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What is it exactly that makes price move ?
Limit orders do not move price, they just sit there waiting to be filled. Limit orders provide liquidity at a specific price only, they do not search out and consume liquidity at other prices.
Doing that is the role of market orders.
Market orders arrive and immediately consume liquidity at the best price available. If all the opposing orders at that price are filled then a gap is left open.
Subsequent market orders move into the gap in search of more liquidity to consume. This is what moves the price.
What about stop orders?
Buy stops, sell stops, ordinary 'take me out' stops - do they move price ?
Indeed they do, these are real movers. As soon as a stop order is hit (any kind of stop order) it is converted into a market order.
This makes sense.
If price is moving against a position and I have an agreement with my broker to take me out at a certain level, I don't want a partial fill, I want to get completely out, and get out now. The only kind of order that can be filled completely now is an order that searches out liquidity and consumes it at the best price available.
That of course is a market order, and only a market order.
Think about it, are there any brokers who guarantee stop order prices without charging a premium to do so ? If they do guarantee stop prices at no extra cost, how can they do that ?
Are stop orders involved in slippage?
Yes they must be, by definition. Remember, market orders move and follow price. All stop orders are filled as market orders, so they are going to be filled at variable prices unless there happens to be more than enough liquidity to go around for all the stops that need to be filled at a price.
Priority execution comes into this too. I mean who gets first shot at the available liquidity.
This is what I see with my broker. Limit orders always fill at the price I specify or better.
If I do get some negative slippage it is always on my 'instant' market orders and pending stop order fills.
What happens when an important level is broken and a cluster of stop orders are hit ? They all convert to market orders and immediately consume whatever liquidity is available, this can move price quickly.
Moving price quickly near key levels will likely trigger more stops and a cascading effect accelerates the process.
Huge commercial trades need huge liquidity to fill their orders.
Where can they find that much counter-party liquidity ?
Forex Broker Activity
One place to look is in these stop cluster cascades.
Do you notice how price often will spike briefly through a previous high/low then reverses strongly in the opposite direction - what was going on ?
Note, we often see long candle wicks running out into new price territory in these situations.
- Where are the stops likely to be located in those situations ?
- Who provides the liquidity to match all those stop/market orders when they cascade out ?
I recommend a detailed explanation of the mechanics of price movement found in nubcake's eye-opening rant on the subject.
Now, how does mechanics of price movement relate to compression ?
I'll be focusing on this question myself over the next couple of days, lets see what we can come up with.