Order Flow Terms and Concepts

Before using order flow tools, it’s essential to understand the core concepts behind market movement. This section covers the key principles that will help you interpret order flow data effectively and apply it later with the right tools.

What Is Absorption?

Imagine you’re trying to push open a heavy door, but someone on the other side is pushing back just as hard. No matter how much force you apply, the door won’t budge. That’s exactly what happens with absorption in the market.

Absorption happens when large limit orders absorb aggressive market orders, stopping prices from moving further. Instead of continuing in the same direction, the price stalls or reverses because the big limit orders are much larger than the aggressive orders hitting the bid/ask.

If buyers are aggressively hitting the ask, but the price won’t go up, passive sellers are absorbing the pressure.If sellers are aggressively hitting the bid, but the price won’t drop, passive buyers are absorbing the sell orders.

How to Identify Absorption in Order Flow

Absorption is best spotted using footprint charts, order books, and delta analysis. Here’s how:

• Footprint Charts: Look for a price level where high volume appears, but the price doesn’t move much. This signals that large orders are absorbing the aggression.
• Order Book (DOM): If a large resting limit order keeps getting refilled as market orders hit it, someone is absorbing liquidity.
• Delta Analysis: If Delta shows strong, aggressive buying but the price fails to move up, or strong, aggressive selling but the price doesn’t drop, absorption is happening.

Absorption tells you that a large player is defending a price level, which can lead to failed breakouts, reversals, or trend continuations. If absorption holds, the price is likely to reverse. But if the absorbing orders disappear, the price can break through aggressively.

What Is Exhaustion?

Exhaustion happens when aggressive buyers or sellers push the price, but the momentum fades because volume dries up. It means there aren’t enough new traders stepping in to keep the move going, causing the price to stall or reverse.

For example:

If the price is moving up but suddenly stops and struggles to continue, it means buyers are losing strength, and volume drops — there aren’t enough new buyers to sustain the move.

If the price is dropping but then slows down and holds at a level, it means sellers are running out of steam — Selling volume fades, and the market no longer has the pressure to push lower.

When exhaustion occurs, the price pauses, consolidates, or reverses because there’s no more force driving the market forward.

How to Identify Exhaustion in Order Flow

The easiest way to spot exhaustion is by looking at delta, volume, and footprint charts:

• Footprint Charts: Look for diminishing volume at the extremes of price movement. If the price is still moving up, but there are fewer aggressive buy orders lifting the ask, or if the price is dropping, but there are fewer sell orders hitting the bid, it signals that traders are losing interest. This often leads to stalling or reversal.
• Delta Divergence: If the price is making new highs, but the delta is making lower highs, buyers are getting weaker. The same applies to new lows and weakening seller delta.
• Volume Decline: A strong trend should have increasing volume. If the volume starts decreasing as the price moves, it indicate exhaustion.

When exhaustion happens, the price stalls, consolidates, or reverses. Traders who jumped in late, expecting a continuation, often get trapped and forced to exit, fueling the reversal.

Absorption stops the price from moving. Exhaustion makes the price stop on its own.

Delta

Delta measures the difference between market buy and market sell orders in the market.

• A positive delta means more aggressive buying → bullish pressure.
• A negative delta means more aggressive selling → bearish pressure.

Since Delta is based on market orders, it shows which side is more aggressive at that moment —buyers or sellers.

You don’t have to calculate Delta manually — the trading platform or order flow tool you’re using will do it for you automatically. Your job is to interpret what the Delta is showing and use it to understand market strength.

Cumulative delta

Cumulative delta adds up these values over time, showing whether buyers or sellers are controlling the session.

• If CVD is rising along with price, it means buyers are buying aggressively, and the price is moving up with real strength.
• If CVD is falling along with price, it confirms that sellers are in control, and the downtrend has real selling pressure.

Delta Divergence

Delta divergence occurs when price and delta move in opposite directions, signaling weakness in the move.

• If the price is making higher highs, but the delta is making lower highs, aggressive buyers are getting weaker — potential reversal ahead.
• If the price is making lower lows, but the delta is making higher lows, aggressive sellers are losing momentum — buyers might take control.

This is a great way to spot fake breakouts before they happen. If Delta isn’t supporting the price move, there’s a good chance it will fail.

Trap Traders & Stop Runs

One of the biggest mistakes retail traders make is chasing price movement, expecting a breakout or breakdown to continue. Institutions and large traders know this, and they deliberately manipulate the price to take advantage of these traders.

This is where trap traders and stop runs come into play.

Understanding these concepts is crucial because they explain why so many retail traders get stopped out just before the price moves in their favor. By learning how big players create and exploit liquidity, you can position yourself on the right side of the market instead of being the one getting trapped.

Identifying Trapped Buyers & Sellers

A trapped trader is someone who enters a position at what seems like the perfect moment, only to have the market reverse against them. These traders often get caught in:

• Failed breakouts – Buying a breakout that quickly reverses.
• Failed breakdowns – Selling a breakdown that suddenly bounces back.

Trapped Sellers at Resistance

Trapped buyers are traders who enter long positions at resistance, expecting the price to break out and continue higher.

They see the price approaching a key resistance level and assume a breakout is coming.

They aggressively buy as the price barely goes above resistance.

But instead of continuing higher, the price stalls and reverses.

Now, they are stuck in a losing trade.

When these traders realize they are on the wrong side of the market, they panic and start selling to close their positions. This selling pressure accelerates the downward move, making the reversal even stronger.

Trapped Sellers at Support

Trapped sellers are traders who enter short positions at support, expecting the price to break down and continue lower.

They see the price approaching a key support level and assume a breakdown is coming.

They aggressively sell as the price barely breaks below support.

But instead of dropping further, the price quickly bounces back up.

Now, they are stuck in a losing trade.

Just like trapped buyers, these sellers panic and start buying to cover their losing trades, creating additional upward pressure. This is how short squeezes are created.

Why This Happens

Markets are designed to move in a way that traps most traders. When too many traders expect a breakout or breakdown, institutions use their large orders to push the price in the opposite direction to create liquidity for themselves.

Stop Runs

A stop run happens when big traders — like institutions or market makers push the price into areas where retail traders have placed stop-loss orders. When those stops get triggered, they turn into market orders, creating a surge of liquidity. Big players use that liquidity to enter or exit their trades at better prices.

Stop runs aren’t random. They happen because large traders need liquidity to fill big orders. A stop run forces traders out of their positions, creating the liquidity big players are looking for.

Stop Runs Below Support

Most traders buy near support and place their stop-losses just below it. Institutions know this, and they take advantage of it:

They push the price slightly below support, triggering stop-losses.

Those stops turn into market sell orders, flooding the market with sellers.

Institutions buy into that selling, getting filled at a cheaper price.

Once they’ve built their long positions, they push the price back up.

The traders who got stopped out now see the market rallying without them. What looked like a real breakdown was just a setup to shake them out before the price moved higher.

Stop Runs Above Resistance

Most traders short near resistance and place their stop-losses just above it. Institutions know this and take advantage of it:

They push the price slightly above resistance, triggering stop-losses.

Those stops turn into market buy orders, creating a surge of buying.

Institutions sell into that buying pressure.

Once they’ve filled their short positions, they let the price drop back down.

At first, it looks like a real breakout, and traders who got stopped out think they were wrong. But in reality, it was a liquidity grab —a stop run designed to clear out weak hands before the real move lower continues.

This is why blindly placing stop-losses at obvious levels can be dangerous. Institutions know where liquidity is, and they will push the price just far enough to take it before reversing.

How to Avoid Stop Runs Using Order Flow

To avoid getting trapped, traders must read order flow to confirm real buying/selling pressure instead of blindly trusting support/resistance levels.

• Footprint Charts: Show absorption — if the price breaks a level but stalls with high volume, it’s likely a stop run.
• Delta Divergence: If the price breaks down, but Delta doesn’t show strong selling, it might be a fake move.
• Order Book: Large limit orders appearing after a stop run suggest institutions are accumulating/distributing.

Imbalances & Stacked Imbalances

In trading, prices move because buyers and sellers compete for control. But what happens when one side is clearly stronger?

That’s where order imbalances come in.

They show us whether buyers or sellers are dominating the market, helping us understand why the price is moving and whether it’s likely to continue or reverse.

What Is an Order Imbalance?

An order imbalance happens when one side of the market is much stronger than the other.

• If there are significantly more market buy orders than sell orders, the price moves up.
• If there are significantly more market sell orders than buy orders, the price moves down.

What Are Stacked Imbalances?

A single imbalance at one price level may not mean much. But when multiple imbalances appear in a row at different price levels, it signals a strong directional move. This is known as a stacked imbalance.

• Stacked Buy Imbalances → When multiple price levels show strong buying, signaling high demand and often creating support.
• Stacked Sell Imbalances → When multiple price levels show strong selling, signaling heavy selling pressure and often creating resistance.