Order Flow: Why Ordinary Candlesticks Are No Longer Enough

Stop guessing the market direction solely from ordinary candlesticks for a moment. Standard candlesticks (candlestick charts) are a brilliant tool, but they have one major drawback – they only show what has already happened. They do not tell you who was in control at a given moment or how much effort it cost them.

If you wish to gain a real ‘edge’ in today’s market, you must look deeper. Order flow and footprint charts function quite literally as X-ray vision. They allow you to peer right into the core of the market and observe the constant battle between aggressive and passive players.

In this first part of our 3-part series, we will explain market mechanics, how to read basic data from a footprint chart, and demonstrate how to identify market dominance.

How the Market Truly Works: Market vs. Limit

The foundation for understanding order flow is grasping the relationship between orders. Every trade in the market requires two sides: a buyer and a seller. Even more importantly, however, is what type of order these players are using.

For the simplest understanding, we will use a familiar, straightforward metaphor: Imagine that limit orders are ‘meat’ (liquidity) and market orders are ‘hungry predators’.

• Market orders (hungry predators/aggression): These are traders who wish to enter the market immediately, at the current price. They are the hungry ones devouring the available liquidity, thereby moving the price.
• Limit orders (meat/passivity): These are traders (often large institutional players and market makers) waiting at a specific price level, ‘creating the meat’. They do not enter straight away but wait for the price to come to them. These orders act as a wall against which the price decelerates.

If there are too many aggressive (market) orders and they consume all the limit orders at a given price, the price will advance to the next level until it finds further limit orders (more meat).

The Anatomy of a Footprint Chart: The Candlestick’s X-Ray Vision

A footprint chart (sometimes abbreviated as ‘FP’) does exactly what its name suggests – it reveals the footprint left behind by the money. Each candlestick is divided into price levels, and at each level, we see two columns of numbers:

• Left (red numbers/bid): These show the volume of market sell orders (which were matched with limit buyers).
• Right (green numbers / ask): These show the volume of market buy orders (which were matched with limit sellers).

Volume and the Candlestick’s POC: Where the Biggest Battle Occurred

Alongside the division into bid and ask, the footprint also displays the total volume (trading volume) at each price level. This is simply the sum of both sides (bid + ask) at a given price.

The location where the highest volume was traded within a single candlestick is called the Volume Point of Control (VPOC) of the candlestick. This area acts as a local magnet or wall and is typically highlighted visually in the Footprint (for instance, with a coloured box). It indicates the price in which both sides had the greatest interest and where the most money changed hands.

Delta: The Heartbeat of the Market

If you wish to know who won the battle in a particular candlestick, you look at the delta. Delta is the net difference between the total volume on the ask (aggressive buyers) and the total volume on the bid (aggressive sellers).

If the delta is +500, it means that 500 more contracts were purchased via aggressive market buy orders in that candlestick.

In addition to the final (closing) delta, the extremes reached during the candlestick’s formation are crucial for a more detailed analysis:

• Max delta: Indicates the highest positive value of buying pressure recorded in the candlestick before it closed.
• Min delta: Indicates the strongest value of selling pressure (deepest into negative territory).

These values are excellent for spotting traps. Imagine a candlestick that has a max delta of +1000 (brutal buyer aggression) yet ultimately closes with a total delta of -200. What does this mean? Buyers attempted to push the price up and expended a vast amount of ammunition but hit such a formidable wall of limit sellers that the sellers ultimately took control of the candlestick anyway. It is a textbook trap and a sign of exhaustion!

For a broader view of the market, cumulative delta (the sum of deltas over a certain period) is then utilised. This perfectly illustrates the overall sentiment (mood) and often helps to identify divergences – situations where, for example, the price is rising, yet the cumulative delta is already falling, signifying hidden exhaustion amongst buyers.

Initial Signals from Order Flow: Imbalance and Absorption

At first glance, a footprint chart might look like a cluster of random numbers from the Matrix, but if you know what to look for, you will see clear patterns. The two most fundamental concepts that confirm the market’s direction are imbalance and absorption.

1. Imbalance (IMB): When One Side Is Overwhelmed

We speak of an imbalance when one side of the market has absolute dominance over the other. In trading software, this is usually set as a ratio, for instance, 3:1.

In a footprint chart, the quotes (bids and asks) are not compared in the same row next to each other, but diagonally. Why? Because of the spread. An aggressive buyer (ask) purchases at a price one ‘tick’ worse than the current bid. If there is a bid with a value of 15 and an ask with a value of 58 on the diagonal (58 / 15 = 3.8), this signifies overwhelming buyer dominance. In the Footprint, this number will be coloured (e.g., in green), and we can clearly see the aggressive buying pressure.

2. Absorption (ABS): Hitting a Brick Wall

This is one of the most favoured patterns amongst experienced traders. Absorption occurs when you see massive numbers of aggressive market orders, yet the price does not move any further.

For example: The market is falling, and at the very bottom of the candlestick (on the low), you see a massive red number (market sell). These sellers are exceptionally aggressive; they want to push the price lower… but the price does not drop. Why? Because they have struck a massive wall of passive (limit buy) orders from large institutions, which have simply ‘swallowed’ – absorbed – this selling pressure.

If we see massive orders absorbed in this manner at local minimums or maximums, it is the first and exceptionally strong indicator of an impending reversal.

Conclusion and What to Expect Next Time

Today, we explained that candlesticks are merely the surface. Beneath them lies Order Flow, where aggressive traders collide with passive ones. We demonstrated what imbalance (dominance of power) and absorption (hitting a wall) look like on a footprint chart.

In the second part of this series, we will dive even deeper into the microscopic level of footprint charts. We will show how Order Flow unmasks formations such as the pinbar or inside bar, explain the ‘micro-trap’ (retail trap) formation, and examine how inexperienced traders behave at the absolute highs and lows in contrast to hidden institutional players.