Video Transcript:
Hey everyone. In this video, I’ll show you the six most common Order Flow mistakes that traders make. And chances are, you are doing at least one of them yourself. But the good news is that they are easy to fix once you know what to look for. So let’s get to it.
The common mistake number one is overanalyzing every footprint because so many people just focus on every single number they see on a chart, which is clearly insane. What you should focus on instead are the big things, which are, for example, heavy volume zones, significant volume clusters like this one or like this one. Those are the things that should stand out. When you look at the Order Flow chart, you should take a look at what the delta is doing. You should look at the imbalances here or here or here. Those are trapped traders here, so keep an eye on those as well. Stacked imbalances like those represent strong support and resistance zones, like in here. As you can see, the price made a beautiful reaction to that. So keep an eye on those important things the big things not every single number, right? So don’t overanalyze the Order Flow. It’s a mistake that so many traders make, but don’t do that.
What comes hand in hand with that is mistake number two ignoring the big picture. That’s why I think it’s very important to have a chart like this on one of your screens, where you see the big picture, where you have a weekly Volume Profile, where you have, let’s say, a 30-minute time frame, and you can also have a weekly VWAP or something similar which is showing you the bigger picture. Right? You need to see what’s going on from the bigger perspective before you dive into the details of Order Flow. You can also use something like this. This is also a 30-minute chart, but in this case it is a footprint chart. It still shows you the big picture because there is the Volume Profile, and you are also seeing those heavy volume clusters that are very important in your decision-making. So this also gives you a bigger picture, right? So have those on your screens. It will definitely help you see where the market is going, what it’s doing, whether it’s rotating or trending, where the big levels are, where the significant volume zones are, and stuff like that. You need to see that before diving into the details of Order Flow trading.
Now, common mistake number three is misunderstanding the bid and ask. We talked about that a couple of times today. I just wanted to make sure to mention it again because this is really, really important. So just to repeat it once again: on the bid, you can have aggressive sellers with market sell orders, as well as passive buyers with limit buy orders. On the ask, there could be either aggressive buyers with market buy orders or passive sellers with limit sell orders. Right? Keep that in mind.
Now another mistake is that people think that Order Flow is not just for intraday but also for swing trading. It’s not. People keep asking me if they can use Order Flow for swing trading. No, this tool is good for intraday trading or for scalping. But for swing trading, there are other tools like Volume Profile. If you want to trade with Order Flow, you can use, for example, tick charts or 1-minute through 30-minute time frames. That’s like the maximum, right? If you want to use higher time frames like hourly, 4-hour, or daily time frames, then Order Flow is not the tool for that. The tool for that is something that shows the bigger picture Volume Profile.
Now another common mistake is that people think that if they trade more markets with Order Flow, they’ll have more winners. But the truth is they probably won’t. Markets differ in many things. They differ in average volatility, typical volume, time of activity when most traders are active, what they react to, different setups, different kinds of news. So every market is different. You can’t apply the same thing to every market. Yes, you can apply the same principles, but the volumes will be completely different, and the volatility will be completely different. That’s why I highly recommend focusing on one or two markets.
Take a look at those two tables here. The first table shows average daily volatility. For example, crude oil has average daily volatility of 7%. If you look at the euro futures at the bottom, then the average daily volatility is only half a percent. You can’t trade those two instruments the same way. You need to become a professional at trading just one or two, right? Focus on a couple of them because they are clearly very different. Volatility is different, and also the average daily volume. If crude oil typically trades over 1 million contracts daily, while euro futures only trade around 150,000 contracts, the charts will look completely different. The volumes will look completely different. If you wait for confirmation by absorption, then that absorption will look completely different on crude oil than on euro futures. So you need to at least roughly know what typical volumes are on the instrument you are trading.
That’s why I’m saying you should specialize in one or two markets. And one very interesting fact here is this: there was a survey that one of the top prop firms made, and it said that the top 6% of traders take 43% of total payouts. This is insane, isn’t it? Read it again. The top 6% of traders take 43% of all payouts. And those top traders are trading just one market. So learn from them, right? Don’t try to take many trades with the goal of multiplying your winners. Chances are it will end up the other way, and you won’t be as successful as you planned. So stick to one or two markets. That’s the best advice I can give you here.
Now, another thing people keep asking me about is Level 2 data. For some reason, people still think they need Level 2 data if they want to trade Order Flow. The difference between Level 1 data and Level 2 data is that Level 1 data shows executed trades, and Level 2 data shows market depth, or in other words, pending orders. Order Flow shows executed trades trades that actually went to the exchange. Somebody traded with real intent to buy or sell. That’s what Level 1 data shows.
Level 2 data shows pending orders, but those are very often not executed. Here you can see the DOM (Depth of Market), and those are pending orders. For example, if an algorithm wants to manipulate the price higher, it places pending orders to lure the price up. But when the price gets close, those orders are withdrawn. So it’s not real intent. That’s the key difference. Order Flow shows real trades. DOM shows potential trades. So you don’t need Level 2 data just Level 1.
Alright guys, that’s that. I hope you liked the video. If you would like to join my Order Flow course, head over to my website trader-dale.com, click on “Trading Course & Tools” and it will take you to the page where you can browse my courses. This one is focused solely on Order Flow trading. You’ll get a complete A-to-Z video course, as well as my custom-made Order Flow indicators and more.
Thanks for watching, and see you next time. Until then, happy trading.
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