OrderFlowAnalytics - Volume Profile Analysis

OrderFlowAnalytics - Volume Profile Analysis Total size:4.97 GB Contains:59 files

Order flow and volume profile trading is a method of trading practice which combines two separate methods of price action analysis to identify price levels with significant support and resistance, thereby improving the rate of accuracy of trades. Traders use order flow analysis to identify and visualize both historic and current/real-time price data to get a clear(er) picture of the depth of market. A volume profile analysis is performed to identify the volume traded at specific price levels over a certain period of time.

The trader then combines the data from order flow and volume profile analysis to identify price levels with significant support and resistance strength by figuring out the distribution of trading volume at each price level for a specified time frame. This helps improve a trader’s rate of accuracy in his trades thereby improving his profit percentage.

However, this is not a trading method that could be used by all traders. This is clearly evident from the debate surrounding the topic over the rate of accuracy of calls generated from this trading strategy by various traders. The one fact accepted by all is that the strategy can be used across a wide array of assets in financial market such as Forex, Commodities, equities and F&O.

The challenge though with OTC markets like the FX market and the Cryptocurrency markets is that as these are not exchange aggregated, the volume/order flow analysis is often fragmented and is often “silo”ed. This presents data from each exchange or “chain” of exchanges which aggregate order flows from the same market maker/supply chain. Often, though it may represent a sample of the market’s sentiments, it may not necessarily be an accurate reflection of the entire market’s exposure. Without central reporting and the regulatory obligation to report these numbers accurately and in a timely manner, whatever data will needed to be handled with a pinch of salt.

One possible alternative is to look at the futures and options instruments with underlying currency units and infer the data and positioning balance of the market. Though this is not an accurate depiction once again, it is the next best thing to obtain authentic data, quickly.

The reason most traders fail to see an improvement in the rate of accuracy of their trades is due to lack of proper understanding of the order flow analysis mechanism. Unlike volume profile analysis which is a one-trick-pony and is a clear-to-understand concept, order flow analysis is a highly advanced technique and a comprehensive method of studying price action.

Order flow analysis cannot be simply explained in a single definition. Multiple examples on how the method of analysis is interpreted could prove to be a limitation, which may hurt the accuracy of calls generated by combining the 2 analysis, which should be only seen as a confirmation call, and not a trade alert. In simple words, order flow analysis is a mechanism used to understand the force that moves price up or down, by identifying the relationship between market orders and pending/limit orders whose interplay could help a trader gain a clear picture of the depth of market and harness the potential effect waiting to happen should price trigger those orders clustered at that price level.

Depth of market is a concept used to identify the number of open buy and sell orders for a financial instrument at different price levels including both pending and instant execution orders. A proper interpretation of market depth helps a trader identify the assets’ ability to sustain relatively large market orders without impacting the price of the security.

Once the trader identifies an asset’s ability to hold steady within a certain price level using order flow analysis, the data from volume profile analysis is taken into consideration. Volume profile analysis takes the total volume data for each price level from a specified time frame and separates them into buy volume or sell volume based on available trade data.

Once the trader is able to understand and identify the above mentioned points from both strategies separately, the trader applies both order flow and volume profile indicators in the chart at the same time to identify price levels where there is high possibility of breakout affecting the directional flow of the financial asset. This helps a trader place trades with increased rate of accuracy improving his/her chances of success in their trading activities.

The limitation of this strategy, as explained above, is how clearly a trader is able to understand, identify and interpret signals (as with all trade calls being highlighted and executed in a discretionary manner). However, the fact that it greatly improves the rate of success of trades by manifolds is accepted by most successful technical traders as long as one has complete understanding of the working mechanism of both strategies.

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OrderFlowAnalytics - Volume Profile Analysis

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