As you may know there are a variety of strategy’s in trading. You may have heard of fundamental analysis where traders take all available information about a given market and derive a value based assessment about whether it is a buy or sell. There is also technical analysis which identifies trading opportunities in price trends and patterns seen on charts. However, one which you may not of heard is order flow analysis. Order flow analysis is a method that attempts to anticipate price movements based on the current orders that are visible in the market. It is this type of trading that TensorCharts is trying to make more prominent in the cryptocurrency market.
How Does Order Flow Analysis Work?
There are hundreds of different strategies within both technical and fundamental analysis based strategies. Order flow analysis is no different. In this article we will give a brief run down of some simpler strategies so you can get a feel for how order flow trading works. It will be up to you to manipulate these strategies for your needs and hopefully make profitable trades as a result.
Reading the Tape
This strategy is order flow trading in its simplest form. It is essentially reading the order book and making trades based off of this. For example if we take the below orderbook from BitMEX on TensorCharts. We see that there are large sellers on the book from 7330 to 7350 and so we may choose to sell.
This is a perfectly reasonable strategy and many people use it successfully. However there are a number of flaws with it, One issue is order spoofing. Order spoofing is the act of placing fake buys or sells on the market in order to spook the market and drive it in a desired direction. This can cause issues in our strategy as we may take trades based on large orders that may be removed. The infamous S&P500 flash crash of 2010 is an extreme example of what order spoofing can do to a market. Another issue is that most exchanges allow for traders to hide their orders from the order book so again we may miss crucial pieces of data.
Technical Analysis Confluence
This strategy takes elements from both technical analysis and order flow analysis. In the below image our red box shows our white resistance line and our yellow block from TensorCharts which represents a large resting sell order. Price went up above our resistance line and the large resting sell orders before continuing downwards again. The use of order flow analysis and technical analysis can be a powerful combination to first identify a support or resistance line and then try to identify whether it will hold based on orders in the market.
This strategy is perhaps the most exciting of our 3 strategies, yet, the most likely to induce heart attacks. It involves fast paced trading on low time frames (primarily on one minute candles) you can use what ever leverage you want but if you want to make it worth your time you are most likely going to have to use higher leverage due to low time frame nature of these trades.
This strategy relies on data from BitMEX so it is recommended you create an account there. To get started on this strategy you’ll want to navigate to the ‘BitMEX stats’ tab on TensorCharts. Highlighted Below.
You will be presented with an interface like the one below. You again want to focus on our beautiful red boxes. The box on top is just your standard Bitcoin price chart, the box on the bottom represents liquidations on BitMEX and is where our strategy lies. You can read the BitMEX documentation to fully understand how liquidations work. But Essentially liquidations create large market cascades which typically reverse.
We first want to identify these large liquidations typically I look for liquidations above at least 5 million and then buy/sell them. In the below chart notice how large liquidations typically reversed.
This strategy requires very stringent risk management as things can go badly very quickly. As mentioned this strategy is very fast and heart palpitations are probable. My average holding time for these types of trades is less than 45 mins you want to take profits relatively quickly as the market can always turn sharply against you. I use this strategy in conjunction with reading the order book to recognize if selling or buying is going to continue or if there is large orders coming in. Again I want to reiterate. If you want to use this strategy make sure you’re using stop losses and take profits quickly.
These three strategies only scratch the surface of order flow trading. Don’t be afraid to dig in and do your own research on different strategies or come up with your own.
TensorCharts has support for a number of different exchanges. Such as Binance, BitMEX, Bitfinex, and others. It even has support for some traditional markets such as CME currency, agriculture, energy, and metal futures. One slight problem I have is that even though TensorCharts has support for a number of crypto exchanges, there are only a few pairs listed on each exchange. For example, BitMEX only has XBTUSD and ETHUSD and is missing all of its altcoin futures contracts. Binance also lacks altcoin pairs. I don’t typically trade altcoins but if you do this is something you may want to keep in mind.
As the cryptocurrency market has grown over the past few years profitable trading has got increasingly more difficult. If you want to be a successful trader you really need a strong edge and a large trading tool belt. TensorCharts is one of the essentials in mine. Whether you’re brand new to trading or have been around the block everyone can find value in TensorCharts and orderflow analysis in general.