Bids vs Offers

Fig 1.1: Bids and Offers in Blue and Red respectively in FGBL (bund)

Bids:

Bids refer to orders that are placed to buy a financial product. These are resting or limit orders , not market orders, that are waiting to be ‘filled’. (Blue rectangles on Fig 1.1 show bids on a ladder or DOM and a histogram of them on the Book Snapshot). A bid consists of a price and volume so the bid on price 162.10 in Fig 1.1 is 162.10 for 536 (lots).

Offers:

Offers refer to orders that are placed to sell a financial product. These are resting or limit orders and not market orders that are waiting to be ‘filled’. (Red rectangles on Fig 1.1 show offers on a ladder or DOM and a histogram of them on the Book Snapshot). An offer consists of a price and volume so the offer on price 162.25 in Fig 1.1 is 335 (lots) at 162.25.

‘Hitting’ the Bid:

Hitting the bid refers to placing a market sell order. The market order will be ‘filled’ at the best bid. In Fig 1.1 this refers to price 162.17 where someone hit the Bid for 33 lots (yellow rectangle).*

‘Lifting’ the Offer:

Similarly to ‘Hitting’ the bid, lifting the offer is the exact opposite. This refers to placing a market buy order which will be ‘filled’ at the best offer. In the case of Fig 1.1 this refers to price 162.18. *

 

Hits vs Lifts

So what information can we get from hits and lifts? Hits and Lifts are what make the market move. Collectively they show the ‘aggression’ of buyers in the case of lifts; and the ‘aggression’ of sellers in the case of hits. Below is an image of hits vs lifts recorded by the TradeLabs VolumeStamp indicator. Numbers on the left of the box represent hits (sells at market) while numbers on the right represent lifts (buys at market).

 

TradeLabs VolumeStamp orderflow order flow footprint

 

One would expect that if there are more hits the market should move down and if there are more lifts the market should move up. However, it all depends on resting orders too which can be seen in what is called the “Book”. Bigger size Bids (either shown or hidden in the form of an Iceberg order) may take a lot of hits to get through a single price whereas the offers may be thin and taken out easily. This is called absorption of sellers where big players may want to get filled “passively”. The opposite is in effect when it takes a lot of lifts to get through an Offer and it’s called absorption of buyers. Below is an image of what this absorption looks like in the TradeLabs VolumeStamp indicator with the Delta setting. The green bars show buyer absorption while the red bars show seller absorption.

 

TradeLabs VolumeStamp orderflow order flow footprint

Absorption is one way of seeing where support or resistance is located. Obviously for someone to want to accumulate such a large quantity at a price or even a range of prices means that at least for some time this price or area of prices can provide support or resistance depending on whether the absorption is done on the bid or the offer. By identifying these prices one immediately has a good risk:reward situation.

However only knowing the hits and the lifts is only half of the story. The other half is told by the “Book” itself.

The “Book”

Bids and Offers make up the Order Book and the information you can gather from these can have a lot of weight. Think of the book as the purest representation of the market. After all a market consists of buyers and sellers that match up their price to create a transaction. The information you get from these transactions (volume traded, price traded etc) can be viewed as a chart after it has happened whereas looking at the book can show the intentions of buyers and sellers in real time. However this is easier said than done due to the pace and activity that occurs.

Areas of high liquidity

Areas of high liquidity exist at points where many market participants have resting orders waiting to get filled. These areas are of high interest and are usually a price of interest (level, technical indicator, psychological level) so they are extremely important to look for. The sheer size of buyers or sellers at some price can provide support or resistance at least in the short term.  Fig 1.2 shows the liquidity around the daily high on the second visit there as viewed on the MarketDNA and Book Snapshot indicators.

Fig 1.2: Area of high liquidity around the daily high in FGBL (bund) futures

Below are descriptions of terms you may come across among order flow traders. More information on these will be provided in a future post as they are more advanced and this is intended as a beginners guide to order flow trading.

Icebergs

An iceberg order is a large order that has been divided into smaller sized blocks to conceal the real order quantity. These can act as a short term price of support or resistance depending if they are on the bid or on the offer.

Spoof:

A spoof order is an illegitimate order which is placed in order to manipulate the market. These are usually large orders that are entered in order to give an artificial impression on the market and are cancelled without trading. Below are a few examples of spoofing in various markets:

In conclusion, by having the information on the order flow, one can have a clear picture of the insights of the market which other chart types cannot provide. Especially for day traders where every move is important, knowing this type of information is invaluable and truly beneficial and in conjunction with technical analysis it can be very powerful.

This is by no means a comprehensive post as it will be updated further in the future but I hope it helps beginners get into order-flow trading.

-01VLS

*More information on placing orders can be found on platform websites