Intraday Liquidity Dynamics and Price Movements [PDF] provides a comprehensive look at how intraday price patterns—captured through candlestick structures—interact with liquidity in the order book. Using detailed market data from European exchanges, the study investigates spreads, depth, order imbalances, and volatility to reveal how specific price configurations, such as Dojis and Hammer-like candles, influence liquidity conditions.
Introduction
Liquidity plays a vital role in ensuring smooth and efficient markets, especially in today’s fast-paced trading environment. This Intraday Liquidity Dynamics and Price Movements PDF provides a comprehensive look at how intraday price patterns—captured through candlestick structures—interact with liquidity in the order book. Using detailed market data from European exchanges, the study investigates spreads, depth, order imbalances, and volatility to reveal how specific price configurations, such as Dojis and Hammer-like candles, influence liquidity conditions.
The guide highlights that certain candlestick patterns are closely associated with temporary improvements in liquidity, offering traders potential advantages in trade execution. For example, Doji structures often coincide with narrower spreads, higher depth, and increased competition among liquidity providers. These effects may be short-lived, but understanding them can help both institutional and retail traders optimize order timing and reduce costs.
What makes this Intraday Liquidity Dynamics and Price Movements PDF particularly valuable is its blend of academic rigor and practical application. It bridges market microstructure research with real trading insights, showing how technical analysis patterns are linked to liquidity behavior. Whether you are a student of finance, a market analyst, or an active trader, this resource equips you with a deeper understanding of how liquidity and price dynamics interact intraday.
Excerpts
This study aims at analyzing whether intraday price movements help better characterize
liquidity in real time. We generate 15-minute price movement configurations based on
Japanese candlesticks and measure liquidity in terms of spread, depth, order imbalance,
dispersion and slope. We also consider trading activity and volatility measures. We find
that Dojis and some Hammer-like configurations are associated with higher liquidity in
the limit order book. The effects are short-lived but could enable traders to benefit from
temporary higher liquidity. These results are robust to changes in the interval lengths.
Our results suggest that the execution of trades could be improved when these particular
structures appear on a price chart.
Liquidity has become of paramount importance in finance. The recent emergence of liquidity
dark pools, algorithmic trading and, more generally, high frequency trading has drawn the
attention of an increasing number of researchers and practitioners. The flash crash of May
6th, 2010 is the best example of the implications of algorithmic trading, on the one hand,
and the absence of liquidity, on the other hand. In such a trading environment and given
the multidimensionality of liquidity, finding and estimating intraday liquidity in a fast and
accurate way is a tough challenge.
One solution to overcome this hurdle has been proposed by Kavajecz and Odders-White
(2004) who reveal some unexpected features of technical analysis. These authors examine
similarities between support and resistance levels and the daily prices for which they observed
high depth in the limit order book. They also study moving average indicators and check their
information content in the order book. Based on NYSE stocks, their results show that signals
in price charts are significantly related to the state of liquidity in the order book. They find
that support and resistance levels and moving averages are strongly correlated with liquidity
measured with customized indicators. The authors also conduct Granger causality tests, which
reveal that technical analysis helps discover depth already present in the book.
In this paper, we extend their analysis to High-Low-Open-Close price dynamics that prac-
titioners typically represent by drawing Japanese candlesticks. This method is an Eastern
charting technique that is in essence very similar to bar charts. When looking at candlestick
charts, traders have a quick snapshot of buying and selling pressures, as well as turning points.
Using market data on a sample of European stocks of three national indexes, we study the re-
lationship between liquidity and price movements by applying an event study methodology on
15-minute time intervals for the best-known candlesticks structures. As outlined by Kavajecz
and Odders-White (2004), price dynamics are expected to be linked with modifications in the
state of the limit order book and with the supply of liquidity. For this purpose, we analyze
different liquidity proxies: the relative spread, one-sided displayed and hidden depth measures
(at the best bid and offer, at the five best limits, and for the whole book), order imbalances,
dispersion measures, and the slope of the book. We also analyze the following trading activity
measures: number and size of buyer and seller-initiated trades, as well as trade imbalances for
number of trades and volumes. We first focus our analysis on the Doji structures which are
the most influential single lines of the literature on Japanese candlesticks. The Dojis are also expected to have a direct impact on liquidity given the succession of price pressures that drive these signals. We then extent our analysis to other types of configurations.
When a Doji appears on screen, our results suggest that liquidity is higher for all proxies
3 although there is less trading activity at that particular moment. The duration of the liquidity
4 changes depends on the proxy but the patterns are always short-lived. This reinforces the
5 hypothesis of an agreement on a price for the security, as exposed in the literature on Japanese
6 candlesticks. This consensus implies a narrower spread, higher depth and less dispersion due
7 to higher competition that liquidity suppliers face. The position of opening and closing prices
8 on the candle is also related to different changes on bid and ask sides: bodies near the highest
9 price of the interval are linked to changes at the ask while bodies near the lowest are related
10 to changes at the bid. Using these dynamics might improve the execution of buy and sell
11 decisions. Liquidity seems also to be higher when a Hammer or a Hanging Man occurs. In this
12 respect, Japanese candlesticks may be used to have a quick idea on the state of liquidity in the
13 limit order book. In a typical asset management firm, the decision to trade comes from the
14 portfolio management team which then ask a broker to get the order executed in the best way.
15 Japanese candlesticks may be used to have a quick idea on the state of liquidity in the limit
16 order book. Trade execution could be improved by looking at these candlestick structures at
17 the trade execution time. The magnitude of the potential gains on transaction costs is beyond
18 the scope of this analysis and is left for further research.
The remainder of the paper is organized as follows. Section 2 provides a brief review of the
19 literature on price dynamics, technical analysis and liquidity. Section 3 describes the dataset
20 and the different liquidity measures that are used. Section 4 presents the methodology that we
21 apply. Section 5 reports the findings of the event study and section 6 contains the robustness
22 checks that are performed. The final section concludes.