow Book must use advanced volume feauters in order to be most efficient.

We can clearly see in the next picture of an Order Book for an IBM stock where traders have placed a large number of Sell Limit orders under the present market price (possible stop losses for the Long open positions, or fresh entries under a strong support), and also the Buy Limit orders above the market price (possible Stop Losses for the Short open positions, or fresh entries above resistence). We can see where there is a larger demand and supply. But my example has only a portion of the order book as we should be able to see also the Sell Stop Orders (above the market price, possible Take Profits for the Long open positions) and Buy Stop orders (under the market price, possible Take Profits for the Short open positions).

The Markets that we are trading are very complex, because the market participants follow different time frames and have different motivations.(fear, greed, interpretation of news, shock from the hedging demand and offers, one’s take profits could be another one’s stop loss).

For each type of trader there is a different type of an order flow book:

  • - Long term traders (investors) that watch the monthly and weekly time frames usually use the C.O.T. (Commitment of Traders) charts, based on C.O.T. reports released by CTFC each Friday at 19:30 GMT for the last Tuesday Data. Dukascopy Bank offers statistics for Eur, Gbp, Jpy, Aud, Chf, Nzd with the USD as a base currency. You can find the C.O.T. charts at the following link.

  • - Medium term traders (speculators and swing traders) watch the Daily and 4 Hours time frames, and use the Liquidity Sentiment Index which is designed to show long and short ratio for the most popular currencies (Usd, Eur, Gbp, Jpy, Chf, Aud) and currency pairs (Eur/Usd, Gbp/Usd, Usd/Jpy, Usd/Chf, Eur/Jpy and Gbp/Jpy). The Sentiment chart is updated every 30 minutes. Dukascopy Bank also provides the Historical Sentiment Index (updated every 30 minutes,6 hours, 1 day and 5 days). Please find the SWFX Sentiment Index at the following link.

  • - Short Term Traders (Intraday Traders) watch the 1Hour, 30 minutes and 15 minutes time frames, and use the Market Depth solution from the J-forex Dukascopy Platform. This feature is more suitable to scalpers that use 5 minutes, 1 minute and tick charts.

In order to make trades with a high win rate we have to correctly determine the order flow.

The Momentum is usually driven by large orders. For example during economic data releases momentum can find contrary orders or orders in the same direction of the price action that can act as trigger for a higher amplitude move.

Large market participants hide both their order size and intentions and often enter the market at the bid or ask of the price.The volume traded shows these moves and also the stop losses and take profits of these positions are shown in the order book.

Attention! A portion of the limit/ stop orders may have no intention of actually selling/ buying those contracts. Instead, that market participant or group of market participants may want to buy later and hopes that by placing that order in the order book, he will convince other traders to sell in front of his offer. Their selling could push the market price lower. If the size of the orders doesn’t change when the price gets closer to it’s execution, it is probably a true one.

The order flow book is almost constantly changing it is very dynamic.

Part 2 – The Order Flow Book Proposal for Dukascopy Bank.

  • - Open Positions Tool – could reveal the entry points for both bullish and bearish positions that are under the pressure of the stop loss or take profit (correlated with the Open Orders). Open Positions should be devided by percent ratios for each price, which should add up to a total of 100% (USD value) at the certain moment. The tool could be updated every 30 minutes, 1 hour and 1 day.
  • - Open Orders Tool – could show concentrations of orders triggers that might result in supports, resistences, or break-outs. The tool should contain two parts: a) Aggregate Open Orders, as percent ratio in USD value, from the total market and Buyers versus Sellers for each instrument, b) For each instrument show a different chart with orders grouped above and under the current price with the proportional percent size for each price point. (Total 100% - USD value),
  • - Historical Order Flow Book could show the open orders change over time on the price action chart. This tool should be places on the price movement chart of the currency pair to show how the orders have evolved through certain price changes. There should be three charts to get a clearer view of the data: a)-Historical Long Orders, b)-Historical Short Orders, c)-Historical Net Orders (Long - Short).
  • - Historical Open Positions evolution tool (as percent proportion), Buyers versus Sellers over the price movement chart.

Conclusion: Imagine that you are a floor trader and you see the Order Book Specialist raising his hands facing inwards or outwards to show the Long or Short orders evolution for the trading instrument with the highest attraction. You spot the guy from a large bank placing a large sell stop order above the current price. I wonder what will you do?

Unfortunately Forex Market Volume data is not centralised and we cannot receive a general order book as each broker can provide the data feed from it’s clients only. But Dukascopy Bank offers a very useful service called Market News straight in the J-forex Platform that can help us to see some of the entry orders, SL and TP from other large market participants. EX: - On Monday morning – 01.10 – a large bank (M.S.) got stopped out of an Gbp/Usd long position (entry 1.6230, SL – 1.6130), but remained bullish from 1.603 (source Dukascopy Market Talk – Dow Jones Newswires).

To your success,


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