"First, master the fundamentals" - Larry Bird
A Simple Example
A Simple Example
Say you own a grocery store. You want to sell apples. You list apples at $1. People come into your store and some buy apples and some don’t.
Ask or Offer Price
As the grocery store owner, you are “asking” or “offering” apples for $1. It’s the same with stocks/futures. The ask is the price that you can buy a stock or future for. It's basically the amount that the market makers are "asking" you to give for the stock or future.
Bid Price
As a grocery store customer, you are bidding $1 for the apple. The bid is the price that you can sell your stock/future for. The term "bid" comes from the fact that market makers are making a bid on the stock/future you own. Basically, it's the price that they're willing to give for your stock/future.
The Price
When looking at a stock or futures quote the price is the dollar amount where the instrument was last bought or sold. So if the last trade was a sell order, the price was actually the bid price. If the last trade was a buy order, the price quoted is actually the ask price. You will often hear that price is just a reflection of value – the level at which a buyer and seller will transact business.
The Spread
The spread is the difference between the bid and ask for a particular security. The size of the spread and the price of the stock/future are determined by supply and demand. The more individual investors or companies that want to buy, the more bids there will be; more sellers results in more offers or asks.
Types of Orders
The order type effects when an how a bid or offer is executed. The most popular orders are outlined below:
Order Type | Description | Execution |
Market | A market order is an order to buy or sell a stock at the best available price. | Immediate but no guarantee of price |
Limit | A buy limit order specifies a maximum purchase price (maximum bid) and a sell limit order specifies a minimum sell price (minimum offer) for the specified security | Not guaranteed. Can only be filled if the securities price reaches the specified limit price. Buy limit orders are only filled if the price reaches the specified bid. Sell limit orders are only filled if the price reaches the specified offer. |
Stop (Stop – Loss) | A Stop Order is an order to buy or sell a stock once the price of the stock reaches a specified price, known as the stop price. When the stop price is reached, a stop order becomes a market order. | A buy stop-loss is generally set above market price to limit losses or protect profits on the short side. A sell stop order is entered at a price below current market price to price to limit losses or protect profits on a long position. |
Stop-Limit | A Stop Limit order is an order to buy or sell a security at a specific price once the stop price has been reached. When the stop price is reached, a stop limit order becomes a limit order. | A buy stop-limit is generally set above market price to limit losses or protect profits on the short side. Unlike a buy stop loss, it is only executed if the market trades to the bid specified. A sell stop order is entered at a price below current market price to price to limit losses or protect profits on a long position. Unlike a sell stop loss, it is only executed if the market trades to the offer specified. |
The Supply/Demand Process
Supply and demand (“The Auction Process”) controls the price of a given security in the market. Fundamentally, markets are the place where buyers and sellers meet to exchange securities.
At any one time, you have market participants in one of three stages:
1. EXIT A POSITION - Sellers offering the sell security at a given ask or offer price
2. ENTER A POSITION - Buyers willing to buy the security at a given bid price
3. DO NOTHING - Individuals waiting on the sideline. These individuals may own the security or not own the security in question.
While you can’t view the historical data for the 3rd category of market participants (those who are not doing anything and sitting on the sideline), you can tell something from the charts about those who have exited or entered a position.
There are only 2 ways of classifying how buyers enter or exit a position: aggressive or non-aggressive. An aggressive trader initiates business with a non-aggressive trader who has is either offering to sell or bidding to buy the underlying security through the use of a market order.
- An aggressive buyer is one who is lifting bids to aggressively buy a security at the ask/offer from a non-aggressive seller.
- An aggressive seller is one who is lowering the offer to aggressively sell the security at the bid from a non-aggressive buyer.
The sum total of these two types of buying and selling moves prices and moves markets.
Price Action | Underlying Supply/Demand |
Increasing | Buyers Aggressive - Market buy orders > market sell orders - Lifting bids to equal ask/offer price |
Neutral | Neither Agreesive - Market buy orders = market sell orders - No price movement |
Decreasing | Sellers Aggressive - Market buy orders < market sell orders - Dropping ask/offer to equal bids |
Great Way of Thinking from Market Delta
A snippet from one of the manuals I linked to below struck me and outlines my way of approaching any trading system. Go in it without pre-conceived notions (as objective as possible), let the results do the talking and make your own conclusions:
“After first gaining a basic understanding of what a Footprint® chart is (which presumably you’ve already achieved) the next step is to gain some level of observational awareness. Avoid making preconceived conclusions. Avoid deciding, in advance, what something is going to mean. Instead, begin the process with simply learning how to pick out key elements of Footprint® structure. That’s what this document is all about. Once you have gained some facility with what the various elements of Footprint® structure are, then you can begin coming to conclusions regarding the meaning of the elements in various contexts. Also, you can begin to assemble the elements into patterns. In this way, you’ll start making your own rules, based on what is real, not what some tradition, some book, or some trading guru has told you; which may or may not be valid information. The Footprint® lets you come to your own conclusions, if you learn to see the Footprint® in an unbiased fashion.”
LINKS
Types of Orders. SEC.
Electronic trading at CME Group. Globex Reference Guide.
Volume Breakdown Indicator from MarketDelta. Volume Breakdown.
Anatomy of a Footprint from MarketDelta. Anatomy of a Footprint.
Learning to read the MarketDelta Footprint from MarketDelta. Reading the Footprint.
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