This is market depth. Snapshot taken on 2018-09-14 at 0948hr. It shows buyers and sellers face off and queuing to buy and sell respectively. Sellers want to sell higher, Buyers want to buy lower. Normal expectations right?
This is taken 10 minutes later at 0958hr. More buyers queued up to buy at $0.033 and from the time and sales, buyers are starting to hit sellers’ price of $0.034 which is a willingness to buy at higher prices. But all this while the market quote for 1 share of this security is Buy/Sell $0.033/$0.034. Which means if you want to buy, $0.034 is the lowest price readily offered. And if you want to sell, $0.033 is the highest bidder. From the market depth, one can roughly gauge resistance and support levels too. How does prices move up? When $0.034 sellers get overwhelmed by buyers and buyers continue wanting to bid at $0.034 then the new price level becomes $0.034/$0.035. It is quite orderly, if you are queuing to sell at $0.036, then $0.035 sellers and those infront of you in queue must get done first.
PRICE-TIME PRIORITY ALGORITHM of the ELECTRONIC MARKET
The market place is where buyers and sellers meet. The market engine matches buyers and sellers along an algorithm. How does this algorithm reflect conventional market dynamics?
The algorithm matches based on PRICE FIRST. If a buyer is willing to buy at $0.034 it is an instant match to a ready seller! If a seller is willing to sell at $0.033 it is an instant match to a ready buyer!
So what if 2 persons want to buy at $0.033? TIMING of order entry is considered. So see who gets into the queue at $0.033 price level sooner and provided one doesn’t pull out of the queue, got to wait till a seller matches your bidding price. Those who put in orders into the queue earlier than you, gets “served” first. Fair.
You want to beat the queue for the position in urgency? There is a ready seller at $0.034 waiting. Pay a higher price. Fair.
Observing the flow data is not foolproof of price direction as this snapshot taken a week later shows. Price is down to $0.031/$0.032.
- Market depth only shows people who queue. Latent demand and supply not reflected as some may choose to only “hit” the buy/sell side prices directly.
- Resistance and support levels in the market depth can be faked too as some put in orders in the queue with no intention of having them filled. But they do risk getting filled too.
- It is a reality that there is no best price of all time, only the best at that point in time. A week ago it appeared that $0.034 was the lowest BEST price a seller can go. But now $0.032 appears to be the lowest BEST price at that POINT IN TIME.
- Market Dynamics is … dynamic. Constantly changing as new information gets assimilated.
Momentum trading is an honest and valid trading style. It’s the stuff of day traders. Anticipating demand, hit the sell side and buy into position, instantly queue to sell 1-2 ticks higher. Occupy the sell side queue at the profitable exit price level.