How to Read Order Flow

Price charts show where trades occurred. Order flow shows how aggressively buyers and sellers competed to make those trades happen.

Two different paths to the same price level mean different things. Understanding how price got there matters as much as where it ended up.

What Order Flow Reveals

Order flow tracks the interaction between market orders and limit orders at each price level.

Market orders: Aggressive orders that take liquidity by executing immediately at the current best price. When someone market buys, they're willing to pay the ask rather than wait for a better price.

Limit orders: Passive orders that provide liquidity by waiting for price to come to them. When someone places a buy limit order below current price, they're willing to wait rather than pay current prices.

The balance: When market buy orders absorb all available sell limit orders at the current price, price must move up to find more sellers. When market sell orders absorb all buy limits, price must move down to find more buyers.

Order flow shows this absorption in real-time. You can see when one side is becoming exhausted and when the other side is becoming aggressive.

Price Acceptance Versus Rejection

The same price move can mean opposite things depending on how order flow shaped it.

Acceptance: Price moves up on moderate buying while sell limit orders refill slowly. Buyers are willing to pay higher prices. Sellers aren't rushing to sell into the move. This suggests price is accepted at new levels and may continue.

Rejection: Price spikes up on a burst of buying, hits heavy sell limit orders, and immediately reverses. Buyers exhausted their demand. Sellers are defending the level. This suggests price was rejected and will likely return to previous levels.

Charts show the same spike and reversal pattern for both scenarios. Order flow reveals which one you're seeing.

Absorption

Absorption happens when one side keeps providing liquidity at a price level despite aggressive orders hitting it.

Example: Price is at 100. A large sell limit order sits at 101. Market buy orders keep hitting it: 500 shares, 300 shares, 1,000 shares. The sell limit order absorbs them all without price moving above 101.

This shows a seller defending 101. They're willing to sell as much as buyers want at that price. Unless buy volume overwhelms the seller, price won't move higher.

The opposite: Price at 100 trying to move to 101. First market buy order of 200 shares takes out all sell limits at 101 and price immediately jumps to 102.

This shows no one wants to sell at 101. Buyers easily push through the level. Price is more likely to continue than reverse.

Imbalances

Order flow imbalances occur when market orders on one side significantly exceed the other side, creating momentum.

Buy imbalance: 5,000 shares of market buy orders hitting consecutive price levels with only 1,000 shares of sell limits getting filled. Buyers are aggressive, sellers are sparse. Price tends to continue up until the imbalance resolves.

Sell imbalance: 8,000 shares of market sell orders with only 2,000 buy limits filled. Heavy selling pressure with few willing buyers. Price tends to continue down.

Resolution: Imbalances resolve when either aggressive side exhausts or the passive side provides enough liquidity to absorb the pressure. Price often stabilizes or reverses after resolution.

Delta

Delta measures the difference between volume executed on market buy orders versus market sell orders.

Positive delta: More volume executed via market buys than market sells. Buyers are more aggressive than sellers. Usually correlates with rising prices.

Negative delta: More volume via market sells than market buys. Sellers are more aggressive. Usually correlates with falling prices.

Divergences matter: If price rises but delta is negative, it means price went up despite more aggressive selling than buying. This divergence suggests the move is weak and likely to reverse.

Similarly, if price falls but delta is positive, more aggressive buying than selling occurred even though price dropped. The sellers may be exhausted and price could reverse up.

Stacked Levels

When order flow shows large limit orders stacked at consecutive price levels, it indicates strong support or resistance.

Stacked buy limits below price: Multiple large buy limit orders at 99, 98, 97. This support likely holds unless selling becomes extremely aggressive. If price approaches, buyers are ready.

Stacked sell limits above price: Large sell orders at 101, 102, 103. Resistance zone where buyers must absorb significant selling to push higher. These levels often cap rallies.

The pullback: If stacked orders get pulled as price approaches, it signals a lack of conviction. The apparent support or resistance was fake. Price may blow through the level easily.

How to Use Order Flow

Order flow works best for confirming or questioning what price action suggests.

Confirming breakouts: If price breaks above resistance and order flow shows strong buy imbalance with minimal selling, the breakout has conviction. If price breaks above but selling actually exceeds buying (negative delta), the breakout is suspect.

Identifying exhaustion: When strong moves show decreasing volume and shrinking order flow imbalances, momentum is fading. The next limit order absorption could reverse the move.

Finding entries: When price pulls back to a level where you see large buy limits stacked, that support is more likely to hold than a level with no visible order flow support.

Setting stops: If you're long and you see sell limits stacking just above your entry, those sellers might cap the move. Tighter stop makes sense. If you see mostly buy limits below you with few sell limits above, the path higher is clearer and a wider stop makes sense.

Limitations

Order flow isn't predictive. It shows current conditions, which can change instantly.

Large orders can be pulled: Seeing a big buy limit order doesn't mean it will stay there. Algos and traders regularly place and cancel orders. The limit order you see at 99 might disappear before price gets there.

Iceberg orders hide size: Some large orders don't show in the book. They reveal only small portions and refill as executed. You might think a level has light selling when actually a massive sell order is hidden there.

Timeframe matters: Order flow in a scalper's 1-minute window looks different than a swing trader's daily view. What appears as heavy selling to a scalper might be normal noise in the daily context.

Learning Order Flow

Reading order flow takes practice. You can't learn it from descriptions alone.

Watch without trading: Open order flow data and watch how price interacts with limit orders. Notice when levels get absorbed versus rejected. See how delta divergences play out.

Start small: If you trade based on order flow, start with small size. You're learning to interpret real-time information under uncertainty. Mistakes happen while learning.

Combine with price action: Order flow confirms or questions what price action shows. Use both. Price action shows the result. Order flow shows the process that created it.

Price is what happened. Order flow is how and why it happened. Both matter.