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Module 3 - Advanced Order Flow Concepts

Module 3 of the document focuses on advanced order flow concepts, emphasizing the significance of hidden trades and iceberg orders in understanding institutional money flow. It distinguishes between absorption and consolidation in market activity, highlighting how high-volume transactions indicate absorption while lower volumes suggest consolidation. The module concludes by outlining key factors for identifying absorption, which include high relative volume, price point volatility, and initiative continuation.

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Mohamed aziz abidi
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32 views

Module 3 - Advanced Order Flow Concepts

Module 3 of the document focuses on advanced order flow concepts, emphasizing the significance of hidden trades and iceberg orders in understanding institutional money flow. It distinguishes between absorption and consolidation in market activity, highlighting how high-volume transactions indicate absorption while lower volumes suggest consolidation. The module concludes by outlining key factors for identifying absorption, which include high relative volume, price point volatility, and initiative continuation.

Uploaded by

Mohamed aziz abidi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Strategic Order Flow Trading

Text

Module 3
Advanced
Order Flow
Concepts
Disclaimer
Hidden trades and locations are a key aspect of understanding institutional
money flow. While retail traders focus on price action visible on their screens,
institutions operate beneath the surface, accumulating or distributing positions.
It is important to realize that the information displayed on the screen represents
only a fraction of the market activity. By analyzing order flow and identifying
things such as value areas, retail traders can identify institutional biases and
locate advantageous trade opportunities outside of the visible price action.
Sometimes it’s hard to know what happening in the footprint if all you have is a
footprint.
Accumulation?
Hidden orders can camouflage the trading flows of significant players in the
market and manipulate perceptions around true liquidity by other participants.
Understanding their influence improves reading real supply/demand.

Iceberg orders enable large traders to disguise their total interest and impact on
order flow. Being aware of their ability to obscure market participation and depth
helps build a more accurate picture.
On a footprint you can’t determine if there was an
iceberg since you are looking at the volume that
traded AFTER it traded.
From my own experience and talking to traders I know at banks, pretty much
any order over 100 contracts is iceberged in the ES. In lesser markets anything
over 25 contracts.
Traders who watch only price may perceive normal two-sided order flow
unaware of the hidden iceberg orders skewing the actual supply and demand
imbalance.

When orders are hidden, normal order flow and liquidity may appear balanced,
even while hidden orders create an imbalance in overall supply or demand.
I prefer to look at the volume traded and
determine the importance of the bids and offers
and how they are trading, knowing that icebergs
are prevalent.
Accepting that hidden liquidity exists allows traders to better contextualize
visible market flows and depth. What is seen on the DOM and price ladder
screens may not tell the whole story.

Taking into account hidden liquidity leads to healthier skepticism about current
prices rather than taking order flow at face value.
For example, hidden buying interest soaking up sell orders
can lead to a short-squeeze as offer liquidity is quickly
removed. Ever hear of trapped traders?
Sudden order imbalances or volatility can occur when hidden orders stop being
renewed or reach completion. Their impact is finally fully felt on price.
Look at the big offers going into the low.
What happened when it ended? Bounce.
Market correcting itself after
run up.
Consolidation and absorption are often confused, but they have different
outcomes; consolidation refers to a sideways market pattern, while absorption
refers to the type of activity in the market.

Consolidation and absorption are similar, but the difference lies in the volume of
transactions, with absorption indicating a release of pressure and a potential
rise in price.

Absorption is more likely to continue than consolidation, and professional


traders look for high relative volume, price point volatility, and initiative
conclusion to determine whether it is absorption or consolidation.

Consolidation and absorption in trading are distinguished by their response to


high volume, price volatility, and the changing market dynamics.
Absorption, look at the amount of effort being put in.
Consolidation
Consolidation refers to a sideways movement in the market, often resembling a
support and resistance zone. However, it is important to note that this term is
not interchangeable with support and resistance. On the other hand, absorption
involves a specific type of activity and interaction among participants. It occurs
when the market reaches a price point and experiences a substantial volume of
transactions. Absorption can be characterized by buyers lifting offers and
encountering large orders, resulting in high-volume, high-velocity trading.
Conversely, consolidation appears similar to absorption but involves lower
volume transactions.
Consolidation
Absorption
To distinguish between absorption and consolidation, traders should focus on
the volume of transactions within a narrow price range. The following factors
can help differentiate the two:

Volume: Absorption involves sustained high-volume trading within a tight range,


indicating significant market activity. Consolidation, on the other hand, exhibits
lower volume transactions.

Price Range: In absorption, buyers lift offers and encounter resistance, leading
to a limited price range. In consolidation, the market may extend the range but
often returns to retest the other side.

Initiative and Continuation: Absorption is typically followed by a continuation of


the price trend, as buyers have filled their orders. Consolidation, however, may
result in limited continuation and a higher likelihood of price retracement.
Consolidation, every time it looks like the market will
break, there is reversion.
Absorption
By understanding these distinctions, traders can apply this knowledge to their
charts and assess the potential value of each scenario.

The key factors to consider when identifying absorption are high relative
volume, price point volatility, and initiative continuation. All three elements must
be present for a valid absorption scenario. Failure to meet these criteria
suggests a consolidation pattern instead.
Text
This concludes Module 3.

In Module 4, I will discuss


Order Flow Shifts

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