Please enable JavaScript.
Coggle requires JavaScript to display documents.
MENTORING - Order flow - Order book and order flow - Coggle Diagram
MENTORING - Order flow - Order book and order flow
An order in a market is a view expressed though a set of rules.
An order needs to have: (a) price; (b) volume; (c) time.
Where is value (from market profile) coming into picture here? Because value is always driven by monetary and certain other conditions.
A price is always a combination of what a buyer says and a seller says. A price cannot be half from each. That means a price cannot be a buyer's number or a seller's number.
A price has to be an agreed price not a biased price. Then only we are talking about the market.
A buyer's price is called a bid and a seller's price is called an ask, or an offer.
In a normal market condition that is uncleared, a bid is always lower than an ask.
In a cleared market, the current bid can be higher or lower than a previous bid price. Similarly the current ask can be higher or lower than a previous ask price.
An order should have a bid or an ask, along with the quantity, and with time specified.
An exchange needs all this information because it executes orders with the following precedence: (a) time, (b) price, and (c) volume.
The first agreement between a buyer and a seller happens only with price. Then volume comes into picture.
A price is formed when time, price and volume are matched.
Here the matching of volume is good to understand.
Now for price to match, either the buyer has to blink first or seller has to blink first. For a price to form, a buyer should move to a seller's price or a seller should move to buyer's price.
The one who is moving is called an active or aggressive player. The one who is not moving is called a passive or restive or responsive player.
So we have four kinds of players now. Active buyers or active sellers. Passive buyers and passive sellers.
A trade or a tick or a price is formed ONLY when: (a) an active seller goes to a passive buyer; and (b) an active buyer goes to a passive seller.
Active players always use market orders, where time, t = 0. Passive players always use limit orders, where time, t = n
So, effectively, a price is formed when a market order hits a limit order. So a market sell order and a limit buy order OR a market buy order and a limit sell order will ONLY make a price.
Two limit orders CAN never make a trade. Two market orders cannot just happen because one has to blink first. The moment they blink the other guy becomes a limit guy.
An orderflow is created from an order book. The order book has only limit orders. Market orders are lying outside the market.
In an orderflow we will look for executed orders on the bid side and the ask side. The executed orders on the left are a result of trades from a limit buy and a market sell. Similarly the executed orders on the right are a result of a limit sell and a market buy.
The order book has only unexecuted orders hence open to manipulation.