In this 2-part article, we’ll look at how to gradually implement Order Flow in your trading – gaining benefits along the way and avoiding frustration.

There’s an aspect to reading order flow that’s a bit like playing a video game. Many video games start easy and then get harder. Each level can’t be too hard or too easy as either will cause you to lose your interest. Research has shown that when adult rats play with juvenile rats, the adult will let the juvenile win around 30% of the time – less than that and the juvenile loses interest. I just think it’s better mentally to book wins and build your confidence than shooting for the moon and falling on your face.

If you take nothing else from this article, take this – try and build in some positive feedback in your trading journey. Don’t start at level 6 and get frustrated, start at level 1 – which is…

FREE BONUS: Take a look into the decision-making process of professional traders with this video training series that helps you make smarter trading decisions. (Article continues below)

Order Flow itself is simply information. Just like charts, it can be used in a number of ways, some good and some bad. But let's first break down order flow into it's components so we all agree what we are talking about:

Order Executions/Tape Reading - This aspect is the real flow of orders. It's the information we see in Time & Sales, Footprint Charts, Cumulative Delta. It is looking at market orders, either as they execute or historically. I guess this is the "true order flow". Every trade is a buy and a sell. We look at market orders because we consider them to be more aggressive. When someone trades with a market orders, they are giving up a price to get an instant fill. Limit orders on the other hand just lazily sit there waiting for a market order to hit them. Often these are market makers with no directional conviction. So we see market orders as being more significant.

But we don't use these in isolation.

Volume Profile/Positions - The tape reading part helps us assess various things like momentum, traders getting stuck, balance of trade BUT the volume profile helps us understand where people are positioned and likely to get stopped out. I sometimes call this "Order Flew". It's important to know when trades will be "washed out" - for example - if we have a volume cluster on the S&P500 Futures and the market moves up 100 points and back down to it, it's unlikely short term traders on either side that were positioned there will still be there. But recent, nearby volume helps us assess areas of positions.

Market Depth - The bids and offers, the lazy passive orders waiting to be hit. This is part of the story but in terms of overall importance, I'd put it at around 20% at most. For example - if you return to the high of the day on any market, the offers will be quite large directly above the high. It means nothing at all. It's just a quirk of the market. It does not help you tell if a price will hold. On the other hand, if you see large depth and as we approach it, we see more added to the depth in front of that price, it means others are front running that depth and that is a useful bit of information.

This is the key - it is all just information. Just like price charts are information. When people look at Order Flow, they consider it to be a technique more than a set of information. They look for things like iceberg orders and decide to make a one rule trading system to fade every iceberg, For these people - yes, order flow is overrated because they are trying to ignore everything else going on in the markets and construct a trading system a chimp could execute.

For those looking to improve a decent trading approach, the best thing to focus on in Order Flow is momentum. Once you can read momentum you can:

• Avoid getting into positions when momentum is against you.
• Confirm trades are working after entry when momentum goes your way.
• Exit trades in profit when momentum fades.

That's perhaps the easiest way to use order flow because momentum is easier to read. It's about the market continuing to do what it's already doing. On the other hand, reading a turn in the market with order flow takes a higher level of skill and a little longer to learn.

Order flow can't put lipstick on a pig. It won't help you 'improve' something that doesn't work anyway, which is why whenever someone calls me, the first thing I ask is what they are currently doing and we discuss whether they need a reset or whether it will actually help.

When Jigsaw started back in 2011 - we were one of the first in the space and certainly had the best education. It was always going to attract the underbelly of the trading education/tools world and now we see stuff out there that is so complex but so impressive and futuristic that new traders are drawn to it like moths to a flame.

So here's my advice when looking at Order Flow

• Order Flow can't improve something that doesn't work.
• Order Flow can be used on it's own, without charts to enter and exit the market but you also have to be able to recognize different market states that need different/altered setups. There is nothing magical about this.
• Don't start jumping at shadows and take 50 trades an hour in your first week looking at Order Flow, be selective. It can be exciting to see cause and effect play out in front of you for the first time but don't overtrade.
• Do drills to learn how to read it before you trade it.
• Markets can only go up and down. Don't overcomplicate it. If you have too many Order Flow tools on your screen - you will not be able to make consistent decisions. Less is more.
• Take time to choose a market with a pace you like. Interest rates might send you to sleep, the DAX might give you a heart attack.

It is hard to see how a set of information could be overrated. It is true that some methods of presenting this information are better than others. It is also true that some people simply get on better with different tools (e.g. Footprint vs DOM).

There's a middle ground between complexity and simplicity that will leave you making consistent decisions where you improve over time. For those people, Order Flow will be way underrated because they will be the one's getting the most out of it.

Those that jump in with both feet on day one and those that have 100 different tools up, for those, it's a painful experience.

Keep it simple and manageable. Start with momentum reading and build from there. You will never look back.

Level 1 – Stop getting run over

I know on the surface, this doesn’t seem very sexy. You just want to know when to get in, right? This is the “anti-trade” in a way. There’s a lot of focus on looking for reasons to get into a trade, but very little on reasons to NOT get into a trade. So there’s 2 skills here – one is reading the Order Flow, the other is letting go of that trade – put that quarter back in your pocket and sit this game of space-invaders out, even though you’ve been queueing up for an hour (yeah – back in the 1900s, we had to go to an arcade to play video games).

The ability to read momentum in Order Flow is a bit like learning to cross the road. Or very much like the Arcade Classic Frogger, which you can play here (just use the arrow keys to play). Give it a try, it’ll help. You are trying to gauge the momentum as price comes towards your entry price. You will do one of 3 things:

• Take the trade at the entry price.
• Take the trade at a new price – this could be at a better or worse price. For instance, if it appears that the momentum very low, then maybe it won’t even make it to your entry price. Or the momentum could be so fast you wait a little and get in at a better price when things have calmed down.
• Not take the trade – which is often made trickier by your desire to take a trade, feeling that you NEED to trade.

In other words – fewer trades that immediately and forcefully run against you after entering. Sure – it’s not as sexy as a “reason to get into a trade” – but it’ll make the difference between a Camry and a Courvette.

Now – the tricky thing is – nobody can tell you how to do it. Like crossing the road, nobody sat you down and explained the physics of stopping distances, if you are lucky – a parent held your hand and repeated the process with you and you learnt through repetition, not theory.

To help you adopt this skill, here’s our video on momentum drills, focused on accepting/rejecting trades.

Level 2 – Volatility Meter

Unless you’ve just started out, you’ll know that one thing that is absolutely consistent in the markets is that volatility (and therefore risk and opportunity) changes every day. Your job as a trader is to take advantage of the opportunity the market makes available to you, while at the same time mitigating your risk. Part of ‘being at one’ with volatility is keeping your eye on the news in the morning, just being situationally aware. News has the potential to create market activity, but it’s no guarantee market participants will react in a certain way – which is why news traders heavily rely on Order Flow to confirm if the market is reacting as expected. So sure – use the News and the VIX – for indications of volatility but confirm with Order Flow.

You can assess volatility at any time but my preference is to focus on the opening minutes. There’s arguments that say it’s better to do it at 10am – when things have calmed down but I find the open to be a good indicator as to how the day will go. Plus, if you wait till – the range is going to tell you a lot about volatility anyway! This is about an early and accurate ‘heads up’ at the start of the day. Overnight range is a good indicator – but the amount of participants in US hours dwarfs the overnight trading volume, so I think you’ll still be left with the question “but how are US participants trading?”.

This is a skill that takes a little longer to adopt, not because it’s hard but because there’s only 1 open a day, so only 1 time each day to work on it.

If you did play Frogger, you probably got hit by a car in the first or second lane. Now, imagine it running at 20x speed, you’d see the difference immediately. You’d recall how it looked the first time you played and when you see it at 20x – you’d see there’s a huge difference. You wouldn’t be able to tell it’s 20x specifically, but you would see that it’s way faster.

You acquire this skill by watching the open each day on your market(s). Watch Depth & Sales as the market opens and just observe it. You are likely at the screen anyway at that time, so it’s zero cost.

On some days, you will see terrible low-volatility, low opportunity action and you’ll go do something else for the day. Of course, this will only happen after you try and trade low opportunity days and spend 8 hours losing a tick and paying the broker. On other days you’ll see high volatility and know to tweak your size/stops/targets as necessary OR chase different trades. If you have an 8 tick stop and volatility doubles – you will get taken out of most of your trades, not by being wrong about the trade but by being wrong about how much ‘wiggle room’ it needs to play out.

In terms of doing the actual adjustments to stops and targets. That’s not something you will have to do every day, if the shift in volatility off the open is small/subtle/hard to perceive – everything stays the same. What you are looking for are significant changes. Changes that make you say “Holy Moly – this is a wild day” are what you are looking for – big, obvious stuff.

And there’s a bonus – if you do this, not only will you be more in tune to shifts in volatility – you can often take trades at that time because of an observed behavior around overnight volume (which is explained in a video you get with daytradr professional ). Just walk before you run, OK?

Level 3 – Reading Pullbacks

I love pullbacks, I feel that some pullbacks have a good R:R because they such low participation, there’s no opportunity for larger players to nudge people out of position. If we put in a low for the day and are still close to it – we KNOW there’s gonna be a ton of stops underneath it and that’s where people that nudge the market around make money. Profitability depends on the stops firing. On the other hand, you don’t have that with a low-volume pullback – there’s not enough stops underneath it to warrant spending money on nudging it down.

Before I explain the mechanics of reading pullbacks, let’s get oriented with the chart and in turn about the mechanics of pullbacks and reversals. 

• This is a 1 minute chart, compressed enough so you can’t see the individual bars – that is intentional. What remains is “where it went and where it turned” – which is really all you need.
• Green numbers are number of ticks in the swing, purple numbers represent the volume in the swing.
• The swings are blue/red. Blue – if it’s an upswing and the volume is greater than the volume on the last downswing. If it’s a downswing and the volume is less than the last upswing, it’s also blue. Reverse that for red.
• Look at the size/number of ticks in the upswings and downswing – you can see that in the trend up from 6:30, upswings were bigger and had more volume than downswings. Then it reverses after 9:30 and now the downswings are bigger/more volume than upswings. 
• Look at the first up swing from 6:30 – the number of ticks and volume are significantly larger than any prior downswing. 
• Look at the first red downswing at around 9am. You can see 22 ticks and 2.7k volume.

This chart is a pullback traders dream. It is consistent that almost every time the market reverses, the first swing in the reversal is significantly larger and more voluminous than prior swings. You want to estimate if a market has turned and now it’s time to stalk trades in the opposite direction – this is the best way I know to do it. You could also rely on cumulative delta for this on the ES – but that’s no longer the case since COVID, the great liquidity sdwindle.

So why is Level 3 pullbacks? Well let’s consider 3-6 to put it into perspective:

• Level 3 – Trading Pullbacks
• Level 4 – Sitting in a trade through “with trend moves”
• Level 5 – Sitting in a trade through multiple with/counter trend moves (legs)
• Level 6 – Trading a news event (added volatility)

As we’ve seen – pullbacks are lower volume (and lower energy) events. Trouble is – you won’t know the volume till the pullback is finished. The upside is that the pullbacks do trade and end in observable ways (discussed in depth in the Jigsaw education).

Now – let’s say your trades have a target of 30 points on the ES. When you get to Level 3 – you are only reading pullbacks. Or rather – that’s the current level of skill you are working on, you should not attempt to manage your trades through multiple upswings/downswings. If you dive straight into that – chances are you’ll get spooked out well before your 30 point target. If you want to dive into the nitty gritty of the theory of pullbacks and reversals – check out this olden but golden video from Jigsaw. 

From an order flow perspective – you’ll focus on 2 things.

• Assess if this really looks like a pullback. The move might be the same pace in terms of number of ticks per session moved (although it’s often slower) but the volume on the countertrend side will be way lower. 
• Nail the entry – often we just get to a point and no more countertrend traders are available but sometimes we see the pullback end with a nice iceberg order/absorption.

This “does this really look like a pullback” and “does it look like a with trend move” – that’s half the battle with Order Flow. They are 2 sides of the same coin, but honestly – I could have saved 6 months with Order Flow if I’d been advised to do this!

So – even if you don’t trade pullbacks, this is still the way to go – pullbacks give you a tamer training ground to read order flow – I mean – there’s literally fewer orders in them.

In Part 2 – we’ll discuss the remaining events.