how price moves...

I have something that has bugged me for a while. I know there will be some people here that will have a better understanding of this than me, so I would like to hear your thoughts on this:

Why do prices move the way they do? What really is the cause of it?

It has probably been asked many times before I cant see anything though. I have heard a couple of different versions myself, and obvoisly have my own view. It may be totally wrong, it wouldnt suprise me.

I will explain a little more by what I mean in my questions...

Does price move up because there is actually not enough sellers there and therefore price goes up till it will reach an equilibrium and stay at its current rate? I have heard a different way which sounds a bit crazy .. i read somewhere someone said there is always an equal number because without a buyer there cannot be a seller because its a 'zero' sum game. If that is the case why does price move? if there is equal number of sellers to buyers how is price decided? who decides the prices too. there must be some corporation that decides on the ultimate price. I would imagine it to be a computer as well so that it can calculate fast enough the changes in buyers and sellers.

Maybe this is all totally wrong, i would like to be enlightened.

There are two prices, the bid and the ask. In its simplets form, these prices have technically not traded yet. They are, in a sense, advertisements about where the next willing trader wants to transact. The real market exists inside of these two prices, because those prices have already been traded at most recently, and they represent the most recent value of what you are looking at. So the bid and ask sitting on the outside represent the next available trading price. Each of these prices contain an indepent limit to how much liquidity is available before there are no more sellers or buyers to transact at that level. So if a large buyer decides to place a buy order at the current ask price, and his order is larger than all the collected orders willing to sell at that level, then the ask price will rise to the next level where there are willing sellers. If his order is large enough, price might move through several levels of sellers before equilibrium is met. Same goes for a large sell orders.

You might also consider what would happen if you were to place a limit order between the bid and the ask. Technically (if your order is big enough), the spread will tighten to accommodate that change. Now again, it may look like you moved price, but until someone actually transacts at that level the market has not actually moved. You could enter and remove that limit order all day long without cost, moving the spread back and forth, as long as no one decides to take you up on your offer of liquidity.

So, with all of that in mind. Price will move if there is a greater demand for liquidity than what is supplied at the most competitive rate. Price can move due to a lack of liquidity, where the market is thin so smaller orders have more influence on price. Price can move when there is heavy supplied liquidity if a large order or several orders push through those prices. Liquidity has several distinctive characteristics: immediacy, width, depth, etc. Understanding these characteristics will help understand what is happening behind the chart.

ah that seems to explain a lot. Some of its a little difficult to comprehend, but I kind of get it.
When you say immediacy, width and depth how are these rocognised?
And thanks for the great explanation.

Acturally, you don`t need to understand why price changes every minute, the point is that you need to know which direction the price will trend.

yeah we need to know where price is going, but to know where its going its important to understand how it gets there.

Recall Reminiscences of a stock operator

"I didn't ask the tape why when I was fourteen, and I don't ask it today, at forty. The reason for what a certain stock does today may not be known for two or three days, or weeks, or months. But what the dickens does that matter?" (Pg.11)

a quote doesnt prove or disprove anything. But i have my answer now, and am happy.

He wasn't asking for a reason behind why a currency (or stock, or bond, etc.) moves, but asking what the mechanics are behind the actual move, i.e. how the buyers and sellers in the market affect the price and make it move the way it does when they transact.

There is a lot behind the seen and having a glimes of it improves our trading... at least to know why price turn.
Good thread, good response!

Another good related thread for anyone who's interested:

The How's & Why's of price
http://www.forexfactory.com/showthread.php?t=47648

bravo

What makes price move up and down is laid out by a natural set of laws in the form of waves, each time frame with it's own individual wave count. For how far these waves move see Gaston's reply in the second post.
The first and second waves determine where subsequent waves will travel to.

Previous auction activity leads up to present auction activity and is therefore influential upon it. That's as far as I can go along with you.

Thanks for the link fxsurfer.
A nice lengthy read which covers every last detail I wanted to know and some..

http://www-rcf.usc.edu/~lharris/Trad...ok-extract.pdf

Yeah, and the way the markets operates and how they are perceived sure hasn't changed since 1923...This quote makes me seriously wonder why so many traders tout this book as the Holy Bible.

On a more constructive note, there is a great amount of literature and research articles on market micro structure and related fields. Check out works by Martin D. Evans, Richard Lyons, Fabrizio Lillo and J. Doyne Farmer just to name drop a few.

Hey Gaston... Get your butt over to the Nights thread & throw your Hat in the Ring.

Input like the above would always be welcome.
Then again; it may be that you just want to drop in for a pop.