Technical Analysis vs Order Flow

The art of speculation and attempting to anticipate changes in prices has always played a large part in financial markets since the dawn of the first trading floor.

 

The many different types of financial data play a vital role in attempting to predict market trends. But just as there are many types of information in the form of market data, there are also many different ways of analysing them.

 

If you are wondering about these different techniques of analysis, read on. We’ll go through the difference between Technical Analysis and Order flow analysis in this article.

 

 

What is Technical Analysis and Order Flow?

Definition of Technical Analysis (TA): Technical analysis is a technique that utilizes historical market data to identify and predict trends. Using simple price and volume traded data to analyse historical prices movements, TA attempts to find recurring patterns that will repeat in the future.

 

Definition of Order Flow: Order flow Analysis is a technique used to anticipate changes in price in the market by observing the flow of constantly changing orders of various sizes (liquidity) and the aggressive trades (transactions) to view their impact on the market price. This analysis allows the trader to observe the balance between different market players as they bull and sell, and is the fundamental building block of market mechanics. 

 

 

 

Pros and Cons of Technical Analysis

Pros of TA: Technical Analysis provides traders with a way to digest price information in a way that makes making a trade more defined. It allows them to look at historical and current trends in a more analytical way.

 

Timing plays a crucial role in trading, and having a predefined way to exit or enter the market makes trading easier. Technical analysis can anticipate when a trend may reverse, which helps traders make market decisions.

 

Cons of TA: Technical Analysis does not take into consideration other financial data such as  the economic and financial factors that can influence the market. However, some traders consider this to be a positive, since they believe that all forms of fundamental news should be baked into the price. 

 

But technical analysis can also be overly complicated, making many traders confused by mixed buy and sell signals. Therefore a detailed plan and a deep understanding of TA signals is vital before taking a trade.

 

 

 

Why Order Flow is Better

Analyzing market movements using order flow is better than price charts alone as it provides the trader with extra insights into the movements in the market. Market liquidity doesn’t lie, since it is the fundamental building block of price discovery and the dual-auction market process.

 

Where TA Falls Short

 

When looking at a price chart, you are seeing the outcome of buyers and sellers. But looking only at price doesn’t tell you what is going at a deeper level beneath the price.

 

For instance, if price is making a higher high, the simple price chart won’t tell you if price is printing higher because buy stops are being triggered, or because offers are pulling.

 

Order flow is an extension of Technical Analysis

 

Order flow also often uses historical data to anticipate prices, just like technical analysis. However, it is much more immediate as good order flow analysis will track the finer details of price, such as volume, as well as the quantity and size of both the purchase side and the sell-side of the market. 

 

 

 

Fig 1: The breakout of a resistance level flipping to support and holding the retest contains a lot more context when looking at it in terms of bids and offers on the heatmap.

 

Limitations of Order flow

 

Like any other analysis in trading, order flow is not the holy grail, because that doesn’t exist. Instead, order flow analysis allows you to see beneath the chart, slightly tilting the odds in your favor. However, like technical analysis, it doesn’t take into consideration things like market fundamentals or news, instead relying on the idea that the output of such data will be visible in the changing liquidity and thus still tradeable. 

 

 

Conclusion

Trading in financial markets involves risks and is a game of probabilities. The purpose of any form of analysis is to provide the trader with accurate information based on historical trends in the market and hopefully a better chance of making a profit. However, this does not guarantee results, since there are still some elements of the markets that are random.

 

Looking beyond price and understanding liquidity and its behaviours can help you dive deeper into the market and make informed decisions. Success or failure ultimately depends on the individual trader, the quality of their analysis, how efficiently they carry out the execution of their analysis.

 

Bookmap was developed for, and by, order flow traders. The array of tools and indicators available, as well as the quality of education available, can make you a better trader just as long as you have the right mind-set! You can try it out today for free. Click here to get started.

 

 

 

FAQ

Some of the frequently asked questions on technical analysis and order flow are listed below:

 

What are chart patterns?

 

Trading chart patterns formed by the historical movement of prices and put repeating price behaviours into a visual pattern. These patterns act as the basis of technical analysis and allow the trader to find entry and exit points, as well as better manage their risk.

 

What are some of the commonly used technical analysis tools?

 

Some of the most commonly used technical analysis tools are:

  • MACD
  • SMAs & EMAs (Simple & Exponential Moving Averages)
  • RSI (Relative Strength Index)
  • ADX (Average Directional Index)
  • Stochastic Oscillator
  • Bollinger Bands

 

 

 

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