Observation from SPY

Yesterday’s session (12 Sep) was an interesting to observe the concept of order flow, support and resistance. For the previous few days, i’m trying to wrap my head around passive participants which are limit orders and aggressive participants which are market orders. It is a very complicated concept to comprehend (at least to me) and am still trying to comprehend. I’m still trying to comprehend this concept because a friend of mine once told me that if you understand this concept, you will most likely be a profitable trader.

Ok so from what I understand, in the market, there are institutional players who have deep pocket to burn, have the tools and resources to decide where the markets go and there are retail traders (like myself) who do not have deep pockets and yet at the same time trying to be profitable.

In the first paragraph, I mention that in the market, there are passive participants, who are usually the large institutional players, provide liquidity to the market without moving the prices much, are limit orders and they buy on the bid (if they are the buyers) and they sell on the ask (if they are the sellers). The passive buyers are participants who want to get long on a particular instrument because they think that that particular instrument they are buying into will increase in price sometime in the future while passive sellers are participants who want to short that particular instrument because they think that particular instrument they are selling into will decrease in price.

Passive buyers and sellers are important because they provide support and resistance to the marketplace. They are the buyers at the low and sellers at the high. When a market cannot get past a certain point, it means that there are passive buyers or passive sellers are coming in to support that level.

So you might ask what is a bid and ask? Bid is the buyers want to buy a particular instrument at a certain price and ask is the the sellers who want to sell a particular instrument at a certain price.

Then come this concept of aggressive participants and delta. Aggressive buyers buy on the ask and aggressive sellers sell on the bid. Delta is the measurement of the net buying or selling that took place for a given candlestick. As the price go higher, you want to see that a positive delta because it is sign of agressive buyers coming into that market to push the market along. One important point to note that for the market to move in a certain direction, the aggressive participants are the ones who does this, not the passive participants.

Simply put, aggressive participants are the one who are hitting on the bid and ask button. They cannot wait to get in a trade.

Why it is important to understand the concept between passive and aggressive participants? Because the passive participants are the ones who make the trend. As a retail trader, you don’t want to go against them because they have the resources that normal retail trader does not have. The resources I’m referring here is not only money but also knowledge about the market that we as normal retail trader does not have access to

So how do you spot passive participants from aggressive participants? I used a tool called volume footprint that shows me the orderflow for a certain pricepoint. But you can observe the price action from the chart itself. When the market cannot get through a certain point with a relatively high volume, it is usually the passive participant at play. Let me give you an example so that you can better understand the concept. For example, looking at the 5 minute chart on 13 Sep for the SPY, from 12pm to 12.04pm, you can see that there is a relative high volume as compared to the previous two candles, but a small body is being formed, followed by a short sell off, before testing the level again but each time it tests that same level, SPY sell off again. This is usually because the big players are at play. It is telling me that at $562.65 to $562.94, 1 or several big institutional player is trying to short the market. The problem with this method is that I do not know if the big players are pumping in money to open new positions or they are closing old positions but with a volume footprint chart I might have a good idea (please see below to reference what im talking about)

And please get me wrong here, I’m not saying using volume footprint is the holy grail but it gives me a general good idea of what the market is telling me. Again, I might be wrong because i’m a relatively new trader but this how i interpret it for now.

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