Bought up / sold off, buying/selling pressure, bid/ask, spread, market & limit orders, what price is shown on a chart

Frequently, much confusion arises when people say that the market or a stock are sold off or bought up, since, ultimately, there is a buyer and a seller on the ends of all transactions. So, what does “sold off” even mean? The important thing here is to understand that there are essentially 2 categories of orders you can make on the market: a limit order and a market order. A limit order is made when you specify the precise price at which you want to buy or sell a stock. The buyer’s price is the bid price (think of a bidder at an auction, who sets the price he wants to buy the item at), while the seller’s price is called the ask price (how much money he is asking to receive for his asset). These are the very bid/ask prices that you see in Level 2 (market depth), and the same terms are used when talking about the bid/ask spread.

When you set up a limit order, you are waiting for someone to come in and buy at your price, which would fulfill your limit order. So, when making either type of order, there is both an advantage and a sacrifice: with a limit order you set an exact price, but you sacrifice immediacy, since your order may be fulfilled later or even never be fulfilled; with a market order, it’s the opposite — you are sure to get your order fulfilled immediately as long as there are limit orders out there (i.e. liquidity), but if the price of the asset at interest is volatile, you may get slippage, which means the order will not go off at the price you saw the moment you pressed the buy/sell button.

So, what happens when a stock is being sold off? Lots of market orders are being made by sellers of an asset. This means that they are “eating away” at the bidders and their limit order bid prices (at which they will buy from the seller). As a seller, naturally, you want to get the highest price for your asset, so your market order will go off at the highest bid price, say, $10.00. The same will keep happening with other sellers sending in market orders until there are no more bidders at $10.00, i.e. market participants who will buy from sellers at $10.

Assuming for a moment that no new limit orders are coming in, then after all bids at $10.00 disappear, new market sell orders will be fulfilled at the highest price after that, which may be, say, $9.98. After sellers sell to the $9.98 bidders, then they have to sell to the bidders at the next highest price, and so on and so forth. As you see, the price at which orders are met keeps going down and down. This is called selling pressure, and this is why the term “selling” is associated with a decreasing asset price and vice versa. With buying pressure, it’s the mirror opposite of the above: buyers set market orders that are fulfilled at ask prices of sellers’ limit orders, chipping away at the ask price from the bottom up.

If there are no market orders coming in, there is no price action happening, which is when you will get a flat candle. The buyers and sellers are in a tug-of-war, and the no-man’s-land between them (where the rope is) is called the bid/ask spread. This spread is usually minimal for assets that are in high enough trading volume at the moment and/or with strong enough price action, and the spread may be very high for unpopular, illiquid stocks, such as many penny stocks. Now that you know what bid/ask means, you will know what those prices are when you see them.

But what is the price that we see on a chart? How can there be only one price on a chart when there are two (bid/ask) in reality? What does it mean that a stock is currently trading at $15.84? This price is the price at which the most recent transaction was completed. So, if the last market order came from a seller, it will be the price at which that person sold. Similarly with a buyer. This means that in reality, when an asset is trading at decent volume, such as a blue-chip stock during main trading hours, the stock price you see on the chart is bouncing between the bid and the ask all the time. However, since blue chips typically have low spreads during market hours, you will not notice much hopping about. However, with less liquid stocks, and even with blue chips (when the latter are traded in extended hours), you may see “barcoding”, that is, relatively long candles and abrupt hopping between prices that are not close to each other. This is not necessarily because a stock is running up or tanking, but simply because the spread is large, so when a buyer’s market order is followed by a seller’s, the ticker price will jump accordingly between them.