Most traders react to every order-flow signal and get lost in noise. This tutorial breaks order-flow patterns into four types—absorption, exhaustion, and initiative—and shows how to filter them using the previous day's volume profile. Key rule: if price spends 30 minutes outside yesterday's value area, look for continuation patterns.
You're probably treating order flow completely wrong. You cannot just buy every bubble you see or sell any imbalance that shows up. Order flow is an amazing timing tool, but if you don't use it in the right context, you will drown in noise and informational overload. So here's how to make order flow trading 10 times simpler. There's 4 main order flow patterns you need to know: absorption, exhaustion, and initiative. Absorption means there was a big effort from, for example, aggressive sellers that didn't have any result. So if you see a pink bubble on the bottom and then price rejecting, or in the footprint you see a really dark area or a high delta level, it means the same thing. Aggressive sellers are punching a wall of passive buyers. As soon as aggressive buyers take control, that's a great reversal pattern. Exhaustion instead is a slightly different reversal pattern. It just means aggressive sellers stopped pushing. This happens, for example, after a breakout with low volume at the bottoms. And volume gradually increasing on the other way around instead. And finally, the initiative is when aggressive buyers, for example, are putting the effort in and that effort is being rewarded. A big green bubble in the body of the candle or stacked imbalances in the footprint. It all means the same: buyers are in control of the auction. But now, where to look for these? How do you find the right context? Well, there's a tool that is literally like a treasure map. The volume profile. Take the previous day cash session profile. If today we open inside, look for these patterns only at the extremes of value areas to get reversals. If we break out and spend at least 30 minutes building value outside previous day value area, then look for continuations. If instead today we open outside, it means that the market already has priced in a higher fair value. So look for these patterns on the test of the value area for continuation. And if you want the best platforms to look at these patterns, just comment DeepCharts to get it at 25% off.
