Ever paused and thought of why Forex prices move? There are various day trading theories out there that try to answer this such as technical analysis, candlestick patterns, Elliot waves, Fibonacci, chart patterns among others.
Anyway, the hard truth is; Prices do not move because of some magical technical Indicator or tool, but because of demand and supply. Simple! This sounds like a radically different philosophy from what you have been used to. Isn’t it?
Anyway, let’s take a look at why prices move.
It all starts from acknowledging that prices move based on demand and supply. Thereafter, you need to narrow down to the order flow footprint charts. This way, you get to see who is buying and selling at each price level.
It is important to note that when you talk of buyers and sellers, you are basically referring to the word ‘volume’. You just cannot talk about volume without giving credit to Mr. R.D Wyckoff. He is the brain behind the most sought after day trading strategy – Volume Spread Analysis.
Order flow analysis compliments Wyckoff’s VSA so well, reason: you get to see where all buyers and sellers are getting filled. These buyers and sellers are aggressive as they hit the current market price. They hope they will get filled and not re-quoted.
By Aggressive, I mean, you want the order to be offensive in nature, not defensive as applies to pending orders (limit orders). Remember these are spot transactions, hence the term aggressive. If there are limit orders that are massive and sustained, they may not move the price much. They may stop the price from moving. But, in order to make maximum profit in the least amount of time, you require aggressive market participants who either hit the bid or ask. This will come in the form of market order executions.
Look, many day trading strategies out there will not measure or tell you how strong/aggressive a buy/sell signal really is. Most systems won’t, yes, not even currency strength meters in my honest opinion. You had better take note of this.
I know many of you have seen the DOM (Depth of Market) and think that Order flow is a complex puzzle. Well, it’s easy, very easy if you dedicate time on the screen. The logic here is very simple.
So, forget about the Depth of Market, time & sales for now. I think these two over-complicate what Order flow trading is about.
Order flow has more to do with aggressive buying and selling. Forex market prices will move up or down because the aggressive traders are hitting the bid or offer to the tune of billions if not millions!
Happy trading, stay sharp and be very happy always! 😉