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Order flow (Order flow is a tool that we will use to see how the auction…
Order flow
Order flow is a tool that we will use to see how the auction is behaving at key Market Profile levels.
In Auction Market Theory, we discussed that a trading market is a continuous double auction. The auction is between buyers and sellers.
The order flow will tell how these buyers and sellers are interacting or reacting at key levels in the market.
Before venturing out into understanding order flow, we need to understand different types of players and their motives or their behaviour.
Traders can be broadly divided into two types, based on the order types they take and the value area levels they enter: (1) active or initiative traders; (2) passive or responsive traders
An active trader is always looking to ride the market direction. This type of trader is not looking at waiting for the market to come to him/her. He is ready to jump at the market. Basically, he is IMPATIENT. He does not have money and time to WAIT.
A passive trader is always looking to ride the market when it comes to him. He will never chase the market. Basically, he is PATIENT. He has time and money to WAIT.
For most active traders, the motto is activity. They are not profit oriented. These guys are not wary about risk. They are risk taking.
For most passive traders, making money is the criteria. Because it is profit that is their motive, they are very wary about risk. These traders are risk averse. They do not want a disadvantageous position in a trade.
Among these two types of traders, there will be active buyers and passive buyers and active sellers and passive sellers.
Active buyers come above VA, and active sellers come below VA.
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In a market order, a trader goes to the market price (that is he goes to the market level) to buy or sell.
In a limit order, a trader waits until the market comes to his level to buy or sell.
The auction market is a continuous interaction between traders through market and limit orders. A trade is a combination of "market buy+limit sell" or "market sell+limit buy". It can never be any other combination.
All the orders given by traders are instructions to the exchange to execute their order. In the order, they have to mention if it is a market order or a limit order.
The exchange gets these orders, which are evident in the order book on the broker terminal.
Once an order is executed, then it is visible in the order flow. So order book and order flow are different. Order book is unexecuted, while order flow is executed orders.