How to use forex order flow data
How can one best utilize the orderboards that we publish here?
I’ll say straight away that it’s not the only tool I use, or indeed support/resistance/pivot, but my time as a succcessful interbank trader taught me to “feel” a market based on price action, fundamentals and info flow. This gut feeling doesn’t come overnight and I’m fortunate that it kept me in good stead for many years ( and continues to do so ) but as a market maker the ability to read a prevailing price action was crucial both in my quoting ( almost always had to be two-way to banks or corp desks) and my attacks on the market.
I do use a variety of tools but usually technical analysis serves as a confirmation of my plan rather than an instigator which I know it does very often for the retail trader. But let’s also understand that many bids ( buy orders ) and offers ( sell orders ) are themselves based on technical support/resistance levels.
Anyhow, with regard to the orderboard it’s important to know that the levels we post are what the banks have to execute for either themselves or their client base. If the orders are of “good size” ( we are not always privy to specific amounts but can safely assume these to be in excess of USD 300m and sometimes 2-3 bln)) then we can reasonably expect traders to “front-run” the level, using the order itself as a built in stop-loss, although for various reasons this practice is frowned upon when implemented by the bank/s that has/have the order/s.
In other words if there is a large sell interest at say 1.3170 we can expect some natural resistance ahead of it. Where traders ( wholesale and retail ) will choose to enter will depend on their size of deal and how much they are prepared to lose. So you might want to sell 10 pips or 5 pips away for example with a stop-loss immediately behind the order level in the expectation that ” lemming-like” many others will be doing the same and hence we’ll see an immediate jerk higher.
Order information flow has always been shared amongst the interbank market and is not considered "insider" trading per se. Obviously if you’re short and have a decent sell interest a little higher up then it would be prudent to encourage others to sell too.
The danger and frustration with this tactic is that certain banks/traders may target the “stops” and force a move higher, to say 1.3175 in this example, only to be sitting there selling as the shorts rush to cover. Therefore the price action/follow-through is limited and essentially a false move. Either way the client who is selling is happy as his order will be filled regardless. It’s the other traders, both wholesale and retail, who will be somewhat hacked off!
As I said front-running the orders we post is at your discretion of course and you may choose to ignore them completely. You may also choose to buy or sell the "break" and hope the momentum earns you a few pips on the follow-through, but beware my comment in the paragraph above!
I think/hope I’ve covered most aspects of this style of trading/strategy. I know it won’t suit some, or even many, of you who are strictly t/a driven but I hope, at least it might give you another tool to consider and shed some light on the process.