Limit orders, market orders and the book

Every chart you have ever looked at is a summary of something simpler: a list of people who want to buy, a list of people who want to sell, and a record of what happened when the two lists met. That list is the order book. If you understand how it works, most of what this course covers becomes obvious rather than mysterious.

Two kinds of orders

A limit order says: "I will buy (or sell) at this price or better, and I am willing to wait." It sits in the book until someone takes the other side or you cancel it. Limit orders provide liquidity.

A market order says: "Fill me now at whatever price is available." It does not wait. It walks into the book and trades against the best resting limit orders until it is filled. Market orders consume liquidity.

Stop orders are a variation: a stop is a dormant market order that switches on when price touches the trigger. For our purposes, once triggered, a stop behaves exactly like a market order, and that detail matters a great deal in Module 5.

What the book looks like

Here is a simplified book for a futures contract, with the best bid at 5000.00 and the best ask at 5000.25 (one tick apart):

   Bid size | Price   | Ask size
  ----------+---------+----------
            | 5001.00 |   220
            | 5000.75 |   185
            | 5000.50 |   140
            | 5000.25 |    95   <- best ask (offer)
     110    | 5000.00 |         <- best bid
     160    | 4999.75 |
     205    | 4999.50 |
     240    | 4999.25 |

Every number is a count of contracts resting at that price. The 95 at 5000.25 is 95 contracts that sellers have offered and are waiting to sell. The 110 at 5000.00 is 110 contracts buyers are waiting to buy.

The gap between best bid and best ask is the spread. On a liquid index future it is usually one tick. On a thin stock or a small-cap crypto pair it can be many ticks wide, and everything in this course gets harder as the spread gets wider.

Who trades with whom

Suppose a trader sends a market order to buy 40 contracts. The order goes to the best ask, 5000.25, where 95 are resting. Forty of those 95 are filled. The buyer paid the ask; 40 resting sellers were "lifted."

  Before                     After a 40-lot market buy
  5000.25 |  95 ask           5000.25 |  55 ask
  5000.00 | 110 bid           5000.00 | 110 bid

Price did not move. The last trade printed at 5000.25, the best ask is still 5000.25, and 55 contracts remain. Price only changes when a level is emptied. If another buyer sends a 60-lot market order, 55 fill at 5000.25, the level is gone, and the remaining 5 fill at 5000.50. Now the best ask is 5000.50 with 135 left. The price "went up."

Key idea: Price does not move because people want it to. Price moves when market orders consume every resting limit order at a level and have to reach for the next one.

Vocabulary you will see everywhere

The words "passive" and "aggressive" carry no judgement. A passive buyer sitting at 4999.75 is not timid; they are demanding a better price and accepting the risk of not being filled. An aggressive seller hitting the bid is not reckless; they decided speed mattered more than a tick.

The one thing beginners get backwards

Many traders believe that a "big buyer" is someone whose huge bid shows up in the book. In fact a large resting bid is a large passive buyer, and passive buyers cannot make price go up. They can only stop it from going down while their order lasts. The only participant who can push price higher is an aggressive buyer lifting offers. The distinction between size that waits and size that acts is the whole basis of order flow reading.

Where this applies

Everything above is literally true for centralised, exchange-traded products: index and commodity futures, exchange-listed stocks, and crypto on centralised exchanges. Spot forex and CFDs have no single central book; what a broker shows you is their own liquidity or an aggregate feed. Order flow tools can still be useful there, but they describe a fragment of the market, not the whole of it.

Try it: Open any platform that shows a DOM, even a free crypto exchange web page. Watch the best bid and ask for two minutes without trading. Count how many times the best ask is fully consumed and price ticks up, versus how many times sellers simply add more at the same price. Write down the ratio. You have just done your first piece of order flow analysis.

Recap

• Limit orders rest in the book and provide liquidity; market orders consume it and are filled immediately.
• A triggered stop becomes a market order.
• Price changes only when all resting orders at a level are consumed and the next order has to trade at the next price.
• Lifting the offer is aggressive buying; hitting the bid is aggressive selling.
• Large passive size can hold a level; only aggressive size can move price through one.