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 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 (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?

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.

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?

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 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 producing music, mixed martial arts, and riding his motorcycle in the summer.