Order flow analysis is basically a decision tool in which an investor can make an understanding and take decisions regarding the kind of interaction which is happening between the buyer and the seller at different price levels. An investor before making investments in the market watches the order flow pattern and the effect it has on the price of shares and eventually helps him in understanding or predicting the future prices of stocks. The investor watches the movement of the prices and the behaviour of other investors to make his own analysis and prediction. This is called tape reading and is referred to by many as order flow analysis.
By watching the order flow analysis people get a micro view of the market and a proper analysis of the investor behaviour. Each candlestick holds loads of information regarding the movement of the market at any aforesaid price. It gives the volume-based strategy for the buyer or seller. The volume activity gives the investor the strength to understand a particular trend at a particular price. The volume-based strategy especially applies to the forex market which is a market with the highest liquidity and has a huge volume of transactions happening on a daily basis. It has a huge amount of movement and volatility in the stocks, bonds and cryptocurrency market.
There is another interesting term that people come across time and again which is the Depth of Market or DOM. This is a display of the stocks to be sold at different prices. This list is displayed according to the price and activity in the market. Through this analysis, the investor can make out the size of the order and predict a shift in the market price. The deeper the market the bigger the size of the order needed to see a shift in the prices.
There are many factors which influence the DOM.
- Tick size: It is the minimum price increment in the market post which the trades can be made.
- Restriction on price movement: Many financial markets operate with price restrictions and do not allow the free exchange of products. They do not allow large traders to operate in the major commodity market.
- Restriction in trading: Future contracts and options prevent markets from adding to the depth of the market.
- Markets and governing bodies set minimum margin requirements for trading various products.
- Market transparency is another major requirement which influences DOM. The latest bid is usually available to most buyers. However additional information like pending bids and orders are not available easily to the buyer and seller. This lack of information can restrict the depth of the market.
Understanding footprint chart
It is a candlestick chart which provides information to the investor regarding trade volume, order flow and price. In a chart, multiple variables can be analysed by an investor. Some of the common footprint charts are asking footprint, delta footprint and volume footprint.
At level 1 the footprints charts provide information like volume, bid charts and liquidity levels prevailing in the market. At level 2 the footprint charts provide information like DOM.
Footprint charts are of various kinds
- A footprint profile helps the investor to see the liquidity pool in the market.
- A bid footprint allows the investor to see if the buyer or the seller is responsible for the price shift in the market.
- To understand the price trend and its continuance in the market it is important that the delta footprint should be studied.
- Volume footprints can be studied based on time and price. Points of capitulation can be studied with the help of these charts.
A few nuances of work order flow have been discussed. To understand the process in a stepwise manner and execute it thoughtfully. It is important that all investors should go through stepwise training to understand the process of work order flow and to execute it in the right manner. People with proper knowledge and expertise will be able to make the right analysis with the help of technical analysis and make an informed decision. Share Market Profile is one of the leaders in the share market training institutes in Chennai. As it is an online course people all across India can go ahead and apply for it. To know more about the course details Contact us: 91 95669 77791 or visit our website www.sharemarketprofile.com