Please enable JavaScript.
Coggle requires JavaScript to display documents.
MENTORING - Order flow - Order flow - Coggle Diagram
MENTORING - Order flow - Order flow
We have two tools to understand orders. (a) order book; (b) order flow
An order book contains orders that are NOT executed.
An order flow contains orders that are EXECUTED.
An order book is with the broker terminal. It is also called the market depth or depth of the market (DOM).
What is an order? It is a view expressed by a trader to execute his view. The view is sent as a communication to the stock exchange for execution. The broker is one who is an intermediary between you and the stock exchange.
Similarly another opposing view is getting executed through an order by another trader. The other trader is communicating with the stock exchange through a same or different broker.
The order book is a consolidated order book of all brokers shown uniformly across all the broker terminals. It is the same with all brokers.
An order is visible in an order book only when the exchange confirms it about receiving the order.
Once an order reaches the exchange, the exchange's matching algorithm matches your order with a matching sell order based on
time, price and volume priorities.
So, every order has three components: (a) time; (b) price; (c) volume.
The first priority is always for time, and then
price (higher for seller, lower for buyer)
, and then volume.
Now the point is how is a price matched, because sellers seek higher prices, while buyers seek lower prices.
Buyers and sellers are of two types based on the time priority. If you want to buy or sell NOW (that is t = 0) then you are an initiative buyer or seller. If you are okay to buy or sell LATER (that is, t=n), then you are a responsive buyer or seller.
If a trader has to get his trade executed he has two ways of expressing his view with respect to time.
If he wants his order to be executed right now, he will take a MARKET ORDER. In a market order, the trader will pay more or higher price than a limit order.
If he is okay to his order to be executed later at his chosen price, then he will take a LIMIT ORDER.
For a trader who takes a market order, time > price. For a trader who takes a limit order, price > time. Greater means more important.
In any market there are only two types of orders. Limit and market order. Any other order type is a variant of these two.
For an order to be matched and executed, one should be a limit order and one should be a market order. No two limit orders and no two market orders cannot be matched.
An order book has only limit orders, as t = n. Market orders are not visible on the order book.
An initiative buyer (market order or market buy) trades with a responsive seller (limit order or limit sell). So a market buy and limit sell will form a trade.
An initiative seller (marker order or market sell) trades with a responsive buyer (limit order or limit buy). So a market sell and limit buy will form a trade.
Asset managers are always responsive buyers and sellers. They never play with market orders. They are never initiative players, even during crisis times. They keep their orders because they have time (t = n). Only leveraged players have no time (t = 0) and pick up market orders to trade.
Why asset managers or real money picks limit orders. Because they want inventory at low cost. It is easy to buy at lower levels and sell at higher levels. Moreover, if they chase the market, they will face higher impact cost and will disturb the market.
An order flow is a software we use to see how the orders are getting executed.