Trading Order Flow

What We Know About Market Activity

Plotting trade activity using Volume at Price Bid-ASK market Generated Data.

A sell or a buy order executed in the form of a limit order is by definition a passive means of participating in the auction.

The buy or sell limit order rest outside the current price.

Sell limit orders rest above the current price and represent supply.

Buy limit orders rest below the current price and represent demand.

Therefore, buy and sell limits orders are referred to as responsive trade, i.e. such orders represent, from the perspective of the buyer or seller, an opportunity to buy below value or sell above value. When a Seller executes an order at the bid, the trade is the result of the seller accepting the buyer’s bid.

When a Buyer executes an order at the offer, the trade is the result of the buyer accepting the seller’s offer.

Therefore, when the Buyer executes an order at the offer and/or a Seller executes an order at the bid, the buyer and seller are said to have initiated trade.

Initiated trade express from the perspective of the buyer or seller a perception that price is moving away from value.

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What Causes Price To Fluctuate, Higher And Lower?

In the market profile hand book, the CBOT states:

Price auctions higher because buyers are willing to accept the seller’s offer

Price auctions lower because sellers are willing to accept the buyer’s bid

Therefore, initiated trade occurs when;

Buyer’s “lift the seller OFFER”

Seller’s “hit the buyer’s BID”

Why would a seller, hit the buyer’s BID at the LOW? -

Because the initiated seller, thinks price is going to go lower.

Why would a buyer, lift the seller OFFER at the HIGH? -

Because the initiated buyer, thinks price is going to go higher.

Therefore, initiated trade occurs when;

Buyers: “lift the seller OFFER” because the buyer perceives price is going to move away from value, i.e. go higher

Seller’s “hit the buyer’s BID” ” because the seller perceives price is going to move away from value, i.e. go lower

When, the Seller’s “hit the buyer’s BID”, the buyer’s BID is called resting limit

orders, which indicates a willingness on the part of the buyer to be long at a specific price.

The buyer is said to be responding, to what he perceives as price moving way from value. In other words, the buyer thinks the security is being offered below value, the price is too low.

When, the Buyer’s: “lift the seller OFFER”, the seller’s OFFER is called resting limit orders, which indicate a willingness on the part of the seller to be short at a specific price

The seller is responding, to what he perceives as price moving away from value. In other words, the seller thinks the security is being offered above value, the price is too high.

Definition of Support

Support equals demand, in the form of resting limit order, sufficient in quantity to absorb supply and there by halt the downward movement in price.

IF, the demand turns from responsive buying to initiated buying,

THEN, there is the possibility that price will reverse its direction and auction higher.

Therefore, responsive selling [supply] is responsible for halting the advance and initiated selling is responsible for auctioning price lower.

Definition of Resistance

Resistance equals supply, in the form of resting limit order, sufficient in quantity to absorb demand and there by halt the upward movement in price.

IF, the supply turns from responsive selling to initiated selling, THEN, there is the possibility that price will reverse its direction and auction lower.

Therefore, responsive buying [demand] is responsible for halting the decline

and initiated buying is responsible for auctioning price higher.

How Can Volume At Price Information Be Used In Discretionary

Trading?

IF; price has auctioned down to where previous demand has entered the market and resulted in halting the decline, i.e. Support and the market generated data indicates that the initiated selling [SUPPLY] has met the responsive buyer [DEMAND]

THEN; at your discretions there exists a possible opportunity to go LONG

What Is The Risk?

The Risk is that on a subsequent probe, the initiated seller’s may come back and provide more supply.

IF; Supply increases at the Low, THEN, there is the potential the Demand may not be sufficient to absorb Supply, i.e. Support is likely to be breached and probability would favor price auctioning lower.

In that case, discretion would suggest, LONG positions should be exited, capitol should be preserved and loss should be minimized.

IF; price has auctioned up to where previous supply has entered the market and resulted in halting the advance, i.e. Resistance and the market generated data indicates that the initiated buying [DEMAND] has met the responsive seller[SUPPLY]

THEN; at your discretion there exists a possible opportunity to go SHORT

What Is The Risk?

The Risk is that on a subsequent probe, the initiated buyers may come back and provide more demand.

IF; Demand increase at the HIGH, THEN, there is the potential that Supply may not be sufficient to absorb Demand, i.e. Resistance is likely to be penetrated and probability would favor price auctioning higher.

In that case, discretion would suggest, SHORT positions should be exited, capitol should be preserved and loss should be minimized.