Many traders use the classic volume analysis of Richard Demille Wyckoff, and are guided by Auction Theory fundamentally. This type of analysis (classical volume) at present has gone from being an everyday analysis to being segregated to high timeframe. The presence of HFTs (High Frecuency Traders) in modern financial markets has greatly obscured their interpretation. The volume is today the way to follow the movement of the price in futures markets, more transparent and with access to this variable 24 hours a day. The extensive feature of this variable often makes it predictable, but when small analysis is involved, things are not very clear. The world has evolved in understanding processes from macrostructural to micro-structural understanding, and financial markets are no exception.
In this context is where we can introduce the order flow. It offers a microstructural view of market forces to help better predict price movements. The price changes arise as a result of the activity between buyers and sellers but not any activity, is by the aggressive activity of these merchants. In the financial markets coexist 2 types of merchants, liquidity providers, and liquidity seekers.
Traditionally it is believed that liquidity providers can not move prices because of their passive nature in a transaction (limit orders). Today we know that this is not the case, because of the presence of HFTs that can launch high-speed limit orders in the depth of the market, turning dormant orders into orders that are still running almost as fast as their market entry speed. Likewise, the presence of neutral or non-tendency algorithms capable of operating very fast and by little profit, without having a direct presence in providing liquidity to the market obscures the analysis.
Then to manual retail traders by genesis, we only have to resort to a technique that is gaining adherents today and is to account for the order flow through order flow tools. In professional trading, the COT (Commitment of Trader) accounting is already a logical tool of modern trading.
And what is order flow concretely?
Traditionally, the tool known as “Time and Sale” provided us with a perimetral view of the flow of orders by time, price and volume. It was possible to see in real time, theoretically, all the aggressive orders that were entering the market, and we say theoretically because in practice it is almost impossible to follow the COT using this tool. At present, the speed of the market every day is greater, and this tool is becoming obsolete, to give way to the order flow, which organizes all the crossing of orders within a candle allowing the trader to follow the market more efficiently.
In a perimetral way also the order flow draws the aggressive orders to the BID or demand on the left side of the candle, and the orders to the ASK or offer on the right side of the candle.
Demand and supply offer a level of friction to the price that constitutes a powerful absorption force for these aggressive orders plotted in the order flow, and therefore this type of tool is of vital importance to understand how the liquidity-volatility relationship works in modern financial markets.