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Economic Question: Why is price affected by supply and demand?

  • #21
  • Apr 9, 2013 1:21pm Apr 9, 2013 1:21pm
Quoting Myo
Ok, hold on, I think you got it 100% wrong this time. Market does care how many are willing to buy or sell - I mean, lol - thatīs exactly what price is in Forex. The quote. And itīs made up of the best bid and the best ask available.

Let's say I'm planning to buy eur/usd. Best asking price could be 1, for me, and after that, when I want to sell that, the best bid price, for me, could be 100 and beyond...
Play the players, not the cards.
  • #22
  • Apr 9, 2013 2:15pm Apr 9, 2013 2:15pm
It seem there is a lot of misconception of how forex market works.
Here some answers:

Quoting Ishtana
Why does price change based on supply and demand?
There is a big difference between a normal supply and demand from the economy point of view and
the forex market. The difference In the forex market is that NO ONE has inventory of a currency. That is why all Banks an Brokers
"quote" two prices . The Price that they would buy it from anybody (bid) and the price that would sell it to anybody
(ask). They need to buy it first to be able to sell it.

Theirs system keep an eye on the hundreds of quotes in ECN pools and they keep their "quotes" very tight to the overall market
quotes at all times.

So, only the actual "real" orders from clients all over the world is the supply and demand of that millisecond. If those orders are unbalance
Banks and brokers change their "quotes" to fill them and balance it. Thats is.. pending orders do not matter, There is no "levels" of prices.
All Major Banks and Brokers know only their internal books, but no one see anybody else...The ECN is just a bunch of spot quotes
with very little significance of any market depth. The forex market works in past tense... the "Quotes" (prices we see in the charts)change
to supply the demand of the "past" last millesecond orders.

Quoting Ishtana
. 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...
The price does move on supply and demand.. It got were it is by pure supply and demand. This market is almost 100% efficient..
No one has inventory but everybody want to buy and sell.. so they "quote" the 2 prices...once a bank or Broker get real order is when
they ck if they can buy from someone else... that may have to raise their bid to get them.. but that raising of the bid could create a domino
effect in everybody raising their bids. No one decides what the price is going to be... I mean the whole world does with "orders" .

J.
  • #23
  • Apr 9, 2013 2:26pm Apr 9, 2013 2:26pm
Quoting GnarlyPips
Let's say I'm planning to buy eur/usd. Best asking price could be 1, for me, and after that, when I want to sell that, the best bid price, for me, could be 100 and beyond...
YEAP... that is the game. You place an order when the broker was quoting "ask" 1,3080, order get accepted now you own X amount of euros
at 1.3080... the Broker in that immediate moment offer you (their bid price) say.. 1.3078. Thats it... from there on the broker will keep offering
the bid price (in pace with the world market) to buy them from you... you decide when to sell them.

J.
  • #24
  • Edited 4:39pm Apr 9, 2013 4:10pm | Edited 4:39pm
Prices in financial products operate on the basis of an auction which is completely different to how one shop operates. Take 2+ shops and now we begin to create conditions for a competitive but simplistic (i.e slow) auction.

Take the example of a hundred shops all offering the same product at different prices in the same area -the shops are the limit orders -price is their advertising mechanism. These shops can also be buyers and also advertise through price. It's now up to the people passing through these shops (the market orders), to consume these products -bids and offers. These people passing through might buy or they might sell just as the shops will buy and sell - its a two way market auction process. Demand/supply is the effect of the best percieved price for buying/selling at tha particular time. People passing through these shops will rush in to buy or sell consuming bids and offers thus driving price up and down. The shops (limit orders) advertise a certain quantity for passers by (market orders) to consume. Until the product is consumed at that price being offered/bid the market will not move lower/higher to the next available price.

External events affect the percieved value of the product at any one time along the price scale causing varying degrees of supply or demand imbalance when considering pure speculation. But of course the forex is not limited to pure speculation so indeed demand/supply is not retricted to percieved market value.
  • #25
  • Apr 9, 2013 6:58pm Apr 9, 2013 6:58pm
I don't think that you can compare financial markets and supermarkets
First of all supply is not usually an issue for the supermarkets. Obviously, if there is a world shortage of say coffee, then the supermarket will be unable to buy so cheaply and the cost to the consumer will increase.
In the financial market if you have a very large buy order that needs to be filled, you will probably have to pay a higher price.
Conversely, because the supermarkets put in very large orders, they are able to negotiate a cheaper price.
When there is a world shortage of something, the sellers may find that there supply can be absorbed mostly by smaller buyers and the supermarkets will lose some of their negotiating power.
When it comes to the supermarket selling their products, it is not a case of supply and demand driving price. It is price that drives demand.
The supermarkets have calculated the best price that stimulates demand and creates the highest profit for that product range.
Put simply, if they sell something with $1 profit, they may sell 1,000 units, so $1,000 profit.
If they reduce the price by $0.5, they are cutting their profit by $0.5 per unit, but if they sell 3,000 units because of the lower price, then they will earn $1,500 on that product range.
That is price driving demand.
Please Do Not PM Me With Coding Enquiries
  • #26
  • Apr 10, 2013 9:30am Apr 10, 2013 9:30am
Quoting Myo
Ok, hold on, I think you got it 100% wrong this time. Market does care how many are willing to buy or sell - I mean, lol - thatīs exactly what price is in Forex. The quote. And itīs made up of the best bid and the best ask available.
Uh.. that doesn't make sense. Nothing changes until the money is committed. Imagine a market maker showing you that very quote, asking you whether you want to buy EURUSD at x price? And you say no, or maybe, then price won't change at all. Why should the price change?

Then you stay all day long on the trading floor and the market maker asks you 100 times whether you want to buy or not, and as long as your answer is no, or maybe, then there is no transaction. And there is no change of price. Why do you think a buyer/seller merely contemplating of purchase/sell can affect the price?

But like I said, the only thing that I can think of when price changes without any supply and demand change is rumor. Market is alive, because humans who operate within them are alive.
  • #27
  • Apr 10, 2013 9:37am Apr 10, 2013 9:37am
Quoting Ishtana
the only thing that I can think of when price changes without any supply and demand change is rumor. Market is alive, because humans who operate within them are alive.
No. ..currency prices never change for any other reason then supply and demand.
"Rumors" creates supply or demand... then "quotes" change accordingly to whatever that may be.

J.
  • #28
  • Apr 10, 2013 11:56am Apr 10, 2013 11:56am
Quoting jeuro
No. ..currency prices never change for any other reason then supply and demand. "Rumors" creates supply or demand... then "quotes" change accordingly to whatever that may be. J.
For example, say the world's supply and demand of oil is at equilibrium, and everyone is doing their own thing. There is no imbalance but then there is news or rumor of wars/disaster involving the OPEC countries. Nothing changes in terms of supply and demand, but price shot up overnight. I don't get it.

For a price to go up, either demand has to go up, or supply has to go down, and ceteris paribus. But in this case demand and supply stay the same. It's only rumor/news. The only explanation I can think of is that panic buyers are responding to news/rumor. These new and additional buyers create imbalance by pushing demand up, and therefore price follows.
  • #29
  • Edited 12:58pm Apr 10, 2013 12:03pm | Edited 12:58pm
Quoting Ishtana
For example, say the world's supply and demand of oil is at equilibrium, and everyone is doing their own thing. There is no imbalance but then there is news or rumor of wars/disaster involving the OPEC countries. Nothing changes in terms of supply and demand, but price shot up overnight. I don't get it. For a price to go up, either demand has to go up, or supply has to go down, and ceteris paribus. But in this case demand and supply stay the same. It's only rumor/news. The only explanation I can think of is that panic buyers are responding to news/rumor....
Incorrect... Demand Changed:

Price shot up over night because of the perceived affect that rumor will have on supplies in the future and thus demand changed (in this case increased) the moment that rumor or information became known and changed the perceived value of Oil.

If you learned a comet was approaching Earth and half of America would be wiped off the map next week, how would you respond if you were holding millions of dollars worth of shares in the stock market>?

You would sell them... Even though the comet has done no damage yet. It's the perception of reality that determines price, not necessarily reality itself.. Hopefully I've made sense.
Time hides Nothing
  • #30
  • Edited 2:32pm Apr 10, 2013 2:09pm | Edited 2:32pm
Quoting GnarlyPips
It's kind of like a race. First one to take away the liquidity gets the price.
Um.. Perhaps, but it could be flip side as well as anyone who enters the market has effectively decided to supply liquidity to anyone of the opposing position.

When buy stops are hit this could create a shortage of sell side liquidity and thus a massive rally in price. Conversely it could simply allow Sellers to be able to sell in large amounts and create a buy side liquidity shortage, and a market fall.

But the rules are there and there is no way around them, this is probably the only advantage a retail trader could ever have: The fact that Liquidity is finite.
Time hides Nothing
  • #31
  • Apr 10, 2013 2:33pm Apr 10, 2013 2:33pm
Quoting Porkpie
External events affect the percieved value of the product at any one time along the price scale causing varying degrees of supply or demand imbalance when considering pure speculation. But of course the forex is not limited to pure speculation so indeed demand/supply is not retricted to percieved market value.
Time hides Nothing
  • #32
  • Apr 10, 2013 3:02pm Apr 10, 2013 3:02pm
.
Whats up with you guys/Ladies.
You keep beating a dead horse. And mixing apples and oranges.
Supply and Demand is supply and demand. But the working "mechanics" is
different for different things. It is not the same for natural resources, manufactured products,
agricultural products, etc. I am sure Ishtana as an economist should understand that.

Like I mentioned in an earlier post. The main difference is NO ONE has "currency" in inventory.

While everything that can be extracted, mined, plant, manufactured and can be kept in inventory
the price can be set arbitrarily by the suppliers to reduce or increase demand, with currency that can not happens.

See.. Dollars, Euros, Yen, CHF etc., already exist. Whatever each Country has printed in paper or digitally is already out there.
But here is the thing.. NO ONE knows "when" and "how much" the holders of those currencies will/want to exchange them for another.
The few orders a few pips of current price sitting in internals servers around the world are irrelevant as most currency transactions
are done "at market" and never show sitting anywhere in any book.

So.. no one has any currency, but they continuously quote prices, very competitive, like screaming HEY, I AM HERE. sell to me I offer you
this price, and buy from me at this other price. So, each millisecond the whole industry is doing the same... and buyer and seller all over the world
"wanting" to exchange place orders trough these market Places points called Banks and Brokers.

The forex market is the most pure and least-manipulated example of supply and demand. It self-regulate and self adjust instantly.

One thing that most get confused with this market is the "symbols" thing.. like EUR/USD , USD/JPY etc. In this market
we "always" buy "one" currency first and later we sell it. Each currency has their own Supply and demand.. it is not a "pair"

If you long the eur/usd you create a demand for euros, when you close your position you create a supply of euros.
If you short the eur/usd you create a demand for dollars, when you close the position you create a supply of dollars.

J.
  • #33
  • Apr 10, 2013 3:04pm Apr 10, 2013 3:04pm
Quoting jeuro
. Whats up with you guys/Ladies. You keep beating a dead horse. And mixing apples and oranges. Supply and Demand is supply and demand. But the working "mechanics" is different for different things. It is not the same for natural resources, manufactured products, agricultural products, etc. I am sure Ishtana as an economist should understand that. Like I mentioned in an earlier post. The main difference is NO ONE has "currency" in inventory. While everything that can be extracted, mined, plant, manufactured and can be kept in inventory the...
Pretty much all been said in different ways... You were last to the horse there buddy!
Time hides Nothing
  • #34
  • Apr 10, 2013 4:57pm Apr 10, 2013 4:57pm
Quoting CindyXXXX
Um.. Perhaps, but it could be flip side as well as anyone who enters the market has effectively decided to supply liquidity to anyone of the opposing position. When buy stops are hit this could create a shortage of sell side liquidity and thus a massive rally in price. Conversely it could simply allow Sellers to be able to sell in large amounts and create a buy side liquidity shortage, and a market fall. But the rules are there and there is no way around them, this is probably the only advantage a retail trader could ever have: The fact that Liquidity...
While it's possible to provide liquidity, you don't get the price until someone takes it away. Matadors and F-1 racers: lure the bull to your red cape, or finish first in the race.
Play the players, not the cards.
  • #35
  • Apr 10, 2013 5:43pm Apr 10, 2013 5:43pm
You must first understand liquidity ??

"A market that is liquid means it has many trades and is composed of many traders. The Forex market is extrememly liquid because hundreds of banks and millions of individuals trade currencies everyday. In fact, nearly $4 trillion is exchanged daily and this number is increasing as interest by retail traders are expanding. Consequently, traders can trade quickly with a click or two."

Worth the read... maybe

http://www.cmsfx.com/en/forex-educat...ary/liquidity/
When the Joker is in the deck.. fear not and play it well
  • #36
  • Apr 10, 2013 5:49pm Apr 10, 2013 5:49pm
Quoting jeuro
. The main difference is NO ONE has "currency" in inventory.
Everyone has currency in "inventory". From the world's central banks. to business for operating capital
to individuals savings accounts.
Better to read this

http://www.cmsfx.com/en/forex-educat...ly-and-demand/


Cheers
When the Joker is in the deck.. fear not and play it well
  • #37
  • Apr 10, 2013 7:34pm Apr 10, 2013 7:34pm
Quoting Slim Buffett
You must first understand liquidity ?? "A market that is liquid means it has many trades and is composed of many traders. The Forex market is extrememly liquid because hundreds of banks and millions of individuals trade currencies everyday. In fact, nearly $4 trillion is exchanged daily and this number is increasing as interest by retail traders are expanding. Consequently, traders can trade quickly with a click or two." Worth the read... maybe http://www.cmsfx.com/en/forex-educat...ary/liquidity/

Four trillion a day is misleading. Hot-potato trading is what happens on a daily basis.

>increasing as interest by retail traders are expanding

As if retail traders provide even 5% of the daily liquidity.
Play the players, not the cards.
  • #38
  • Apr 10, 2013 7:40pm Apr 10, 2013 7:40pm
Quoting GnarlyPips
Four trillion a day is misleading. Hot-potato trading is what happens on a daily basis. >increasing as interest by retail traders are expanding As if retail traders provide even 5% of the daily liquidity.
I don't know how 4T daily is misleading in the context of liquidity.

Hot potato, cold potato, e-i-o
.... has nothin' to do with liquidity
When the Joker is in the deck.. fear not and play it well
  • #39
  • Apr 10, 2013 9:11pm Apr 10, 2013 9:11pm
Quoting Slim Buffett
Everyone has currency in "inventory". From the world's central banks. to business for operating capital to individuals savings accounts. Better to read this http://www.cmsfx.com/en/forex-educat...ly-and-demand/ Cheers
Come on Slim... you must be kidding.
You really do not understand how the exchange market works?
All Banks have some cash... BUT their own country currency . NOT other currencies in inventory. ( I guess a few bills to exchange
once in a while). They do not use that money to exchange it.

Take a look to their Balance sheets once in a while and you would realize that even their own is a tinny amount compare
to how much the "Exchange" in a daily base. Banks and brokers just Market make and "exchange" for a fee, they do not have
any , nor hold any. If they do, is speculation... and they do almost nothing of that.

J.
  • #40
  • Apr 10, 2013 9:28pm Apr 10, 2013 9:28pm
Quoting Slim Buffett
I don't know how 4T daily is misleading in the context of liquidity. Hot potato, cold potato, e-i-o .... has nothin' to do with liquidity

Banks and corporations don't trade in just one single trade for their positions, they have to space out their trades.
Play the players, not the cards.
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