Order Flow Liquidity Model

Lets take this example: Market was at equilibrium. Now, lets say there is a shift in fundamental values to being more bullish.

What are the implications for the market and order flow and liquidity?

1. The Latent orders that Darkstar talks about, become market orders and limit orders.

2. Some market participants judge the fundamental shift to be imminent and great, resulting in execution of huge market orders into the market

3. Some market participants judge the fundamental shift to be fairly imminent, and decently sized, resulting in a smaller batch of market orders hitting the market.

4. Some market participants who were short and realize the fundamental shift need to cover, either through market orders, or waiting for a small retracement limit orders. This further reinforces the surge of market orders, and reinforces the bids at the support levels.

5. Other market participants who think there is a fundamental shift, but are not willing to commit market orders yet. Lets say they had bids which were 500 pips away, but now pull their bids higher to 100-200 pips below market. This reinforces bids at the key retracement points and support levels.

6. Other market participants who are oblivious to the fundamental shift place trades which are lower probability than what they realized(but are oblivious to it), and cause above average losses to their systems. They turn into uninformed traders and provide liquidity to the informed traders who correctly saw the change in fundamental values.

7. Market participants who correctly saw a fundamental change in values, but are not willing to commit market orders just yet or limit orders, but instead want price to go up to validate their analysis and then will generate market orders. This is where the buy stops accumulate above the key resistance points.

8. Other market participants who were already heavily long, and correctly saw a further change in fundamental values reinforces their conviction in their trade. These market participants who would have normally had take profit sell orders now decide to pull those sell orders, and reset them higher up, or decide to reduce the size of their standing limit sell orders. Results in a general thinning of the offers in the market, further adding fuel to the bullishness as buyers search for enough liquidity to place decently sized trades.

Now I hope you guys get the idea. I can probably add another 100 things to that list, but it is up to you to make sense of it and harmonize it with your personality. I can’t do that. I can just stimulate thought.

Now the other question is how do you determine change in fundamental value? Or how do you determine when fundamental values will quickly reverse? Or have been falsely interpreted? Or grossly misinterpreted?

That is for you to figure out. It will make you a far superior trader if you figure it out yourself.

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