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Market "Pressure"

  • #1
  • First Post: Jul 7, 2014 8:29am Jul 7, 2014 8:29am
Hello All...another light bulb has turned on for me that clears up a lot of confusion I've had about the concept of price action and order flow. It is a concept I call market "pressure".

Now I may "touch a nerve" with some of you who believe the market is "rigged" or that a malevolent conspiracy exists that controls the market. But I ask your indulgence to just hear me out before dismissing me as another of the "mindless masses".

Order Flow - literally the flow of orders in the market over time. Assuming there are more buy orders than there are sell orders the price will tick higher to attract sellers to fill the buy orders - right? Well...not always. Let me explain.

While the order flow concept is a sound one it doesn't explain what I've come to see an anomalous price action that defies explanation. I have been lucky enough to be able to code a reasonable proxy for order flow that allows me to "see" the orders that are filling in the market in real time...however, I have seen (again a bullish example), strong buying in the market yet prices are falling..and continue to fall. The opposite is true for a bearish example. From an order flow stand point this doesn't make sense and seems to negate or at least diminish the concept of - More demand higher prices...more supply lower prices. Other times I see a range form where there is a strong buying occurring inside that range, yet price breaks the bottom of the range...stalls then moves higher breaking the top of the range and moving one...(head fake). WHY in each of these instances is price moving lower in the face of buying...strong buying...

So I went back to the basics and studied market structure -- AGAIN! This time I began to see things a bit more clearly. As I've mentioned in my previous thread "Market Relativity" ( http://www.forexfactory.com/showthread.php?t=490690 ) I believe prices are the RESULT of market forces...not the cause, and that all those market forces are all relative to each other.

I believe I have found an additional market force that must be factored into the equation. "Market Pressure".

To understand this lets look at an example. Lets say you have a classic car that you love and would never part with. And one nice Sunday you drive it into town to a restaurant to have brunch. Three fellows there see your car and offer to buy it. One offers you $25,000. You say, "I'm sorry friend but this care is not for sale." The next fellow offers you $35,000. Again you refuse. The next fellow offers you $75,000. Again you don't want to sell. Then the first guy ups the bid to $150,000 saying, "son I just gotta have that car." This continues for a short while and a bidding war erupts between these three fellows. Each bidding more than the next. In this case - WHERE is the market pressure? All these buyers are putting an enormous pressure on YOU (the seller) to complete this transaction. The buyers are in a frenzy as prices rise but the PRESSURE is to sell...clear so far?

The greater pressure is most often opposite on the opposite side of the order flow or volume.

Now lets look at this in terms of market structure. The market (assuming a transparent and open one) is obligated to match buy and sell orders at the closes possible price. The most common is a buy and sell come in at a price with only 1-2 ticks difference and are matched. But what happens if a whole bunch of buy orders come in all at once and there are no matching sell orders? Most people think that prices will rise...but that doesn't always happen...

The market will match the CLOSEST sell order to the buy orders...so what happens if the closest sell order is BELOW the market? The market will tick DOWN to match that buy order with the sell order at the lower price...Then when the closest sell order is above the market...the price will start ticking higher...or may even JUMP higher.

Remember...more buyers than sellers = more selling pressure. For any of you who have moved your stop on your long to see it get stopped out and then move your way afterward...THIS IS WHAT's HAPPENING...it is not a conspiracy...it is market pressure and market structure. The market is merely matching the closest sell order with the flood of buy orders that are coming in...unfortunately your stop was among those sell orders...in fact many stops probably got hit...which is why price will hit those stops...pause and turn...then move higher. Think about this for a while...Market Pressure determines which WAY prices will move

So I must concentrate on rebalancing my formula to include market pressure. Higher buying volume means higher selling pressure. Once the sellers in one area are used up...prices will then rise...to the next area where there are sell orders. I haven't quite been able to quantify this yet but I am working on it.

Ideas? Comments? Keep them productive or constructive please
  • #2
  • Jul 7, 2014 9:10am Jul 7, 2014 9:10am
I think that could explain a lot gspajon. Might even cover why ratios work so well, repetitively and largely in equal moves. I don't have access to the transparency you do so I can only theorize here but, take these ratio moves here.

Starts with a lot of buying and price moves up. "logically" traders see this and join in the buying to achieve the first ratio rise here. More traders see the "trend" and buy but there's no balance so price drops due to the pressure to seek the closest sellers, SL's etc... It stops, traders see this and more buying sends it higher yet.

Now buyers are really excited to get in on the action so even at the top there's buying but again, nothing to buy so more selling pressure. Price once again settles to find those "sales" and then rises in an equal ratio to the first rise as the selling pressure is once again relieved in balance. ?? Maybe?? Only theory here.
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  • #3
  • Jul 7, 2014 9:21am Jul 7, 2014 9:21am
Quoting gspajon
Hello All...another light bulb has turned on for me that clears up a lot of confusion I've had about the concept of price action and order flow. It is a concept I call market "pressure". Now I may "touch a nerve" with some of you who believe the market is "rigged" or that a malevolent conspiracy exists that controls the market. But I ask your indulgence to just hear me out before dismissing me as another of the "mindless masses". Order Flow - literally the flow of orders in the market over time. Assuming there are more buy orders than there are...
Also, don't forget to factor in the buyers/sellers from all the major currencies. EURUSD for example moves not only because of what happens to EUR and/or USD. But also because of what happens to all the other currencies that they are tied up to. I think of it as a pond filled with water. And water drops are buy/sell orders. They create ripples/waves, so the difficulty is in figuring out these waves and how they affect each other. Just a little addition to what you got going there

And also don't forget, buying of EURUSD, you are buying one and selling another, so it will have many ripple affects that you will have to take into consideration.

Not sure if I am explaining it well.. let me know if you want me to explain it better.
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  • #4
  • Jul 7, 2014 9:35am Jul 7, 2014 9:35am
First, let me say that I am new to FOREX and these concepts are still quite hard for me to understand. I have one question regarding your example: Who will be willing to sell below the current price especially when he observes big demand. This will be quite irrational, right?
  • #5
  • Jul 7, 2014 9:38am Jul 7, 2014 9:38am
Quoting saver0
{quote} Also, don't forget to factor in the buyers/sellers from all the major currencies. EURUSD for example moves not only because of what happens to EUR and/or USD. But also because of what happens to all the other currencies that they are tied up to. I think of it as a pond filled with water. And water drops are buy/sell orders. They create ripples/waves, so the difficulty is in figuring out these waves and how they affect each other. Just a little addition to what you got going there And also don't forget, buying of EURUSD, you are buying...
I follow your logic...hadn't thought about it as deeply from a spot currency point of view. I would argue that the single currency in your example (EUR) would be seen on the futures side, and your ripple effect is merely the valuation occurring when comparing any move against its counter part...USD...GBP...gold, etc.

The base currency is still what's being bought and/or sold.
  • #6
  • Jul 7, 2014 9:38am Jul 7, 2014 9:38am
"Order Flow - literally the flow of orders in the market over time. Assuming there are more buy orders than there are sell orders the price will tick higher to attract sellers to fill the buy orders - right? Well...not always. Let me explain."

Lol I might take some offense to that, Just kidding. It would be hard to comment because I am not sure we might be talking about the same things, since our indicators that we use are custom and show very different results Iam sure. But i think you might be over looking something somewhere, in your example above the bidders were putting "pressure" on the seller but they didn't really put any money on the floor, but in the market, it's only when an order is live, meaning a market order, that any pressure is applied in the market in my opinion. And as Saver0 said what you see is a collection of the entire market so how you use that information or if not would make a big difference on what you see. I will follow along subscribed.
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  • #7
  • Jul 7, 2014 9:56am Jul 7, 2014 9:56am
Quoting saneblane
"Order Flow - literally the flow of orders in the market over time. Assuming there are more buy orders than there are sell orders the price will tick higher to attract sellers to fill the buy orders - right? Well...not always. Let me explain." Lol I might take some offense to that, Just kidding. It would be hard to comment because I am not sure we might be talking about the same things, since our indicators that we use are custom and show very different results Iam sure. But i think you might be over looking something somewhere, in your example...
Your point is well taken...my example only meant to show..."more buyers than sellers" and how that effects price AND the pressure on the other side to transact. I do understand that each transaction does not "count" until it is complete. That is, of course, how the real market works...on the other hand, prices do seem to "gravitate" toward unfilled orders...precisely (in my opinion) because those orders are needed to complete extraneous unfilled orders that are currently in the market.

No transaction is complete until BOTH a buyer and a seller are matched...however my point is that sometimes, prices MUST move to a higher or lower point so that a transaction can be completed.

Example. I place a buy order at the market. There are NO sell orders (at the market) to match me with. There is a pending sell below the market at -13 pips away. There is a pending sell order above the market +35 pips away. The market will drop its price to the lower order because it is the closest...THEN the transaction will take place and the resulting market price ticks down 13 pips.

That is my reasoning...but I've been wrong...often.
  • #8
  • Edited 11:13am Jul 7, 2014 10:05am | Edited 11:13am
Hi there,
i had developed something similar which i have been using consistently for about a year, to quantify this "pressure" you are talking about.
  • #9
  • Jul 7, 2014 10:16am Jul 7, 2014 10:16am
Quoting albchr
I think that could explain a lot gspajon. Might even cover why ratios work so well, repetitively and largely in equal moves. I don't have access to the transparency you do so I can only theorize here but, take these ratio moves here. Starts with a lot of buying and price moves up. "logically" traders see this and join in the buying to achieve the first ratio rise here. More traders see the "trend" and buy but there's no balance so price drops due to the pressure to seek the closest sellers, SL's etc... It stops, traders see this and more buying...
I'm afraid I am not big on ratios and am completely unfamiliar with harmonic price movement. Not to say it has no value, its just that I've concentrated more on what I think is the catalyst for price movement.

However in your chart I see the price pattern that has so often confused me and have circled it here...this also give a perfect example of my point. It looks like this was the NFP announcement. As price whipped up, then down, then up again, (with out seeing how the buying or selling volume was) I can assume there was enormous pressure to sell...because there were so many BUY orders. Thus price move higher...then lower because the sell orders were used up...then ultimately higher to find the sellers above the market.
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  • #10
  • Jul 7, 2014 10:18am Jul 7, 2014 10:18am
I really like your theory, nice to read something fresh. It would of course be sell stops getting hit.

I used to do an analysis with volume (by eye) which was much more basic but similar to what you were talking about in your market relativity thread.. And this would happen a lot .. Id be convinced of strong buying but then the market would do the opposite BEFORE the bullish move... It used to throw me to the point where I finally rendered it unreliable..

Good stuff, thanks just thinking it over.
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  • #11
  • Jul 7, 2014 10:19am Jul 7, 2014 10:19am
Quoting Rand Yap
Hi there, i had developed something similar which i have been using consistently for about a year, to quantify this "pressure" you are talking about. Attached is 1min chart for EURUSD tonight. Blue is buying pressure and red is selling pressure. This indicator does not repaint. {image}
Hello Rand...yes that is indeed a good indicator. I understand completely why it paints the color you have coded here....but wish to say that what you have indicated as "blue" pressure should actually be Pressure to sell...the higher the price goes the more pressure there is to sell.
  • #12
  • Jul 7, 2014 10:21am Jul 7, 2014 10:21am
Quoting simonb
I really like your theory, nice to read something fresh. It would of course be sell stops getting hit. I used to do an analysis with volume (by eye) which was much more basic but similar to what you were talking about in your market relativity thread.. And this would happen a lot .. Is be convinced of strong buying but then the market would do the opposite BEFORE the bullish move... It used to throw me to the point where I finally rendered it unreliable.. Good stuff, thanks just thinking it over.
Thank you for your kind words...but its really just reconciling logic with market structure...the best for me would be if I could look at the order book...
  • #13
  • Jul 7, 2014 10:31am Jul 7, 2014 10:31am
Quoting gspajon
{quote} Hello Rand...yes that is indeed a good indicator. I understand completely why it paints the color you have coded here....but wish to say that what you have indicated as "blue" pressure should actually be Pressure to sell...the higher the price goes the more pressure there is to sell.
Hi gspajon,
yes, if defined in accordance with what you have written above. Thumbs up for your post.
  • #14
  • Jul 7, 2014 10:43am Jul 7, 2014 10:43am
Quoting Rand Yap
{quote} Hi gspajon, yes, if defined in accordance with what you have written above. Thumbs up for your post.
Again, I understand completely why you have the colors set the way you do...when trading there is no time to think opposites...blue, up, buy!
  • #15
  • Jul 7, 2014 10:51am Jul 7, 2014 10:51am
Quoting gspajon
{quote} Again, I understand completely why you have the colors set the way you do...when trading there is no time to think opposites...blue, up, buy!
While i do not use it exactly as a buy or sell signal, it has its value in feeling the market when read collectively.
  • #16
  • Jul 7, 2014 10:52am Jul 7, 2014 10:52am
Quoting Rand Yap
Hi there, i had developed something similar which i have been using consistently for about a year, to quantify this "pressure" you are talking about. Attached is 1min chart for EURUSD tonight. Blue is buying pressure and red is selling pressure. This indicator does not repaint. {image}
awesome indicator. its showing volumes or order flow very well
  • #17
  • Jul 7, 2014 1:26pm Jul 7, 2014 1:26pm
Looking forward to seeing your indicator Rand Yap
  • #18
  • Jul 7, 2014 8:24pm Jul 7, 2014 8:24pm
Your threads interesting gspajon.

About the sort of behaviour you circled in albchr's image, if this happened during a high impact news release; what usually occurs is that the market's liquidity falls dramatically around that time (compared to 'regular trading hour non-news periods'), the orderbook becomes so 'thin' and so matching whatever market orders come in often causes 'price jumps' relative to the last price printed (i.e. where the last match between buyer and seller was made).

So, an influx of buy market orders come in (not necessarily large in quantity but abundant relative to the sell orders available), the price spikes up consuming whatever sell orders present (larger portion of which, at that time, will be sell limit orders above the market, hence the spike); some algo or human trader reacts to fade this move throwing some sell market orders in (which might actually be less than the initial buying volume that caused the spike up), price spikes down filling all the buy orders that can be found till it hits a price where a load of buy limits are sitting, or new orders to buy at market come in.

A very simplistic example using numbers:

> Last traded price = 5 dollars;
> Sell limit orders present during low liquidity = 3 lots at 8 dollars, 2 lots at 10 dollars, 5 lots at 12 dollars, 4 lots at 14 dollars, 8 lots at 15 dollars.
> Buy market orders of 20 lots consume sell limits,
> Price jumps from 5 dollars, 8 dollars printed, 15 dollars is last printed price (Heres your spike up)
> Buy limits present = 6 lots at 4 dollars
> Sell market order of 5 lots
> Price jumps from 15 to 4 dollars (spike down)
> Process repeats till liquidity returns

The compound result of action like this is that the net volume over the time period may depict a high volume of buyers, yet the price dips. An aside is that price is much more easily manipulated at low liquidity times like this...and can be brought to points where an abundance of limit and stop orders are sitting and could be triggered.

However on a more general basis about the conditions youve termed market pressure, that is:

Quoting gspajon
{quote} Example. I place a buy order at the market. There are NO sell orders (at the market) to match me with. There is a pending sell below the market at -13 pips away. There is a pending sell order above the market +35 pips away. The market will drop its price to the lower order because it is the closest...THEN the transaction will take place and the resulting market price ticks down 13 pips.

I would say what happens is a bit different. The order to sell below the market is a stop order which will not trigger, your order will be matched with the sell limit order +35 pips away if you went in with a buy market order. For the -13 pip sell stop order to be triggered, someone must offer to buy at -13, then be filled with someone willing to sell at -13 in order to make that price 'print' as a traded price THEN your sell stop will automatically be triggered and look for the closest buy market or limit order.

This is not to say price may not move downwards while buying is occurring during normal market periods..what I would say is actually happening is that a load of buy market orders are coming in BUT theyre hitting a WALL of sell limit orders preventing a price rise, (these trades are actually accounted to buying volume, i.e. it shows up on your MT4 as buying volume); now once those that can see the order book realise theres a massive block of sell limits sitting there they will start front running those sell orders, offering to sell at a lower price using limit or market orders, and so price descends a few pips till the sell market orders overwhelm the buy market orders (at which point you see selling volume overwhelm buying volume on your MT4), and then the price is pushed downwards OR all the limit orders are consumed and the price rises after the initial descent.
  • #19
  • Jul 8, 2014 2:52am Jul 8, 2014 2:52am
Quoting gspajon
.
Hi gspajon,

This is simply not the case.

You said you have a proxy for order flow. How do you know whether it's accurate? Have you tried it on a market where you can actually see the order flow and verified its accuracy? Just a question, not the real issue. I trade order flow in a market where I can see all the order flow, so let me offer my opinion.

Strong buying, market continues to fall... that would mean buyers lifting the offer, otherwise the market would be held in its tracks. So if the market continues down, while the flow of market or marketable limits is on the buy side, this can only be due to one reason: sell limits keep coming in on the offer, in greater quantity and urgency than the buyers are lifting. That is necessarily the case, otherwise the offer wouldn't be moving down as the large number of buying orders would be moving it up. Therefore you could say the pressure (not using your definition of pressure) is on the downside, i.e. despite all the buying, prices are not moving higher and sellers keep reloading the offer and lowering their offers. To me that's a bearish sign.

Quote
One offers you $25,000. You say, "I'm sorry friend but this care is not for sale." The next fellow offers you $35,000. Again you refuse. The next fellow offers you $75,000. Again you don't want to sell. Then the first guy ups the bid to $150,000 saying, "son I just gotta have that car." This continues for a short while and a bidding war erupts between these three fellows. Each bidding more than the next. In this case - WHERE is the market pressure? All these buyers are putting an enormous pressure on YOU (the seller) to complete this transaction....
I see what you're saying, but the pressure as far as the market goes is clearly upwards, hence the rising price. The pressure on you to sell is even less real than the pressure on them to buy in order to satisfy their desires, since you have no such desire. And I don't think it's a good analogy since you don't want to sell your car, but in the market you're coming in explicitly to buy and sell, whether at a profit or loss.
Quote
Now lets look at this in terms of market structure. The market (assuming a transparent and open one) is obligated to match buy and sell orders at the closes possible price. The most common is a buy and sell come in at a price with only 1-2 ticks difference and are matched.
Let's be precise here. The market matches market or marketable limit orders with (limit) orders at the best/nearest price on the other side of the incoming order. So a buy market order for 1 lot is filled by the first lot to have been placed at the nearest price on the offer, assuming price/time priority rules as most markets use vs pro rata. Market orders are always filled by limit orders. Two market orders coming in on opposite sides will never match.
Quote
But what happens if a whole bunch of buy orders come in all at once and there are no matching sell orders? Most people think that prices will rise...but that doesn't always happen...
The market will match the CLOSEST sell order to the buy orders...so what happens if the closest sell order is BELOW the market? The market will tick DOWN to match that buy order with the sell order at the lower price...Then when the closest sell order is above the market...the price will start ticking higher...or may even JUMP higher.
No. First of all the only orders that "need" to be matched are market orders, so I assume the buy orders you refer to are market orders. Since they can only be matched with limit sell orders, that immediately shows the above to be incorrect since a sell limit entered below the market (i.e. below the bid and offer) is a marketable limit order and therefore immediately matched with buy limits and so filled. Or if it's a particularly big order, it will be filled by all the orders on each bid price up until its limit price, whereupon it becomes the new best offer. Even in a non-centralised market like fx, where you might get different prices on different exchanges, and situations like this might exist for brief moments before being arbed out, if the venues with different prices couldn't match each other than they wouldn't do so by the market moving down either.
Quote
For any of you who have moved your stop on your long to see it get stopped out and then move your way afterward...THIS IS WHAT's HAPPENING...it is not a conspiracy...it is market pressure and market structure. The market is merely matching the closest sell order with the flood of buy orders that are coming in...unfortunately your stop was among those sell orders...in fact many stops probably got hit...which is why price will hit those stops...pause and turn...then move higher.
As above, a flood of buy orders coming in that need to be matched would not be matched with stop orders, which are market orders.

It's much simpler than all of that. Lots of buyers and buying interest vs sellers and selling interest = upside pressure. That doesn't mean that even in a bullish market people won't be trying to shake buyers out of the market first... e.g. sell it down to make it look bearish, get people to stop themselves out of long positions or get short, and then turn it around to the upside, and get those who got short to stop themselves out (which adds to buying pressure) or chase long entries (again more buying pressure). Half the point of shaking longs out before moving higher is that longs are sellers... they have already bought and now have a position to sell. And you don't want them selling out as it goes higher, as that adds to selling pressure so hinders price rises. You want them to be chasing/buying as it goes higher while you're already long, and even selling it up there to them. So you shake them out first. "You" being those with the capital to do so...
  • #20
  • Jul 8, 2014 3:21am Jul 8, 2014 3:21am
Quoting eurotrash
{quote} Hi gspajon, This is simply not the case. You said you have a proxy for order flow. How do you know whether it's accurate? Have you tried it on a market where you can actually see the order flow and verified its accuracy? Just a question, not the real issue. I trade order flow in a market where I can see all the order flow, so let me offer my opinion. Strong buying, market continues to fall... that would mean buyers lifting the offer, otherwise the market would be held in its tracks. So if the market continues down, while the flow of market...
Great post
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