Liquidity on Market (and it’s lack)

01/08/2021 Yorgwarez

When you open any software displaying Orderflow, you will see blinking price changes for your instrument as well as per row 2 prices: Bid & Ask Prices. The ask (also called offer) shows the lowest price which market is willing to sell (what will mean buy for you). The bid shows the highest price which market is able to buy at (what will mean sell for you). Example of order flow is presented below:


Above table consist Depth of Market (DOM) example taken from Bitcoin. You can see from left Prices and then in column “Buys” we have Bid Offers, while in column “Sells” are displayed Ask Offers. All orders displayed in table are “Limit Orders”, so orders that are awaiting completion when price will reach particular Price Level at which they’re placed. We also can distinguish another type of Orders, called Market Orders – those are not displayed in DOM and we know about them only post factum – so after realisation.

Finished trades can be read from Footprint type of chart (example below):

This is working like x-ray scanner of each candle from standard price chart. Inside each box you can see how many deals on each price level happened – both on Bid and Ask side.

The limit orders from DOM, are called passive order flow, what we can also call “Liquidity”. Limit orders are often the method of place awaiting orders by larger players (like Hedge Funds etc.). They use them mainly to prevent slippage. By using limit orders, such traders are Liquid Makers – as they’re putting liquidity into order book. By executing Market Orders, trader is Liquid Taker as they take out liquidity from Order Book.

DOM is working like advertisement agency – traders are placing their offers at which they’re either willing to buy or sell instrument. Until order will be executed (market order is paired with limit order) – it doesn’t mean anything.

Bigger players are having problem with immediate execution their big orders at particular price level, therefore very often they split such order into several smaller ones. Such big execution (even if split into parts) is often moving price either upside or downside quite aggresively – what can be observed on Price Chart by long candles. As their order is split into multiple parts, they need to await for price to come back into their initial price level for further execution rest of their orders. As even few cents/points/dollars/euro can be very pricey for them – especially when you’re managing very large position and you have the power to move market.

Such come back of price to initial area of interest when it’s coming to price at which they want to execute orders is called order-stacking. Orders are awaiting execution in areas of Imbalances – either Supply or Demand. Simply for Big Players to move the markets it’s needed to enough liquidity be present on the market.

Balance and Imbalance on market

Balanced state of market is visible on chart by consolidation (trading range). When high momentum happen (correlated with high volume), we have Imbalance on market. This is visible by long candles (with no/short wicks) relatively comparing them to rest of candles from the past. When momentum candle appear, then we enter Low Liquidity state. In order flow, buyers overcome sellers (or reverse) and price is moved significantly. What moves the price is Imbalance – what can be also measured as high volatility.

Such liquidity gaps as other types of gaps – are driven to get filled. As mentioned earlier, it’s a zone for Big Players to execute rest of their awaiting Limit Orders. And here comes the idea to play this out by you, dear Readers 🙂 Simply speaking, as this is a point of interest for Big Players to accumulate their Limit Orders, try to join this move.

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Intraday Trader, trading mainly on Dax, S&P500 and Gold. Passionate of new technologies and ex-developer. Currently creating software after hours in order to improve Trading and perform automatic analysis on as big scale as possible. Not trying to predict future, however always having plan and possible scenarios to play.

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