What you see in front of you is called 'Depth of Market'. This Depth of Market displays

how many limit orders there are at a particular price. On the left, we will see buy limit

orders and on the right, we will see sell limit orders.

This Depth of Market is nowadays a basic feature of any charting platform and you can commonly

find it as a 'DOM', which is abbreviation for 'Depth of Market'. One important thing

to mention is that DOM only displays limit orders - this is sometime called a 'passive

orderflow'. On the DOM, you cannot see market orders - market orders are called 'active

orderflow' and there are different tools for displaying them. Another important thing to

bear in mind is that this DOM is not static, because markets are not static. DOM is dynamic

and numbers of limit orders change all the time - simply because there may be hundreds

of people watching the market at any given time. And they are sending orders, changing

them or canceling them. So to keep it clear and simple, in this scenario we are going

to assume that there are only a few traders who trade this market and we know about all

of them.

Say that the market opens at 8 AM and the first trader comes in. He want to buy. He

wants to buy 5 contracts at a price of 98, so he doesn't want to buy now but he specifies

the price. Therefore, the sends a buy limit order to buy 5 contracts - and you now know

that he is a passive buyer. On the DOM, his buy limit order will be displayed like this.

It will be on the bid side, because it is a buy limit order and DOM will show a quantity

of 5 on bid at a price of 98. One minute later, another trader comes in. He wants to sell

- he wants to sell 10 contracts at the price of 99. He specifies the price, so he uses

a sell limit order and he is therefore a passive seller. His sell limit will be on the ask

side - because he is asking somebody to buy 10 contracts from him and he's asking for

price of 99 per contract. On the other hand, the first trader is willing to buy no higher

than 98, therefore his order is on the bid side.

Now, two more traders want to buy and sell. Trader 3, who wants to buy 2 contracts at

97 and trader 4, who wants to sell 3 contracts at a price of 100. On DOM, we can already

see these new limit orders. None of these orders will be paired with each other and

the price doesn't move - because all these traders demand a different price. At the moment,

2 buyers are willing to buy at 98 and 97 and 2 sellers are willing to sell at 99 and 100

respectively - so there is no agreement between them.

Let's continue. We've got one more seller, trader 5, who wants to sell 4 contracts at

a price of 99 - so same like trader 2. So the ask is now 14. And this ask size of 14

consists of: 10 contracts of trader 2 and 4 contracts of trader 5. Still, nothing happens.

But suddenly, somebody comes in and says - 'I don't want to wait anymore. I want to buy

5 contracts now'. And this is our aggressive buyer that we were waiting for. You should

remember that he uses a buy market order and this order doesn't specify the price. The

buy market order buys the first available offer from a passive seller. Where is this

first available offer? At the price of 99. So this aggressive buyer buys 5 contracts

at a price of 99. By doing this, he cleared 5 sell limits on the ask side at a price of

99. That means the ask at a price of 99 will be reduced from 14 to 9. All of these 5 sell

limits at a price of 99 belonged to trader 2, because he came first. And therefore, he

has got a sell limit for 5 contracts left, still waiting to be matched with more aggressive

buy market orders. So at the price of 99, there are 9 sell limits left. And they will

be filled in the following order - firstly, all of the remaining sell limits of trader

2 and then, sell limits of trader 5. So it's like a queue - the limit orders are sorted

chronologically with a logic of first comes, first served. So because the trader 5 came

in later than trader 2, then he has got to wait until the trader 2 will get filled all

of his sell limits.

Now, aggressive seller comes in, making the price to move. The actual price is 99, because

that's the price at which the most recent trade took place. The aggressive seller wants

to sell 3 contracts using a sell market order. You should remember that the sell market order

is paired with the first available bid from a passive buyer. In other words - it is paired

with the first available buy limit order on the bid side. Where is this first available

buy limit? At a price of 98. So the aggressive seller send the sell market order and the

passive buyer buys from him. Now, because this passive buyer has got his buy limit at

a price of 98, the price goes down so it can match the sell market order to this buy limit.

The aggressive seller sold 3 contracts, therefore he clears 3 buy limits at a price of 98 and

there were 5 buy limits at this price in total. Less 3 of them were cleared by this aggressive

seller, that means that there are 2 more buy limits left to filled at this price. Notice

that the price has moved down, yet the number of sell vs. buy orders is equal. The price

didn't move down because there were more sellers than buyers, but because sellers were more

aggressive than buyers.

Now, what needs to happen in order for the price to move from 98 to 97? It's simple - there

must be more aggressive sellers who will clear these 2 more buy limits at a price of 98.

So it's like a barrier - this barrier of limit orders must be broken in order for the price

to move. One aggressive sellers comes in - he sends sell market order to sell 3 contracts.

But you see that at the price of 98, there are only 2 buy limits - so this barrier of

buy limits is not strong enough to satisfy this aggressive seller. So what happens? 2

sell market orders are paired with 2 buy limits at a price of 98 and this clears all the buy

limits at 98. And then, there are no buy limits left at this price. However - there's 1 more

sell market order left to be paired. Since there are no buy limits left at the price

of 98, the market now must move lower to find more buy limit orders. So it moves from 98

to 97. At 97, one sell market order left is paired with new buy limit. This completes

the order of aggressive seller - to sell 3 contracts. This aggressive seller therefore

moved the market down, because his market order was paired with buy limits at 2 different

prices. His sell market order for 3 contracts was paired with 2 buy limits at 98 and 1 buy

limit at 97. Now notice this - the price has moved from 98 to 97 despite there was 1 seller

and 2 different buyers. However, the number of buy and sell orders is equal - sell market

order for 3 contracts and buy limits for 3 contracts in total.

Now, what do you see at the price of 98? There are no sell limit orders at this price. Do

you remember that the market order doesn't specify the price? The price at which the

market order is filled only depends on the availability of limit orders. So where are

the first available sell limits? First available sell limits are at 99. Now, the aggressive

buyer comes in and he wants to buy 1 contract by using a market order. The actual price

is 97, there are no sell limits at 98, first available sell limits are at 99. Despite the

actual price being 97, the aggressive buyer is filled for 99 - because that's the price

at which he finds somebody to buy from. So he moved the market up from 97 to 99, because

at 98, there was no liquidity - no sell limit orders. So the market has skipped this price

and moved to 99 straight away. This is called a 'gap' - the market has gapped up from 97

to 99. The aggressive buyer has got what's called a 'slippage' - this means that he bought

for worse price than he was expecting. He sent the buy market order when the actual

price was 97. He would be expecting to be filled for 98 because logically, there should

be some sell limits. In reality, there were no sell limits so the market has gapped up

and he bought for 99. That means he has got a worse price and got a slippage. So in this

situation, there was 1 buyer and 1 seller. One buy market order and one sell limit order

and the price has moved from 97 to 99.

And now - the final situation that we will have a look at. A big trader comes in and

he wants to buy 15 contracts. As you can see, in the meantime, some more passive sellers

have appeared and sent their limit orders into the market. The last price is 99 - this

is the price at which the most recent trade has taken place. This is the price that the

big trader is looking at when he decides to send his order into the market. This buy trader

uses a buy market order to buy 15 contracts. By doing this, he will move the price from

99 to 103. You can see how his market order for 15 contracts was paired - take a moment

to have a look at this. So, there was 1 buyer and many more sellers and the price has moved

by 4 points. However, the quantity of buy and sell orders was equal - 15 contracts to

buy and 15 contract to sell. This is always equal and this is how the price moves.

However, in reality, such a big trader is likely to use a limit order to open a trade

- because he trades such big positions, that the potential slippage when using market orders

is very big.

So, to sum it up - the price moves in relation to market orders and available limit orders.

These limit orders are like a barrier - when this barrier is not strong enough to satisfy

market orders, the price moves. However, number of buy and sell is always equal. For example

in this last scenario - the price has moved from 99 to 103 and there were 15 buy market

orders and 15 sell limit orders.