Analysing Order Flow and Market Structure

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Video Transcription:

Hello traders, welcome to the Price Action Course and the fifth module: Order Flow. In this lesson we are going to go through what order flow is and why it is so important for you to learn how to analyze it and analyze market structure. And basically this module is going to teach you how to read price action? How to use it, and how to measure it to decide whether you should hold on to a winning trade or you should get out and take your profit. We are going to go through what acceleration is and we are going to go through analyzing the deftness of the corrective move to predict future price movements.

So, let’s start by defining what order flow is. Order flow or transaction flow is the analysis of the transactions or orders placed in the market. This is very important when we are deciding on placing a trade and even more important when we decide to hold onto a trade or to close it. Order flow is all about predicting what will be generated and position yourself to take advantage of that order flow, which will move the market. So, we are looking to position our sales where the big players position themselves. It’s all about analyzing all the different variables, scenarios, emotions, market players, positioning, et cetera, that can generate sufficient order flow to move price.

Order Flow

Order flow analysis has nothing to do with technical or fundamental analysis. This is pure price action analysis. What’s important here or what’s cool about this is that we are basing our decisions on pure price action meaning that we have nothing else that is going to confirm our ideas but price itself. Here we aim at understanding what the big players are doing by reading and measuring price action. So, we are going to use order flow to measure the moves in the market. Remember that when we trade based on price, we are trading with the direction of the market, so we are directional traders. We are going to aim at positioning our sales where the big money positions itself, meaning that with this analysis we are going to make our risk to reward ratios and winning rates even better.

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So lets to go a GBP/USD four-hour chart and let’s start analyzing the structure of the market. So here’s the GBP/US dollar four-hour chart and as you can see, we are in healthy down move. And we are going to start from this high right here. What we are going to do is we are going to place lines at each swing low and this is going to help us further in this module when we start measuring these moves and interpreting what the deftness of each move means. So, as you can see, we have the first swing low at this level, then we have a corrective move and we are also going to place lines at each swing high, okay? Then, we have this swing low, then we have a corrective move to these highs. And then we have another swing low, because you can see the prices making lows, then a lower low, then a lower low. And we have the third corrective move at these highs right here.

You can see at this level, price made a higher low and failed to make a higher high. This means that this is just part of the corrective move before we actually move to the next swing low which is this one right here. You can see that price actually made a base at this swing low. But, let’s go back to this part of price action. You can see that we corrected to around the 62 level, then we made a higher low and we failed to make a higher high. And then price just plummeted to these lows. This is very important because if, let’s say that price had broken here and made a higher high than a higher low, this down structure would no longer be in play and our analysis would tell us that we should be looking for long opportunities. But price failed to go higher and just re-tested the same levels before moving lower.

Order Flow on a Chart

So we have the fourth lower low at these levels and the corrective move at these highs. You can see that price actually stayed at these levels or continued ranging inside this swing low and this swing high for a while — actually for a month and a half — before making a new low at these levels right here. Now this is the fifth swing low and this is the corrective move to the off side. Now, as you can see we have now a very visual representation of the structure of this market. We have every swing low and every swing high marked with a horizontal line. And this is the first step in analyzing market flow. Because, after that we are going to analyze every single one of these swings to determine whether the move is decelerating and whether, if we were on a short position, we should get out.

First of all, you can know and you can see that just by looking at this chart… let’s say that we were on a short position after these corrective move to the downside. And you can see that this corrective move is shorter than the previous corrective move, but the third wave right here is actually shorter than the second wave and the third corrective move is larger than the second corrective move. This means that at this time in price action, the move to the downside has decelerated and we might want to think to close our position. Okay? And if price had made a higher high right here, we would have closed our positions. But when price failed to break these highs, we were still on a short position and we could have placed our stop losses right above these highs. Okay? And by placing our stop loss orders or moving our stop loss orders above these highs, we are actually locking in the profits from our entry around these highs and we actually are using market structure to determine whether we should get out or not of the trade.

If price breaks with this high, this means that the short idea is no longer in play and we should get out immediately. But because price failed to break this high, we were able to increase our profits to these lows. And again, when price corrects to the upside, we could have placed our stop orders above the swing high and hold our positions through all of this range of price action before continuation to the downside. If we are actually still in the short position, we could have moved our stops above the corrective move, just waiting for a continuation to the downside. Now, this is how we use market structure to manage your trade. In the next lessons, we are going to use every one of these measurements or every on of these swing highs and swing lows to determine the flow of the market.

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