Market "Pressure"

I agree with Eurotrash. Your "Model" doesn't match with the real market mechanics.

Lots of interesting replies in this thread.

Another thing to consider is that, sure we have this market with all the pending orders, so we see where they are sitting (at least we think we see them). But the reality the way I see it is that the market is where it is because it already factored in all these pending orders and all the orders that were executed up to that point and factored in where everyone thinks it will go next. So I think what really moves the market are the market orders or pending orders that gets executed on the dot of the price. I'm sure lot of the big money and the HFT execute there trades right when the price reaches their levels and not with pending orders.

So I think our best chance is to understand the existing structure of the market. That is, where all the pending orders are. And then to have a way of measuring real time order execution and velocity to determine where it's headed. The pending orders become sort of like the roads, and the live price becomes the driver. There are many many roads, and many highways. We don't know where the market (the driver) will take us too far into the future.. might only be able to see the possible turning points and see as far as the headlights would light up. And knowing the structure, we can figure out the path of least resistance that the price might most likely take (doesn't mean it will definitely take this path though). And this is no easy task.. haha

That's my take on this

Hi Eurotrash...

First of all, Thank you!! for a great post. Much of what you bring up I had not considered...it sounds to me like you were or are a floor trader. To answer you question I have never been in a position to actually "see" the order flow in real time. Unless one is a broker, I don't know how that can be accomplished...perhaps you can help?

Of the things I learned from your post, I didn't know that two market orders could NOT be matched...I was completely unaware that a market order MUST be matched with a pending order. I was aware of the forex world where there is no central exchange...that banks place liquidity at certain levels and that orders must "eat through" that liquidity before price moves ...However I was unaware that on a centralized exchange...like the CME for example...that two market orders could NOT offset each other (all things being equal). This is completely contrary to what I have been taught and what I have read...but that doesn't mean what I was taught or read is correct.

Your post has caused me to go back and rethink my original premis about my order flow "proxy". I have attached a chart of the anomalies I have been observing and which lead me to conclude my "theory" of market pressure.

As I (like most traders here) must trade "in the blind" with regard to order flow, my process has been the following: (1) Observe, (2) Theorize, (3) Quantify, (4) Codify - write code for testing, (5) Test/Observe...Rinse, Repeat.

This is probably why it has taken me so long to come to conclusions that others find obvious.

I would greatly appreciate any "wisdom" you care to share on this forum has to how one might be able to "verify" order flow or "see" it some how with some degree of quantifiable reliability.

Thank you again for your post...I'm thinking....thinking...thinking.

Hi,

With spot fx you're unlikely to be able to see the flows; what I meant re: verifying your order flow proxy was to test it in a market where you do see the flows e.g. futures, so you can compare what your proxy shows there with the actual flows and see if your proxy is in fact a good approximation of the flows or not.

Re: matching orders, brief outline of how orders work. Limit orders provide liquidity i.e. the ability or option to trade x size at x price, whereas market orders have no price attached and simply ask to be filled in their entirety at the best available price(s). Market orders "take" the liquidity that limit orders provide. Limit orders simply sit there waiting for orders on the other side to fill them. For example if you put 10 lots on the bid, you're providing a potential seller the option of selling 10 lots to you. So you're providing liquidity. That's a limit order. If you're using a market order to buy, you're not providing liquidity, because the market order isn't sitting in the book at a price giving someone the option to trade with it; it jumps in and consumes as much liquidity on the offer as it needs. So it's taking the liquidity that the limits on the offer are providing.

Market orders then can never fill each other because they take liquidity, and they can only take liquidity from an order that provides liquidity, i.e. limit orders. Also there is no price component to market orders. It just says "buy/sell x amount now at the best available price". That's why market orders and stops can get slipped. Market buys always trade with the offer and markets sells with the bid.

Even in fx it should be the same, because a dealer should be offering to trade a limited quantity on the bid and offer, and they capture the spread. If a buy and sell market order for the same amount both come in at the same time, matching them at the same price would provide no profit to the dealer (not talking here about bank dealers just retail market making dealers).

Stop orders have a price attached but once triggered they become regular market orders. The one thing about stop orders is they can sort of be considered to provide liquidity, only if you know where they are - because if triggered they will want to trade immediately with the opposite side. This gives you the option of placing limits on the other side of the stops to try to trade with them when they're triggered. You are still technically providing the liquidity to the stops to allow them to get filled, but they are giving you the option to trade with them (sort of), and an option to trade is liquidity. Of course that depends on you knowing where they are (they're not visible on the book), and then the market moving to the price that triggers them.

Note that if you're trading with a non-exchange retail dealer then you don't have access to real limit orders, you can only use market orders even if your dealer calls them limits (e.g. as Oanda does). If you could place real limits with them then you'd be competing with them, stealing their spreads.

Re: your chart, I can't really say much as I don't know what that volume bar signifies or how it's calculated, or if it's even real volume. Only thing I would recommend as far as watching order flow would be (if you don't have a futures account which works with MarketDelta or the appropriate Sierra Chart package) would be to open a MD demo account with a broker that supports them and choose some contract (not currencies) and just observe. That will allow you to not only see the order flow but also get a much better picture of what's going on, since trades that hit the bid are listed on the left and trades lifting the offer are on the right, so you can the sellers vs buyers and the effect. For example here's a screenshot of MarketDelta on the 1m from early this morning from the market I trade:

http://i.imgur.com/PRWvVEA.png

It had just dipped a little, then bounced a couple ticks, then (from the point you can see) was moving sideways. It was mostly 54 bid/55 offered during this time. After a couple minutes the 54 bid started getting sold into more and more quickly. The bid stayed small, around 30-50 but with all the selling the bid just kept around that same size, obviously someone "iceburging" there, even taken out and immediately back to bid, kept reloading/refreshing the bid. (I bid 54s when I saw this absorption.) Then the selling stopped and the bid quickly became normal size, and then we went up (not very far, granted, but quickly). What to take from this? Well first of all if you compressed that into a single candle you might have an up candle with more selling volume than buying volume. Secondly it's not just about the buying/selling volume, but also how the other side is reacting, what impact it's actually having on price. Not the best example ever, as the impact was small and volumes low as it was very early, but good enough...

Good post eurotrash. The secret of multibillion dollars banks/big market players/"insiders": if they want to put "real" sell, they will put buy orders using very big lots to push the price higher to attract more buyers to join in and because they know there are alot of buy stop orders above it out there. If the price has moved up to reach a certain point and the volumes are sufficient, they will put "real" sell orders with very very much bigger lots to cover the first loss of "faked" buy orders,and will cause the price to move down.