1/20/23, 6:34 PM What Makes Markets Move | Orderflow Explained

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What Causes Markets To Move?

by Robert Castillo | Apr 29, 2022 | Economics, Trading | 0 comments

In this short lesson we’re going to take a look at what causes

actual movement in price quotes for an asset from a technical
level.

Why Is Understanding Price

Movement Useful To Us Traders?
It may help to understand how and why price moves, because
once we grasp the concept of how order books work and how
orders flow in a market from the perspective of incremental price
change (ticks in price), we can apply this understanding to how
and why liquidity is built in all of its different forms on a
candlestick chart; and how price can be manipulated to trick
passive market participants into placing orders at certain prices
to help an active market manipulator / whale generate liquidity
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for their benefit, whether to fill their bags at better prices and
build a position or to create enough liquidity to sell or buy an
asset without causing a market to crash or boom when
offloading a position.

What Is Depth of Market?

Photo Credit: Binance

Candlestick & Line Charts Show Historical Transaction Data (The

historical price at which a Currency or Asset transacted at in the
past).

A Depth of Market Chart is a measure of the supply and demand

for liquid, tradable assets in a market.

The x axis is a range of price from low to high with the current
price being in the center.

The y axis represents the volume of orders at each price.

The gap in the centre represents the spread between current bid
and ask prices.

What Causes Prices To Move Up?

An active market participant with the financial means and
conviction to buy enough of an asset at the current asking price
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(and higher) from sellers to cause the asset to transact at a

higher value.

In other words, buying enough of an asset at a price point that

seller(s) are offering it for until there are no sellers left selling at
that price, thus buying up all of the supply and creating a
demand for the asset. (Undersupply = More Perceived Value)

This is called Bidding The Price Up.

What Causes Prices To Move Down?

An active market participant with the financial means and
conviction to sell enough of an asset at the bid price (and lower)
to buyers to cause the asset to transact at a lower value.

In other words, selling enough of an asset at a price point that

buyer(s) are bidding at until there are no buyers left who are
interested in buying at that price, thus selling until demand
drops, and flooding the market with a large supply. of the asset.
(Oversupply = Less Perceived Value)

This is called Bidding The Price Down.

What Is A Buy Or Sell Wall?

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A high volume of limit buy or sell orders defending certain prices

in a market. (i.e. Buyers propping a market up / Sellers absorbing
bids)

Large jumps in price are a result of large market orders

absorbing all of the bids or offers on the other side of the market.
(draw box on DOM chart to illustrate)

Why Are Buy Or Sell Walls Deceiving?

In markets with DOM, and “public” order books, it’s possible for
buyers to spoof large limit buy orders and sellers to spoof large
limit sell orders to create the illusion of there being a ton of
buyers or sellers at a certain price ready to defend that level.

On top of that, you can only see limit orders on that particular
centralised exchange or brokerage (stocks and crypto) AND you
don’t know if someone is going to execute a market order at a
certain price point and overpower a buy or a sell wall.

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We should be aware of the fact that large market orders can be

executed at any time which can eat through bids or asks and
cause a big jump in price up or down.

We should also be aware that there are buy stop and sell stop
orders sitting everywhere at different volumes waiting to be
triggered, ready to inject buy or sell pressure / liquidity into the
market at any price.

How Does Depth of Market Apply To

The Forex Market?
We can’t see any of this in forex markets, but it’s important to be
aware of it. We don’t have depth of market, ticker tape, or an
accurate way to look at the volume profile outside of what our
broker provides.

You can’t see where a central bank has a 10 million standard lot
sell or buy order, and even if there was DOM in forex, it’d be in
their best interest to hide it by executing a market order rather
than setting a limit. 

This is why we analyse historical price action by looking at what

price points / zones / levels that are likely to have liquidity sitting
above or below them, then use our best interpretation of the
manipulation of price by a market maker / whale / central bank
to develop trade ideas that respect our trade plan and finally to
execute on them.

What Causes The Price of Real Estate

To Change?

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An example of this occurring in a less liquid market: Real Estate.

If 5 homeowners with the exact same houses on a street to sell

their houses for 1 million each, and a multiple buyers come in
offering 1.2 million for one of the homes, and a home sells at that
asking price (buyer executing a market buy order for 1.2 million),
some homeowners on the street pull their homes off of the
market, and builders stop building new homes because of new
strict zoning laws put in place by the municipal government, the
other homeowners on the street will likely up the asking price
(sellers setting limit sell orders higher) of their homes to 1.2 million
or higher to make more on their sale. There is an undersupply of
housing.

If in the same scenario with the same 5 homeowners selling for 1

million each on the same street then have multiple buyers come
in and make offers under 1 million and one of the homes sells for
800,000 (buyer setting limit buy order for 800,000) because the
seller wants a quick sale (seller executing market sell order), and

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10 other homeowners with the exact same homes on the same

street put their homes on the market, the other homeowners
may decide to lower the asking price of their homes (sellers
setting limit orders lower) because no buyer is willing to pay 1
million for the homes on the market. There is an oversupply of
housing.

Robert Castillo – Currency & Commodities Trader,

Financial Analyst, Writer & Editor.

Robert is a funded trader based out of Toronto, Canada, and has

been trading currencies, commodities, stocks, and
cryptocurrencies for over 7 years. Outside of trading he enjoys

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producing music, mixed martial arts, and riding his motorcycle in

the summer.

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