We take many things for granted. I myself am surprised to be indoctrinated with the supply and demand principle as defined in economics. I did graduate from economics degree, but I never at peace with their teachings. This question relates to the most fundamental aspect of market mechanism.
This is a question I've had for a while, so I would love to hear it from the traders point of view:
Why does price change based on supply and demand?
Easy Peasy. Or is it really? We take that principle without question because it sounds so logical. But I think it is a bit of challenge on itself as to really explain the mechanism.
For example, just because there are people buying a lot of bread today in their local supermarket, clearing the shelves off completely, with no additional supply from the supermarket, will the new batch in tomorrow increase in price? Theoretically speaking, there is an imbalance of supply and demand. And theoretically speaking price should increase. But I don't think supermarket will charge a dollar more when the new batch of bread comes in.
But you may say, they do give discount on oversupplied items. Yes, but that's more on offer and acceptance and price manipulation. If milk costs $5 and they have large stock of unsold supply (oversupply), THEY make a decision to reduce it and offer it to a customer with a new price. Can they hold on to the stock and let it all turn rancid? THEY have the decision power to do that.
My point is price doesn't change automatically. Price is controllable by those who have the power to do so. A mere supply and demand does not explain the change in price. Buyers and sellers THEMSELVES decide and exercise their power.
Can you have an imbalanced supply and demand yet price remains? Of course. It depends entirely on buyers and sellers to decide to lower and raise the price and by how much. Essentially both sides are engaging in offer and acceptance of a contract.
Can you have a balanced supply and demand yet price jumps up and down? Definitely. A mere rumor is enough to blitz the price of oil overnight, without any imbalance in supply and demand.
Economists know the price of everything, and the value of nothing. Diamond and water are the cliche example I learned about supply and demand, value and scarcity. If someone finds a massive rock of diamond without knowing that it is a diamond and sell it for a penny, then all economics principles are thrown out of the window.
If I'm selling a product and my customers are keep buying it, it is purely MY decision to increase the price. In the market, whose decision is it to change the price?
My bottom line is I think the market works on bidding principle, and less on supply and demand. Supply and demand merely making the transaction possible. If you long on EUR/USD at $x, someone has to be willing to sell that at $x to process that transaction, but the burning question is:
How did the price come to x in the first place, and who get to decide that?
I want to address the fundamental question of why, for example, does EUR/USD is up by 1 pip?
I'm firm in my stand that it works by bidding principle, and less on supply and demand. EUR/USD moves up a pip because there is a buyer who is bidding to buy at 1 pip higher than the current price and there is a seller who is willing to sell at 1 pip higher.
This is a question I've had for a while, so I would love to hear it from the traders point of view:
Why does price change based on supply and demand?
Easy Peasy. Or is it really? We take that principle without question because it sounds so logical. But I think it is a bit of challenge on itself as to really explain the mechanism.
For example, just because there are people buying a lot of bread today in their local supermarket, clearing the shelves off completely, with no additional supply from the supermarket, will the new batch in tomorrow increase in price? Theoretically speaking, there is an imbalance of supply and demand. And theoretically speaking price should increase. But I don't think supermarket will charge a dollar more when the new batch of bread comes in.
But you may say, they do give discount on oversupplied items. Yes, but that's more on offer and acceptance and price manipulation. If milk costs $5 and they have large stock of unsold supply (oversupply), THEY make a decision to reduce it and offer it to a customer with a new price. Can they hold on to the stock and let it all turn rancid? THEY have the decision power to do that.
My point is price doesn't change automatically. Price is controllable by those who have the power to do so. A mere supply and demand does not explain the change in price. Buyers and sellers THEMSELVES decide and exercise their power.
Can you have an imbalanced supply and demand yet price remains? Of course. It depends entirely on buyers and sellers to decide to lower and raise the price and by how much. Essentially both sides are engaging in offer and acceptance of a contract.
Can you have a balanced supply and demand yet price jumps up and down? Definitely. A mere rumor is enough to blitz the price of oil overnight, without any imbalance in supply and demand.
Economists know the price of everything, and the value of nothing. Diamond and water are the cliche example I learned about supply and demand, value and scarcity. If someone finds a massive rock of diamond without knowing that it is a diamond and sell it for a penny, then all economics principles are thrown out of the window.
If I'm selling a product and my customers are keep buying it, it is purely MY decision to increase the price. In the market, whose decision is it to change the price?
My bottom line is I think the market works on bidding principle, and less on supply and demand. Supply and demand merely making the transaction possible. If you long on EUR/USD at $x, someone has to be willing to sell that at $x to process that transaction, but the burning question is:
How did the price come to x in the first place, and who get to decide that?
I want to address the fundamental question of why, for example, does EUR/USD is up by 1 pip?
I'm firm in my stand that it works by bidding principle, and less on supply and demand. EUR/USD moves up a pip because there is a buyer who is bidding to buy at 1 pip higher than the current price and there is a seller who is willing to sell at 1 pip higher.
No SL done the job. You can check Market Profile theory to get better insight. There are papers available on CME. 
