Order flow in the aspect of ordertypes

Hi All!

I learn about market microstructure these days and some question* came to my mind !

* about the technical aspect how the market works(and not strategy)

1.
price is at 1.0652 and heading down . Despite the 1.0000 level was very strong all the time held the lvl several time.
So my (and other's) thinking was that there must be demand there. So i made a note(line, rectangle for ppz..etc) on my chart.

But yesterday i started to think: I have read that market orders moves the market because they accept the liquidity provider's price.
So if we need huge demand once the price drop to the 1.000 zone we NEED a lot of market orders.
But those who aware of this zone before the price hit it ,so those will place limit buy orders. not? so if the majority of traders think the 1.000 will hold they place LIMIT ORDER.
So in my view the zone will definitly hold because monster quantity of limit buy orders are hard to absorb by market sell orders BUT in the same view its hard to push price up from the level 1.000 because who will market buy? The buyers have limit buys.

2.
despite the price is between 1.2010 and 1.2040 for the last X hours and all of sudden it pushes up to 1,2130 in one bar.

Am I right if I think the following? ->
The move happened because one of these 3 things:
1. lot of buy market order came in so limit sell got absorbed easily.
2. just a small pack of market order came in but there was only a very few limit sell order
3. the next limit sell was exactly at 1.2130 so buyers needed to buy those (but in this case it would be a gap bar i think)


3.
In a very illiquid market it shouldnt be easier to catch bigger moves?
Here is what I mean: We have a market with very low volume. This means that the orders are rare. And if the orders are rare then no-one will fill again the limit orders gap once they get cleard so the price has more chance for a big move
example:
price is at 13.50$
order book:
limit sells are at 13.60$, 13.80$, 13.90$, 14.00$
limit buys are at 13.40$, 13.20$, 13.10$, 13.00$

market buys came in and pushed the price to 13.80$ (limit sells at13.6 and 13.8 got filled).
the book right now:
limit sells are at 13.90$, 14.00$
limit buys are at 13.40$, 13.20$, 13.10$, 13.00$

so we have a limit order gap between 13.40$ and 13.90$. And because the market is illiquid it wouldnt be filled soon with buy limits.
The price is right now 13.80$. Could this means that shorters have way higher rewards than longer?


4.
The core of any trading strategy must be the question? : where will the market orders come in and are there out the sufficient limit orders to fill these orders or not? am i right?

Thanks

bump.

Anyone to this maybe?

Good questions really ... I read somewhere in FF News, an algo went berserk a couple of weeks ago, it produced unbelievable amounts of limit orders (and cancelled them in a flash). This thingy alone produced FOUR percent of all limit orders that week ...
What you depicted here are snapshots, a state that could be accurate for about 2 or 3 microseconds tops (my wild guess) but the market is quite dynamic, orders being submitted and cancelled all the time.

1. First of all it's not just market orders that move the market; for example, whoever's making the spread/market can adjust their bid/ask up or down without any orders being executed. Same when there are multiple participants all creating the market, one might move their bid up and others might consequently raise their offer as well, without anyone having traded. However this isn't very important to your question.

So let's say there are limits at 1.0. Limits are filled via price/time priority, meaning that whoever gives the best price (highest bid, lowest offer) gets their order filled first. If there are multiple limits at the BBO (best bid/offer) then whoever put their limit in first will get filled (time priority).

Let's say lots of people put buy limits at 1.0. Will they all get filled? That depends if (a) the market actually trades at that price, and (b) how much is sold at that price. Assuming the market manages to trade there, will there be as much selling as there are limit orders to buy? Assuming that there is large buying interest there, and not as much selling, then not all the buy orders will be filled. This means that some who wished to buy at that level in order to profit from an expected turn won't be filled. What will likely happen is that after they fail to be filled, they'll adjust their limits higher (or buy via market orders) in order to get a fill.

Now, there's no reason to assume that people will only be buying at 1.0. Knowing that they might not get filled at that precise price due to expected significant buying interest, they'll buy a little higher. Should there be little enough selling so that those anticipatory buy orders fill all the sells, then those at 1.0 won't get any fills and will have to chase the market. What about those who are waiting for confirmation of a bounce before buying? Or the momentum traders? Or shorts who sold on the way down looking for a break who are now covering on the way up? Or those buying and selling at any price in between for any other reason? This is a simplistic view but hopefully you'll see that there are not simply only buy orders at one price, but all over and the market can move and adjust to pressure even without orders being transacted, and with people chasing the price and front running and stopping out, there can easily be market orders coming in all over the place.


2. Yes, and possibly more scenarios but all of yours are valid.


3. Remember the "price" (as in, the market) is the bid/ask, or BBO. So in the first instance the price isn't 13.50, it's 13.40/13.60. And in the second instance it's 13.40/13.90. If there's a single price then it refers either to bid or ask; or midpoint but that's not a real price, i.e. you can't trade at it. So unless I misunderstood your scenario, you cannot sell 13.80 because there are no bids there to sell to. You could put an offer at 13.80 but there's no telling when it will be filled, given the illiquidity of the market. Plus you will also have to exit which may not be easy if the market is illiquid. To answer your final question, I don't think there's any inherent advantage to selling rather than buying at this point. It depends why the market moved. If it's simply someone who was forced to trade, with no new information and there's no reason to suspect more sustained trading in that direction, then fading his price impact may be a good idea (but who's going to buy from you? And the market maker will probably be quick to front run your sell limit with his own offer). But if there's a "proper" reason why it's moving, then selling might not be a good idea. So basically I don't think there's any real advantage in trading an illiquid market from that perspective, unless you're a market maker, because you will be paying a large spread and then it won't move much and you might find it difficult or costly to exit.


4. I'll simply comment on your question from a "technical" perspective (not TA). Market orders move price but so do limit orders. They have a different impact but if there are lots of limit orders and people keep adjusting them up and repopulating them because they're bullish, then you could even have market orders only from the sell side but the buy limits easily fill them all and keep being put higher, creating a rising market.

Thank you very much!

i think I got it.

It seems I simplyfied things.