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One of my favorite ways to use order flow is to identify market exhaustion which tells me when a move can most likely end because the last seller sold or the last buyer bought. It is really simple to see in the footprint chart, there are no fancy calculations that need to be done. Just simple observation.
When the market is trending strongly in one direction, it often reaches a point where there are no more buyers or sellers left to continue pushing the price higher or lower. This is known as market exhaustion. By observing the order flow in the footprint chart, I can easily spot this point and anticipate a potential reversal or a pause in the ongoing trend.
For example, if I see a series of aggressive buying orders pushing the price higher, but suddenly notice a lack of aggressive buying orders and a surge in selling orders, this indicates that the last buyer has likely entered the market. With no more buyers left to push the price higher, a reversal or a consolidation phase could be imminent. This information allows me to make informed trading decisions and potentially profit from the market turning in the opposite direction.
Similarly, if I notice a strong downtrend with a flurry of selling orders, but suddenly see a decrease in aggressive selling and a surge in buying orders, this signals that the last seller may have sold. With no more sellers left to drive the price lower, a potential reversal or a consolidation phase may be on the horizon. Again, by understanding this market exhaustion, I can make strategic trading decisions to capitalize on the market's potential shift.
The beauty of using order flow to identify market exhaustion is its simplicity. It doesn't require complex mathematical calculations or indicators. It relies on basic observation and understanding the dynamics of buyers and sellers in the market. By keeping a close eye on the footprint chart and interpreting the order flow correctly, I can gain valuable insights into the market's potential turning points and make more successful trading decisions.
