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November 12, 2020
Trading
Orderflow Trading: Delta vs Liquidity – Complete Strategy and Indicators Guide

Orderflow trading can be intimidating at first.

Thanks to many different tools such as Depth of market, Times and sales, footprint
charts, or heatmaps, things might look very complicated for newer traders.

This article will break down the orderflow trading in a simple way, so things will
look much easier once we are done.

Once I cover the basics, I will focus on the aggressive orderflow, also known as
market orders, as they play much more significance in what is going on in the
markets.

The orderflow play high significance in my trading, if you are interested in

learning the techniques I use, you can check out the Trading Blueprint.

Table of Contents

Is Orderflow trading just a buzzword?

What is Orderflow in trading
Limit Orders
Market Orders
What makes markets tick
Volume
Liquidity
Why liquidity can be misleading
Volatility
Delta in Orderflow Trading
Different usage of the delta as an indicator
Cumulative volume delta
Cumulative Volume Delta – Regular divergence
Lack of aggressive buyers/sellers
Cumulative Volume Delta – Absorption
Cumulative Volume Delta – Hidden divergence
Single Bar Delta Divergence
Limit Driven Breakout
Delta on Footprint chart
Delta Y-Axis Profile
Conclusion
Is Orderflow trading just a buzzword?

Orderflow trading is often sold as a “secret to the market” and the way you can
trade like “professionals.”

This is why all these people teaching orderflow trading online sell courses that
start at around a $1,000 price tag.

If you have even the slightest knowledge of how the trading industry works, there
is no reason telling you that you don’t need to pay someone $1,000 to learn these
things.

Although you might learn something interesting in those courses, the fact that
these people try to sell you the hidden truth (which doesn’t exist) makes it not
worth the money and time.

Especially since the orderflow trading is very easy once you learn the basics.

So why is orderflow important, and why should you care?

It is simply because the orderflow shows us what is going on in the market.

It breaks down the auction process and gives us pure information about what market
participants are doing.

I use the orderflow because it breaks down trading logically and shows what is
going on.

This is something you won’t get if you use technical indicators such as RSI or
moving averages.

Even though there are situations where these indicators work, traders that are
using them only base their decisions on what indicators are showing them without
any deep understanding of the market.

Because you are making decisions based on what is going on in the market, you will
get much more confidence in your trading with enough screentime as some orderflow
patterns repeat repeatedly.
What is Orderflow in trading

As I already covered in the Auction Market Theory article, the trading DOM (Depth
Of Market) is the rawest form of the price you can see.

In this trading DOM, you have highlighted three things.

First is the price on the far left.

In blue and red columns you can see resting orders, also called passive orderflow
or liquidity.
Limit Orders

Limit orders are often the heavier hand in the market as larger players typically
use them to prevent slippage.

If you are using a limit order, you are a liquidity maker as you put liquidity to
the order book.

Everyone can place a limit order into the order book and advertise the prices for
which he/she is willing to buy/sell. But until the order is executed, It does not
mean anything.
Market Orders

The red and blue numbers in the middle show us the executions on the bid and the
offer.

These are the finalized orders at the bid and ask, also called delta.

Delta is the difference between finalized executions at the bid and the offer.

Market orders are often the weaker hand in the market.

Market orders are required for markets to move.

What makes markets tick

You often hear that markets either trend or are in range.

But why is that?

There are three factors that affect market movements, liquidity, volume, and
volatility.
Volume

Compared to delta which displays differences between orders executed at bid and
offer.

Volume represents the total number of contracts traded.

Here is the little quiz for you.

If you look at the Bid/Ask Footprint that shows 27 contracts hit the bid and 189
lift the offer, what is the value of Delta and Volume?

If you are seeing this for the first time and have no idea what the answer if you
should go read the Footprint Charts article.

Anyway, those who guessed Delta of 162 and 216 Volume are correct.

It is simply because 189 contracts bought and 27 sold, that gives you 162 (189-27)
and the total number of the traded contract was 216 (189+27).

High volumes in the market mean that you have a high number of finalized orders
therefore markets are moving.
Liquidity

As I already mentioned, liquidity represents resting orders in the order book.

They are the advertisement on the market.

Each market has different liquidity, you might hear the term thin and thick
markets.

Thick markets such as bonds are very liquid which means that they are moving slower
compared to thin markets such as cryptocurrency or some index futures.

You can see them in the DOM or heatmap charts.

Why liquidity can be misleading

A lot of traders tend to use these heatmaps in their analysis and decision making
as watching where the big players place their orders.

There is one significant problem with that.

As these orders can be placed in a matter of seconds, they can be pulled at the
same speed.

Think about it, why would anyone who is trading significant size, want you to see
their orders?

Large traders prefer to use hidden orders in form of an Iceberg order instead of
placing a large size at one level.

Iceberg orders are large single orders that are split into small limit orders.

The purpose of the Iceberg order is to hide the actual order quantity.

So why are these large orders seen on heatmaps and DOMs?

First of all, there are cases when these are genuine orders, but more often than
not they are spoof orders.

Spoofing is an illegal form of market manipulation in which traders place a large

order to buy or sell, with no intention of executing.

By doing so, the traders create a false impression of the high demand for the
asset.

Looking at the example here you can see a large sell order (yellow line) disappear
as price broke through it.

A lot of traders see this simply as someone pulled the order or that just buyers
were more aggressive than sellers.

But more often than not there is something much more going on.

As you can see before the price broke above it paused and consolidate below the
level with a large order.

This is a very common cause, as a lot of traders see these large orders and try to
front-run them.

What they don’t know is that the seller who advertised the large sell order above
is sitting on the bid and absorbing all their sell orders so he can build his buy
order.

Once sellers are exhausted, he simply pulls his limit sell order and the price can
easily go higher with his newly build buy position.

The key takeaway from this is that these levels are still important as they bring
an interest of those that are trading with a much bigger size than you and me.

But there is much more depth than just selling or buying were big size is resting.

These levels are going to play some role in the market, but if you see the market
turning ahead of a large order, make sure to take a look at another side if someone
is not silently buying all these shorts and vice versa.
Volatility
Volatility measures the relationship between volume and liquidity.

You might hear that markets are volatile or not volatile but why this happens?

There are three different scenarios we can have in the market.

High Volume + High Liquidity = Moderate Volatility which is same as Low Volume
+ Low Liquidity = Moderate Volatility
Low Volume + High Liquidity = Low Volatility
High Volume + Low Liquidity = High Volatility

Delta in Orderflow Trading

So now that you know why markets are moving and how liquidity works, we can proceed
to something which is in my opinion the most useful thing in orderflow trading,
delta.

As I already mentioned, Delta represents the difference between finalized orders at

bid and offer.

Why I find delta (market orders) more useful compared to liquidity (limit orders)
is simply because delta shows us the real orders that were executed in the market.

Compared to limit orders, they are just an advertisement and can be placed in the
books to confuse and mislead traders, but once an order goes through, there is no
turning back.
Different usage of the delta as an indicator

There are several ways how to interpret delta in your chart.

You can use cumulative volume delta to spot divergences, look at delta on footprint
chart or plot it vertically on volume profile.

Let’s have a look at all of these options.

Cumulative volume delta

Cumulative volume delta plots an indicator that shows us a running total of

finalized executions at the bid and ask.

cumulative volume delta

Compared to classical indicators such as RSI, cumulative volume delta doesn’t give
us overbought/oversold levels, but it shows us where the heavier hand is in the
market.

In healthy trends, you want CVD and price go hand in hand.

Once there is a discrepancy between cumulative volume delta and price, you can spot
potential trading opportunities.
Cumulative Volume Delta – Regular divergence

There are two types of situations you can have as the divergence between price and
CVD, both mean something different but the outcome is the same
Lack of aggressive buyers/sellers

Price is making new highs (lows), but the delta is not.

This tells us that there are no aggressive buyers or sellers at new highs/lows.
Because limit orders are usually heavier hand, the trend can still continue, but
without aggressive participants, there is a higher likelihood of pause or reversal.

cumulative volume delta

As you can see price makes a lower low but delta doesn’t.

This tells us that there is no willingness to sell and these new prices.

In other words, there are no aggressive sellers at new lows.

The same goes for the opposite when price makes a new high, but it is not reflected
in the delta.

cumulative volume delta

Cumulative Volume Delta – Absorption

This is my personal favorite type of divergence.

When cumulative volume delta makes a new high or low, but the price doesn’t, it
signals absorption in the market.

It means that a lot of market orders that are reflected in the cumulative volume
delta were absorbed by passive orders.

cumulative volume delta

The example above clearly shows a higher high in cumulative volume delta, but a
lower low in price.

This tells us that aggressive buyers are getting absorbed by passive sellers and
price sells off shortly after.

cumulative volume delta

Something I have noticed over my trading is that there are sometimes days when CVD
and price go straight opposite from the start of the session.

I am not sure why these happen but it is important to be aware of these days early
as you won’t put too much emphasis on these divergences.

Here is a recent example that I noticed during my trading in the Bund.

The only thing I can say for certain is that those aggressive market buyers didn’t
have a great day.

cumulative volume delta

Cumulative Volume Delta – Hidden divergence

This is the more complicated one, so if you are new to these concepts it can bit
little challenging to spot these.

Once again there are two types of these and they signal two different things.

I can stress enough that these divergences same as orderflow trading overall is
critical to use at the key levels.

If you are going to try to spot these things in the middle of nowhere, you won’t
find much success.

If you are interested to see how I find my levels and combine delta with different
price patterns and other factors of confluence, you can go and check out the
Trading Blueprint.
Single Bar Delta Divergence

Single bar delta divergence occurs when on a price chart there is an up candle with
negative delta or a down candle with positive delta.

If you are not sure how delta in the bar is calculated it can be easily explained
with this footprint example.

delta orderflow

The highlighted candle shows the number of contracts traded at the bid and the
offer for each price.

The difference between those two gives us delta.

At the bottom you can see a total delta for the whole bar, in this case, it is 428,
but the bar closed red.

This is called a single bar delta divergence.

This tells us that although there were more buy orders executed, the candle closed
red so the buyers got absorbed.

You can spot single bar delta divergence on your cumulative volume delta.

cumulative volume delta

As you can notice there is a lot of divergences throughout the trading session,
especially on lower timeframes which this chart represents.

This is why is extremely important to watch the overall context of the market and
what it tries to achieve.

Also, I do recommend you to watch those divergences which are really obvious.

Numbers are relative to the instrument but if you know that your average bar has
around +/- 1000 delta and you have a bearish bar with +20 delta, it probably
doesn’t mean anything.

But if you have a bearish rejection bar with +900 delta, you should probably start
to pay attention.

cumulative volume delta

This is exactly what happens in the example above where price breaks below the
support area and on the attempt to break back above, we can see a rejection candle
with 900 positive delta.

It clearly shows an attempt from the buyers to push the price higher but absorption
from sellers took place.
Limit Driven Breakout

This one is also not the easiest one to spot and on top of that, you won’t feel
very confident getting into the trade as you are buying or selling a breakout.
I am not a fan of breakout trading, but if there is a situation where to trade
breakout it is this one.

Sometimes you will get into the situation where you will see a big bar on the
candlestick chart but the bar on cumulative volume delta will be very small.

This is actually a very bullish or bearish signal since it tells us that the whole
movement was driven by the limit orders.

Once market orders realize what is going on they start aggressively hitting the bid
or lifting the offer and the market very often just goes one direction without many
pullbacks.

These are not easy trades to execute but once you spot the pattern on a key
structural level, you will know that it is most likely the go time.

cumulative volume delta

As you can see you get a zero pullback opportunity, so if you are okay with the
risk, the best thing is just to jump in at the market.

cumulative volume delta

This second example is much better in a way that price tested the resistance areas
so you already should be in a short trade.

The limit driven move you get afterward is a great confluence that you are on the
right side of the market.
Delta on Footprint chart

A footprint chart is a great tool to look at delta for single bars.

I won’t go in-depth, as I already did in the Footprint Chart article.

But you should always be looking at your footprint chart to spot where market
participants might getting too long or too short.

This way you can easily spot the absorption and also strength or weakness of moves
happening in real-time.

delta footprint
Delta Y-Axis Profile

The last use of delta can be found the same as the volume profile, on the Y-axis of
your chart.

This plots a delta for each price level through the trading day.

As delta builds on each profile level, we can easily see at which prices traders
got either too long or too short.

You always want to look at extreme values with the best trading opportunities
provided when you are longing into levels with high negative delta or shorting into
levels with high positive delta.

This is simply because you have price approaching these levels where traders are
sitting off-side and most of them will be closing their positions on break even or
slight profit/loss, this usually ads the fuel into the desired direction.
deltaprofile

Although this might seem like a simple resistance turned support situation, there
is something a lot of traders won’t notice.

On the prior day, there was a significant selling in the same area.

As the price is trading above it, all these shorts will try to exit their
underwater positions on break-even on slight loss.

Since they are buying back their shorts, we have a strong orderflow confluence of
the move to the upside.
Conclusion

Compared to dumbed-down technical indicators, Orderflow trading requires a little

bit of practice and common sense.

But once you get used to trading and watching Orderflow, it offers an invaluable
advantage in your own trading.

SHARE

17
Adam

chaos
Comments

reply
Fresh
January 19, 2021

Merci
reply
Sam
February 8, 2021

So, while I do really enjoy reading your blog and have learned some tidbits, I
think this post starts off in rather poor taste. This is just my opinion, however
it seems like you singled out one guy and claim he’s ripping people off with a
$1000 course when that simply isn’t the case.

The reality is that the course you claim isn’t worth $1000 comes with upwards
of 60+ hours of video lessons, tons of examples, shares ALL of his trading
strategies, gives you access to all of his chartbooks, and also grants you access
to asking him questions at any time. Whether he copied chartbooks, or the
chartbooks aren’t worth $1000, that’s debatable at best. He also doesn’t go on to
say that he’s teaching you some grand secret despite his ads sounding that way, and
he shows off EVERYTHING you share on this blog and far more, in much greater
detail. If you ask me, that’s more than worth the price tag it holds. And in all
fairness, you’re charging roughly $210 for your trading strategies + chartbooks in
a bundle. The guy charging $1k goes into great detail to explain everything just as
you do on this blog, but with far more clarity (some of your posts are very
confusing and have grammatical issues that detract from the material being taught).
Can you fault him for wanting to make some money for the time and effort he spent
organizing all of the information and teaching it in an effective manner?
 Again, I really enjoy your blog, it just seems unnecessary to single out one
educator in your post when countless RETAIL educators like Nikk Legend and Shaun
Godinez are parading around blatantly scamming people with candlestick courses that
have about a 20% win rate at best. It’s better to just mention broadly that a lot
of courses teach nonsense and some people may claim orderflow is a miracle trading
indicator (it’s not but it is insanely powerful). However, the guy you single out
in that image is not the person you seem to have painted him as, and his
testimonials of people tagging him on IG (which you can look up and aren’t
manipulated) are a testament to that.
reply
Adam
February 12, 2021

Hi Sam,

sorry for the late response, I have completely missed the comment.

Anyway, I don’t think I have singled out one person on purpose. I have seen
the guy on a Facebook add and added screenshots of the price of other courses.

Although I understand this can come across as I directly targeted at him,

it’s not like that.

I am not saying that he does not provide valuable content in his course,
but the claims he has on the website of $1000+ custom DOM and Footprint are pure
marketing strategy, nothing else.

I can see that you are most likely paid for his content and liked it, which
is great and if it helped in your trading it’s amazing, but it doesn’t change the
fact that he is using cool buzzwords like “DOM” and “Footprint” which retail
traders don’t understand and put extreme prices to them.

Of course, all of this cannot be compared to the retail trading space where
90% of people just blatantly scamming others by asking hundreds or thousands for
teaching how to use moving averages.

To somehow end this, as I said, my intention was not to single one person
and put him on a blast, I saw the Facebook ad for his course around the same time I
was putting this article together and took the screenshot of it, I believe he
provides a value in his courses but it doesn’t change the fact that you can learn
these things for much cheaper.

Have a great day,

Adam

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