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Can someone please explain a newbie question, I've got myself confused.
I need an explanation of what is happening at the bid price and the ask price and how that shows up as delta.
I'm I right, that sellers transactions happen at the bid and buyers transactions happen at the ask.
Follow up question is delta. If a candle has more transactions at the bid price (i.e. negative delta), then sellers were more aggressive.
Trading: The one I'm creating in the present....Index Futures mini/micro, ZF
Posts: 2,311 since Nov 2011
Thanks Given: 7,341
Thanks Received: 4,518
Limit orders only pair with market orders. Buy limits stack up at each price below and at the current market, the best bid and then all the rest below it. Sell limits stack up at each price above and at the current market, the best ask (or also called "offer") and then the rest above it. So a buy limit order can only pair with a sell market order. And a sell limit order can only pair with a buy market order. Market orders in a general sense can be viewed as being more aggressive and limits in the same general sense can be viewed as more passive. But this is not always the case. Limits can be aggressive at times (ice bergs for example) and markets can be slightly passive at times (low volume perhaps). But it's safe to say generally this is how it is, market orders aggressive, limit orders passive.
So if we only have a bunch of limit orders stacked up above and below the current market price making the bids and offers, great, but price is not going to move, at all! So to have a healthy market, or market at all, there has to be people willing to hit into the bid or lift the offer. In other words someone to hit the market button (screen based trading). But by the same token we need the limits too. We need both. People willing to wait for a fill and others wanting to get filled right away. So if one guy wants to buy 10 contracts 2 ticks below the market he could place a buy limit order for 10 there. If the market made it's way down to him he has to have somebody (or a few) on the other side wanting to sell to him on a market order, hit his bid. If he does the trade happens and a 10 lot counts as a sell on the delta. Vice versa of course for buy delta. Sell limit placed above etc etc.......
The only way to make sense of this, truly, to the extent possible, is in the context of the current market. So if there is more negative delta and it's far from value, below lets say, there could very well be a higher probability it is selling exhaustion. Meaning the sellers dry up afterwards, get exhausted, no more sellers etc and price moves back toward value. So the trade was a long even though we saw a negative delta. We need to find the value on the chart (this is how I understand it many do things different) and trade it. Value is where the market trades the most, has the most volume for an area IMHO. ............ Peanut butter is $5 most of the time, lets say. But the store advertises it for $4. We don't sell it at $4. We buy it at $4. And then it goes back to $5. Some will sell it that don't understand value. And that's fine. We need those people to supply the profits.....lol.
Hope this makes some sense....I think my 8 year old would understand this.....but I can't be sure.....lol... would have to be repeated many times.....
Ron
...My calamity is My providence, outwardly it is fire and vengeance, but inwardly it is light and mercy...
The steed of this Valley is pain; and if there be no pain this journey will never end.
Buy Low And Sell High (read left to right or right to left....lol)
You're a condo developer, you have 500 condos to sell, and your advertised price is $100k per condo. I put in an offer at $99k. What happens? Nothing. Either you lower your price to the "bid" which is my 99k offer, or I raise my offer to $100k (the "ask). Until that happens, we just stare at each other all day.
While we're in this Mexican standoff, Blash comes in and offers you $98k per condo. What happens now? Still nothing.
Eventually, let's say you get bored, and decide to accept my offer at $99k. You've crossed the spread is the technical lingo here, and voila, one condo gets sold. Delta in this case notches a -1.
What happens next? Nothing, because the only offer to buy is still waiting at $98k. So if you want to sell another condo, you have to lower the price again to $98k, and then delta moves down again.
So yes, in this case, more transactions happened at the bid, the condo developer was less patient and wanted to transact immediately by accepting the bid price instead of waiting for someone to pay the asking price.
You have cleared my confusion. @Blash, thanks for the thorough explanation, @MacroNinja thanks for the practical example
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I don't know why but that just made me laugh pretty hard. :-)
Must be my warped sense of humour...great explanation by the way.
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- Trade what you see. Invest in what you believe -
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Trading: The one I'm creating in the present....Index Futures mini/micro, ZF
Posts: 2,311 since Nov 2011
Thanks Given: 7,341
Thanks Received: 4,518
You are very welcome my friend. I think you got it. I think of it as the market orders. The aggressive side of the trade. Even though it could not of happen with out the limit orders. The aggression side takes precedents and is what we see in the cumulative delta.
Ron
...My calamity is My providence, outwardly it is fire and vengeance, but inwardly it is light and mercy...
The steed of this Valley is pain; and if there be no pain this journey will never end.
Buy Low And Sell High (read left to right or right to left....lol)
