Term · Liquidity & Trading
Order Flow
In briefOrder flow is the stream of buy and sell orders for a security and shows whether buying or selling pressure prevails. For illiquid small stocks, individual large orders can strongly distort the order flow and the price and complicate execution.
Definition
Order flow refers to the stream of incoming buy and sell orders for a security over time. It shows whether buying or selling pressure tends to prevail in the market, and it influences short-term price movements and liquidity. Analyzing order flow is part of market microstructure.
How it is calculated
Formula. Order flow imbalance = (Buy volume − Sell volume) ÷ (Buy volume + Sell volume)
Why it matters for small caps
For illiquid small stocks with a thin order book, a single large order can strongly distort the order flow and thereby the price. An unbalanced order flow amplifies price swings and execution risks.
Common misreadings
- Order flow is not a reliable predictor of future prices; a short-term imbalance often reflects only individual orders and not a fundamental development.
In the process
Frequently asked
How is order flow related to liquidity?
A steady, balanced order flow points to good liquidity, while a thin or one-sided flow indicates illiquid stocks and higher trading costs.
Can prices be predicted from order flow?
Only to a limited extent; short-term imbalances are often random or driven by individual orders and not a reliable indicator of fundamental development.
Why is order flow more volatile for micro caps?
Because low trading volume means that individual orders make up a disproportionate share of the total order flow.
Related terms
Education only, not investment advice. Ranges and thresholds are didactic orientation values, not an official standard.