Order flow refers to the continuous process of buying and selling orders moving in and out of a particular market. As you read this, someone is clicking “buy” and someone is clicking “sell” and the buy and sell orders are being sent to an exchange or interbank system. If there are buyers and sellers of an asset, they will find each other electronically through these exchanges and bank connections.
This is what we mean by a “full order”; it refers to the actual buying and selling that takes place with the market in balance, so if someone wants to buy 100 shares and they hit the buy button and someone out there sells 100 shares of stock, the buyer’s order is written and they buy the full 100 shares.
Order flow is important for business and investment. If there is no order to enter or exit the market, the market will not move. We have seen this when the store is closed. For example, the US stock market is open from 9:30 a.m. to 4 p.m. Eastern Standard Time. EST, it is open for 6.5 hours; it closes for 17.5 hours. When the market is closed, prices cannot move because no orders can reach the market.
The number of buys and sells determines the difference between the market. If there are more orders than orders, the price will inevitably increase. If there are more sales than orders, the price will inevitably decrease. Think of it like anything else in life: If a product is bought in large quantities, the price of that product will increase, but if there are fewer buyers and more sellers, the price will decrease. That’s exactly how financial markets work.
The beauty of a market economy is that unlike real-life products, we can see everything that happens from the successful order. We can see what day the order was completed, whether there were many buyers or sellers. The chart represents the order of execution, but the flow order is lost. The order flow that we want to use as traders is still there.
Depending on finding a valid counterparty, some of the orders that come into the market will be executed (and become Filled Orders) and some may be cancelled after a while.
Orders that are still waiting to be either executed or canceled are known as Un-Filled Orders (UFOs). This is not to be confused with Unidentified Flying Objects (although the app we use that plots them on the chart for us does show them as flying saucers!).
What the app is helping to do is identify where there are buy orders waiting to be executed and where there are sell orders waiting to be executed. We see the Un-Filled Orders on the chart depicted as green (buy) UFOs or red (sell) UFOs. We will explain the use of this technology later in the book.
Direct vs Indirect Forces
As a result, the flow of orders into the market is a direct force behind the price action. All other factors (such as news etc.) will be considered biased, as their impact will only translate into price action when there are several change orders from “Not Executed” to “Executed”.
The biggest example of this is natural disasters. Of course, tsunamis, earthquakes, and hurricanes are significant events that can affect many markets. But what if it happens on the weekend? Although the reality of natural disasters is obvious, the market cannot be ignored because no orders can enter the market. We also know that some fake news or government information will be updated at a later date. These conditions are not true, but they may still persuade buyers or sellers to enter the market.
Price movement happens, not because the news is fake or real, big or small but, because of orders. Ultimately, it is all down to the direct force of buy orders and sell orders.
Our job as investors is to catch and keep up with economic trends, which means getting into the market and following its profitable path. To do this, we really need to rely on the direct power of the flow of order, but we want to go beyond that and use a combination of direct and indirect power to differentiate ourselves.
Characteristics of Indirect Forces
News, reports, policies, business processes, etc. can be subject to translation;
By definition, interpretation is subjective. It often reduces the risk of those involved in this business doing the wrong thing. One reason for this may be that large business participants often have access to this information before small business participants, and therefore are first in line. Since translations are subjective, their interpretations may differ from ours, and their decisions are more likely to be reflected in the market. Subjectivity cannot be the same way of doing business because the price changes according to the purpose: buy and sell orders.
Indirect forces are a powerful factor in business movement, but planning a business based on this information is often problematic because the results are often inconsistent. If the price always went up after a good report, that would be common sense and everyone would benefit, but that is not the case.
Sometimes, based on news or other unfairness, a business behaves in a way that most people don’t want. Here’s an example:
Here we see EURUSD falling and we are faced with the Consumer Price Index (CPI) report which is expected to be worse than the previous CPI report. Since EURUSD has already fallen and the data is expected to be worse than before, many international traders opened short positions in this market before seeing the new data.
When new data comes out and the numbers are worse than expected, many people will start short selling in the hope that the price will fall further. In fact, the opposite is true:
The simple reason that the EURUSD went up instead of down was that there were more buy orders filled than sell orders. Although a generic interpretation would have been that we expected a move to the downside, perhaps large market players already had clues about the information and sold much earlier, because the news was already priced in. Alternatively, perhaps there were other indirect forces that motivated the large market players to buy the euro and they simply used this report to purchase large quantities of the euro at a lower price.
We do not know, nor would we ever be able to find out but, what we know for sure is, there were more buy orders than sell orders. It simply could not be otherwise.
Think of buying and selling like anything else in life, let’s say a property. If someone is trying to sell a property and no one is buying, after a while the seller needs to lower the price to find a buyer. Once the seller lowers the price, perhaps a buyer emerges, and the transaction takes place, and the “order is filled”. If someone wants to buy a property of a certain specification for a set price, and all properties that meet the buyer’s specifications are more expensive, he or she may need a budget increase to be able to buy the property.
With the euro, price was falling because there were many sellers and few buyers. For the euro to turn and go back up, it needed to be that there were few sellers and many buyers. At some point in that region of price where the euro turned, large market players would be buying so much from anyone who wanted to sell, to a point where everyone who wanted to sell had sold and there was no longer a significant number of sellers at any of the above price points. Therefore, price had nowhere else to go but up.
What may seem counterintuitive, but is a fact about price movement, is that price does not move because of excess buying or excess selling. Price movement happens because of lack of buying or lack of selling. In the case of a huge market like the euro, how could we end up with a lack of selling, especially in the case of news reports that are likely to encourage sellers? The answer is because the large market players purchased so much that they removed the sellers, so price moves up looking for the next available seller, like how the price of anything moves in real life.
Characteristics of Direct Forces
A trade occurs when the status of an order changes from “Unexecuted” to “Completed” regardless of why the order entered the market in the first place. If there was a way to identify unexecuted orders (UFOs) before they were executed, traders would be able to catch the trades without interruption. There is no “explanation” needed. We don’t know why these orders are there, and we don’t need to know; we just want to know the objective truth of their lives.
There are some small orders in the market that can cause temporary price delays or small changes in the market. As traders, we want to pay attention to large orders that can be larger and faster in the market. The benefit of this is that when a larger and faster move occurs, other traders can join the group and continue to add orders that support the move.
For example, if many people buy to push the price up and then the price rises rapidly, international traders will start buying now that they see the price has gone up. Their orders are now causing costs to rise.
It would be very good for us if we entered the group of unfilled orders at the beginning of the movement. In order to make money, others must buy after us, pushing the price down, or others must push the price down and sell after we sell.
The question is, “How do we detect UFOs?” Doing so involves using advanced business techniques. Of course, those who are experienced and skilled at analyzing drawings and finding patterns can use their eyes to accomplish this task. But we want to do everything possible, eliminate the possibility of human error as much as possible, and base our business decisions on purpose rather than interpretation.
Additionally, there is more to price than what the human eye can see. It is not just about the structure of the candles that gives us clues about where orders may lie, but information such as volume and the number of trades that took place per candle. These are processes the human eye cannot see and, although we could access that information and analyze it all manually, that would take a long time, and there is still a possibility of error and misinterpretation.
This is why we use technology, which can access the needed information, analyze it and display it to us as trading opportunities, all at the speed of light.
If you were to use the AutoClimate™ app and see that a market is going in a particular direction, and that it is likely to continue to move in that direction, and you know you have UFOs also pointing in the same direction, then it makes a lot of sense to enter at that price. In this case, we have multiple parameters pointing to the same conclusion, which increases the probability of success.
Of course, sometimes orders are canceled and sometimes indirect forces may cause crazy movements in the markets; that’s why we use stops. Although we have higher probability, it still isn’t guaranteed so we always, always, always use stops.
Huge orders that enter the market from large market players are placed within a range of price, so rather than having a huge order for one exact price point, they will add many orders which are at random prices with random quantities within a range of price. Sometimes tricks are played on retail trades, where market makers will show a very large order at a price point, only for it to be removed at the speed of light just as retail traders start adding their orders.
Big traders spend a lot of money to put their ultra-fast computers and servers in the same building and on the same floor as the exchange. The proximity means that the fiber optic cable connecting the computer to the server takes a nanosecond longer than it would if it were further away. In today’s technological world, they can play with this extra time, placing and canceling large orders to create the impression that the price will move in a certain direction, encouraging new people to buy and sell orders, but in the end. they are canceled. the decision may be in the opposite direction of the business.
The good news is that when big traders enter the market, they move the price even if they split their orders into smaller lots of certain amounts. They can do this because they have enough capital to allow the number of orders to exceed the number of orders (or vice versa). We use the AutoUFOs® app as a UFO reporting tool that constantly looks for lines that indicate the asset’s behavior.
Use strategies that make the order seem more objective; we don’t need to care if the action is for management, the media, or the unemployment numbers. All we care about is understanding the market sentiment and the likelihood of the market going up or down, and then entering the market where there are many orders waiting to push the price.
This kind of process needs to be run immediately because UFOs can be added or removed from the market at any time. As investors, we need to be prepared for this; sometimes you have a business where everything is in place, all the rules are met and then a new UFO appears because a new order is added or the previous UFO disappears because the order was canceled. This can also lead to climate change, so you have to cancel the deal or prepare another deal in the opposite direction.
Direct Forces in Action
Using the same EURUSD chart that we used before, we will now display what the AutoUFOs® app is currently telling us and show us where it is not desirable to push the price higher (this one). To summarize, at 10:00 GMT we received a report that was supposed to be bad news, but when it came out it was worse news. Many novice traders around the world were shorting (or selling) the Euro during this period, with many thinking that the market would crash due to this bad news. Now we have UFOs on the map telling us where the right action is:
This suggests that price is moving in the opposite direction of demand because enough buying can create a gap between sellers, causing the same thing to happen: price higher.
That’s the difference between understanding the mechanics of work and not understanding them. Perhaps the best comparison is when we talk about architects. Unless you’re an artist, when you see a private home you’ll be amazed and think, “How did he live like that?” You want to see what’s involved: measurement, the physics of gravity, the concepts used to calculate everything, and more.
Investors can see people in the media or know other investors who are surprised or amazed by what’s happening in the market. We see the flow of action and understand what’s happening.
In the business world, we can divide traders into animals and animals. Ideally, we want to be the best butcher that will allow us to survive, but this cannot be done as a retailer or marketer. Our goal as tradesmen is not to be victimized. We want to enter the market in a way that will benefit from the result according to the situation and if we suffer losses (at least) we want to survive. If you suffer, you will be defeated and you will not survive in the market.
So when buying and selling, the important thing is to buy only when big traders are buying and sell only when big traders are selling. By aligning our command with those who have the power to enter the market, we can turn the situation to our advantage and increase our ability to survive. Using strategies that see big orders will involve us in big business and we will be less valuable.
