How to analyse the strength of support and resistance levels using Order and Position Books

In the lens of technical analysis trading, the most basic trading set-ups aim to establish a bullish entry near or at support levels and an exit near or at resistance levels.

The reverse applies to short-selling strategies where a bearish entry is established near or at resistance levels, and exiting such positions occurs near or at support levels.

Support and resistance levels can be used with other technical analysis tools, such as moving averages and momentum indicators, to gauge the strength of a prevailing trend even on a shorter-term horizon, such as the 1-hour chart of any highly liquid tradable instrument.

The missing jigsaw piece to enhance these technical analysis tools in any style of trading set-up is to utilize open order flows and positioning data to form a more robust trading strategy. Pending open orders at the respective price levels can gauge the strength of support and resistance levels, and sentiment can be inferred from the positioning of open orders.

Using the 1-hour chart of GBP/USD as an example, the recent 2.8% slide seen in the GBP/USD from 26 September 2024 to 7 October 2024 has stalled at a minor support zone of 1.3060/3020 which also confluences with the 50-day moving average (see Figure 1).

In addition, the hourly RSI indicator has flashed out a bullish divergence condition at its oversold level suggesting that the slide from 26 September to 7 October 2024 may have lost downside momentum. This in turn supports a potential short-term mean reversion rebound towards the near-term resistances of 1.3175 and 1.3220/3245 (also coincides closely with the 20-day moving average).

A short-term trader may want to establish a bullish entry near or at the support zone of 1.3060/3020 and exit at the resistance levels of 1.3175 and 1.3220/3245.

To increase the odds of a potential rebound from the 1.3060/3020 support zone, we need to have a peek to see how the open order flows are being staked at the 1.3060/3020 region.

Suppose there are more open buy orders over sell orders on a relative percentage basis. This type of order flow analysis suggests that the 1.3060/3020 support zone may be an inflexion area that can lead to a high odd of the short-term mean reversion rebound to play out as intended.

This is where the OANDA Order Book becomes a powerful tool to complement any technical analysis-based trading strategy and set-up. The OANDA Order Book includes client data from both OANDA Corporation and some clients from other OANDA entities globally (specifically entities based in UK, Singapore, Australia, Canada and Japan).

Based on an example of the GBP/USD Order Book, the current market price of GBP/USD is at 1.3070 (depicted by the dotted horizontal orange line) (see Figure 2).

The orange bars represent sell orders at specific prices (below and above the current market price), and the length of orange bars at specific price levels represents the intensity of sell orders.

The green bars represent buy orders at specific prices (below and above the current market price), and the length of green bars at specific price levels represents the intensity of buy orders.

The next key element of the Order Book is the placement of the different types of buy and sell orders, which are split into four quadrants.

All the orange bars above the current market price (the dotted horizontal orange line) are classified as sell limits (sell orders above the current market price).

For orange bars below the current market price, these are stop orders (sell orders below the current market price).

All the green bars above the current market price are classified as buy stops (buy orders above the current market price).

For green bars that are below the current market price, these are buy limits (buy orders below market price).

From the Order Book diagram, we can see that the 1.3035 to 1.3000 cluster levels of the GBP/USD have recorded relatively higher levels of buy orders over sell orders on average (box A), which complements the graphical support zone of 1.3060/3020 depicted earlier in our short-term technical analysis-based mean reversion rebound strategy.

Hence, an entry-level can be established at or near the 1.3060/3020 support zone of the GBP/USD with a stop-loss slightly below 1.3000.

The next step is to use the Order Book to determine where the potential inflexion exit levels are under the sell limit quadrant. The area of box B highlighted the cluster levels of 1.3160 to 1.3225 on the GBP/USD, which have relatively higher levels of sell orders over buy orders. Overlay this sell order book information closely matches graphical resistances of 1.3175 and 1.3220/3245.

Hence, the short-term trader can consider exiting the short-term mean reversion rebound trade once it hits between 1.3160 and 1.3220.

Next up is the OANDA Position Book (data also obtained from OANDA clients worldwide), which can help short-term traders dynamically assess the specific instrument's sentiment.

Open positioning reflects market sentiment. If most traders are long, it could suggest a bullish sentiment, and vice versa for short positions.

The green bars on the OANDA Position Book represent long positions, and the orange bars reflect short positions. The length of these bars measures the magnitude of long and short positions, respectively (see Figure 3).

Using our example of GBP/USD, its Position Book has shown a significantly high net-long positions cluster at around the 1.3125 to 1.3070 price levels zone.

The significant amount of net-long open positions suggests that there is a concentration of bullish sentiment built up at the 1.3125 to 1.3070 cluster, which coincides closely with the short-term mean reversion trading strategy’s support

zone of 1.3060/3020.

In short-term trading, the Order Book and Position Book are powerful tools for analysing market dynamics. While the Order Book helps traders understand current liquidity and potential price levels of interest, the Open Position Book offers insights into market sentiment and positioning. By using these tools together, traders can make more informed decisions, improving the precision of their entries, exits, and overall trading strategies.

Successful short-term trading often hinges on understanding the balance of market forces. Integrating data from the Order Book and Open Position Book into their strategies allows traders to stay ahead of the market, capitalize on short-term fluctuations, and avoid unnecessary risks.