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

  • #41
  • Apr 10, 2013 9:40pm Apr 10, 2013 9:40pm
Quoting jeuro
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...
On the contrary my little friend.
Other than the US itself, China is/was the largest holder of US currency reserves, I don't
make a habit of keeping up to the minute on all that.

The point is.. banks and brokers may "just Market make" as you put it. But they all have currency
in "inventory" (as you so eloquently stated) or more likely, misstated

Do you really believe that the sole purpose of banks are that of a market maker and even though
mandated by law in any country that I know of, they have no measurable amount of currency
in "inventory"

Do you think that business has no need for cash in
inventory ?? How would they operate ?

Do you think that the work of generations of people has ALL been squandered away
because they have no currency "inventory"

If so, then indeed you have much to learn
When the Joker is in the deck.. fear not and play it well
  • #42
  • Apr 10, 2013 10:24pm Apr 10, 2013 10:24pm
Quoting Ishtana
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.

To be TOTALLY honest;
I think you may have overpaid for your economics degree
and I'm only wrong 99% of the time

trust me
When the Joker is in the deck.. fear not and play it well
  • #43
  • Edited 11:20pm Apr 10, 2013 11:08pm | Edited 11:20pm
Quoting Slim Buffett
To be TOTALLY honest; I think you may have overpaid for your economics degree and I'm only wrong 99% of the time trust me
Not really, I just refuse to give up my right for my own free thinking. Economics is flawed because it starts with an assumption. It is not exact science, but basic principles of science should still apply. Observe -> hypothesis -> successful and repeatable experiment -> theory. In economics: assumption -> theory -> try to fit in the theory into real life situation -> if it seems to explain how the economy works, now how it really works, you get a Nobel prize.

If you think economics that is taught in colleges these days is true and complete, then you're not using the capacity of your brain to reason and question, and the capacity of your soul to find the truth.

The worst student is a sponge who absorbs all he/she receives and accepts textbooks as the Gospel truth. They are not smart. They are great at studying, but poor and lazy at discovering the truth.
  • #44
  • Apr 10, 2013 11:55pm Apr 10, 2013 11:55pm
Quoting Ishtana
Not really, I just refuse to give up my right for my own free thinking. ... If you think economics that is taught in colleges these days is true and complete, then you're not using the capacity of your brain to reason and question, and the capacity of your soul to find the truth. The worst student is a sponge who absorbs all he/she receives and accepts textbooks as the Gospel truth. They are not smart. They are great at studying, but poor and lazy at discovering the truth.
I VERY MUCH respect that. You are one of few.
..... in fact, I'm speechless.........
When the Joker is in the deck.. fear not and play it well
  • #45
  • Apr 11, 2013 12:13am Apr 11, 2013 12:13am
Quoting Slim Buffett
I VERY MUCH respect that. You are one of few. ..... in fact, I'm speechless.........
I don't know whether you've made an obvious sarcasm or not, but I'm definitely not one of the few, and I don't think I've done anything worthy of anyone's respect unlike some great members of this forum.

If I'm the smartest around, nobody would've corrected me. Looking at the number of posts made in this thread alone is enough to prove it otherwise.

You've made 1,207 posts and you have 4 vouches. It should speak by itself.
  • #46
  • Apr 11, 2013 12:25am Apr 11, 2013 12:25am
Quoting Ishtana
I don't know whether you've made an obvious sarcasm or not, but I'm definitely not one of the few, and I don't think I've done anything worthy of anyone's respect unlike some great members of this forum. If I'm the smartest around, nobody would've corrected me. Looking at the number of posts made in this thread alone is enough to prove it otherwise. You've made 1,207 posts and you have 4 vouches. It should speak by itself.
No.... it was Not sarcasm. You are one of the few because you
can think "outside the box".

Vouches mean nothing

It's what's in your head that matters

and you have more than I do
When the Joker is in the deck.. fear not and play it well
  • #47
  • Apr 11, 2013 4:16am Apr 11, 2013 4:16am
Quoting Slim Buffett
On the contrary my little friend. Other than the US itself, China is/was the largest holder of US currency reserves, I don't make a habit of keeping up to the minute on all that. The point is.. banks and brokers may "just Market make" as you put it. But they all have currency in "inventory" (as you so eloquently stated) or more likely, misstated Do you really believe that the sole purpose of banks are that of a market maker and even though mandated by law in any country that I know of, they have no measurable amount of currency in...
uff Slim, here again... apples and oranges.
The whole discussion in this thread is about supply-demand-price relationship for the "forex" market ..is it?
"forex"= "Foreign exchange". When I refer to "inventory" is to "foreign" currencies" in Inventory. Not the Banks/Broker
own accounting currency. Of course all Banks/Brokers have their own working capital as shown in their balance sheets, but
most likely, they do not use a penny of that for their "exchange Operations".

Sure.. China holds a very large of dollars.. but that is exact word.."hold". They do not buy or exchange it for "another" currency.
They don't need to. They received dollars for their crap and they pay with same dollars for raw material or whatever they need.
Those dollars will never see the "exchange market". Why they would want to dump them in the exchange market?? and devalue
what they own?? They are not stupid. They have more then a few better options to their advantage with what they "hold".

Let me ask this to anyone.... if you had the technical resources, a reasonable capital, and a large client base. And could
arbitrage/market make with the millions or orders up there in the many ECN networks,... would you hold any currency for more then
a millisecond and expose yourself to the risk?? or just would grab a tiny spread and run every tick you get hit??

In general, that is why Major banks do not give a crap about the exchange rates, It does not matter if goes up or down, the only
thing that matter is being hit with orders, match them, fill them and done. Most major Banks have some "speculative" department.
But all with traders trader like you and me. With an assigned working capital, that's all their speculative participation.

J.
  • #48
  • Nov 1, 2013 1:31pm Nov 1, 2013 1:31pm
Quoting Porkpie
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...

Hi , I like that explanation! So brokers are liquidity providers to other passer buyers which in tern are also other brokers who have clients. So its one brokers clients wanting to buy and sell with other brokers clients, that's how the price moves sort of speak. I kind of understand , but difficult to put in words. Price can only move once the selling and buying is complete and there is no more liquidity at that price or price range. The price now moves if there is more supply to transact or demand to fill.

If not the last traction of price becomes the percieved market price?

But what I dont understand is how price can move up from a supply zone if there are limit orders sitting there to sell if those limit orders are to be consumed. Does market orders push price? I have been struggling with this for a while, as to how these zones influence price to move?

Is it because there a re no limit orders there and thats were market orders come in?
  • #49
  • Nov 1, 2013 2:28pm Nov 1, 2013 2:28pm
Since there is no inventory in forex, then the inventory sort of speak is us? The brokers clients that want to trade, buy and sell at what ever price?

Now if that’s the case and big orders that are looking to get filled are going to be by big banks or large traders, if they don’t want to drive the price against their selling or buying. Who is moving the price into the liquidity zones so that the large traders can liquidate their positions at the price that they deem favorable?
Who’s selling and buying to move price?
How do you know who is in the market doing what, it seems that this is the key to understanding the supply and demand concept in forex, cause there is no inventory , the traders are the inventory, from what I am understanding, it’s your buying and selling that provides liquidity and thus moves price. Can someone correct me if I am wrong?

Now in terms of limit orders being stacked at a certain price level, If those orders are providing liquidty for traders wanting to buy or sell, then how does the price move away from these zones, Limit orders get consumed? Something has to be cause the imbalance for price to move the other way?

If that is the case how do you know which supply demand area is going to hold off he selling in a down move and cause price to rally and what is causing the price to rally up?

Hope someone can answer this in laymans terms?
  • #50
  • Nov 1, 2013 2:29pm Nov 1, 2013 2:29pm
Hey Jeuro , hope you can answer my question.
  • #51
  • Nov 1, 2013 5:04pm Nov 1, 2013 5:04pm
Don't worry about this talk of "inventory". The market moves because buyers lift the offer and sellers hit the bid. If we run down into a "demand" area - which presumably will have thicker bids - then either the bids will get filled or they won't (obviously some in between, but ykwim). If they get filled then it's only because there is an equal amount of selling going on down there - at least until this point. Then either the sellers run out and there's still buying interest, or the buyers run out (all filled) and sellers are still selling.

If buyers don't get a fill they may chase price (e.g. move their bids higher or lift the offer at higher prices) - this causes the market to move up.
If buyers do get good fills then remember for each lot that was bought, one was sold. So you've got lots of shorts down there who will start puking, i.e. buying the market, at various points along the way up.
Realistically you'll have a combination of the two. Plus order getting filled at every price along the way, so always plenty of pukers in either direction, helping the market along.

Of course the market could go down through the bids but I'm just talking about a bounce at a "demand" zone.
  • #52
  • Nov 2, 2013 8:10am Nov 2, 2013 8:10am
Quoting eurotrash
Don't worry about this talk of \"inventory\". The market moves because buyers lift the offer and sellers hit the bid. If we run down into a \"demand\" area - which presumably will have thicker bids - then either the bids will get filled or they won't (obviously some in between, but ykwim). If they get filled then it's only because there is an equal amount of selling going on down there - at least until this point. Then either the sellers run out and there's still buying interest, or the buyers run out (all filled) and sellers are still...

"So you've got lots of shorts down there who will start puking, i.e. buying the market, at various points along the way up" I see those this statement defines how stop losses are pushing the price back up?

So in essence to get in and out of a trade, you gotta buy and sell twice and vice versa depending if you buying or selling the market. I see, had to read your post a few times. Once you buy, you gotta sell to get out, once you sell you gotta buy to get out.

So all who sold at demand levels in hopes of price falling further are getting there stops hit on the way up due to buying pressure and the sellers all ready in positions have to liquidate?
  • #53
  • Nov 2, 2013 8:18am Nov 2, 2013 8:18am
so its the opposite for price pushing through, demand orders get overwhelmed and sell stops are hit on the way down and cause price to fall further?

But tell me, but why does price retrace to a demand level when it has pushed through it and all the stops were executed?

Second I hear that stop hunting is price being pushed through demand levels and when the sell stops are hit buy orders get executed and carry price back up, Is that another reason for price to move back up?

If so how do you know whats happening at those levels to determine if they will hold or not, I know that is a forward question, but you could Pm me and we could skype chat. Dappadap1. It seems like the guys that know whats really going on don't share tactics on free forums, just my thoughts.
  • #54
  • Nov 2, 2013 8:31am Nov 2, 2013 8:31am
Is it possible to see the order flow on the chart on a lower time frame, like a 1 or 5 minute, meaning if you see a very large range 5 minute bar, lets say about 10 to 15 pips, is that orders coming into the market?


Sorry for the bombardment of questions, but I think I am getting closer to a better understanding of the market mechanics and how orders get executed and in turn that helps the understanding of what your looking at.
  • #55
  • Nov 2, 2013 8:33am Nov 2, 2013 8:33am
Quoting dappa
so its the opposite for price pushing through, demand orders get overwhelmed and sell stops are hit on the way down and cause price to fall further? But tell me, but why does price retrace to a demand level when it has pushed through it and all the stops were executed? Second I hear that stop hunting is price being pushed through demand levels and when the sell stops are hit buy orders get executed and carry price back up, Is that another reason for price to move back up? If so how do you know whats happening at those levels to determine if they...
If you really want to know whatīs going on, you should browse through ftiīs old posts or ask the man himself. He has laid out the structure of the forex market on several occasions, and, if I remember correctly, the way price moves has nothing to do with "where the orders lie", as orders donīt move the market. Thatīs probably a model which works on centralized exchanges, but not in an OTC market, where price is whereever the dealers want it to be. That being said, I donīt know how it works myself, so donīt ask me any questions, lol.
  • #56
  • Nov 2, 2013 2:45pm Nov 2, 2013 2:45pm
Quoting dappa
So in essence to get in and out of a trade, you gotta buy and sell twice and vice versa depending if you buying or selling the market. ... Once you buy, you gotta sell to get out, once you sell you gotta buy to get out. So all who sold at demand levels in hopes of price falling further are getting there stops hit on the way up due to buying pressure and the sellers all ready in positions have to liquidate?
That's pretty much it. Every buyer becomes a seller and every seller becomes a buyer - because they have to close out their positions in order to realise their profit or stop their loss. Take the sellers who sold into an area where the market then bounces from, they need to buy back their positions, and their buying creates further fuel for the market to go higher. And of course also just general buying from people looking to get long, whether at the lows (helping create the initial "bounce") or as the market moves up. If you want to get in *now* or get out *now*, you will lift the offer or hit the bid. And that's what moves markets.

Quote
so its the opposite for price pushing through, demand orders get overwhelmed and sell stops are hit on the way down and cause price to fall further?
Yeah so if the bids at some area get filled and there's still more selling coming through, and no one's reposting bids in any size there, then the selling will cause the market to fall so that the sell orders can be matched with bids at lower prices. The selling can come, as always, from sellers looking to short, longs who bought at "support" or higher up or wheverver selling out for a loss, etc.

Quote
But tell me, but why does price retrace to a demand level when it has pushed through it and all the stops were executed?
There are many scenarios to explain it, I can't say "this is the definitive reason why this sort of thing happens". But one reason can be that after breaking through the area, and some of the buyers stopping out and the sellers having generally shorted as much as they want, you might get some short covering, maybe you've run into another "demand" area, maybe no one wants to sell down here because they think "it will retrace and I'll sell then", etc etc... I guess it depends on the context of the situation, could help you make a good guess as to what's going on.

Quote
Second I hear that stop hunting is price being pushed through demand levels and when the sell stops are hit buy orders get executed and carry price back up, Is that another reason for price to move back up?
Absolutely, that happens all the time. It's not likely to be "the" cause in isolation, you'll have all sorts of market participants jumping in at all prices, with different timeframes (not chart timeframes but like scalping, swing, etc), so all play a part.

Quote
If so how do you know whats happening at those levels to determine if they will hold or not ... Is it possible to see the order flow on the chart on a lower time frame, like a 1 or 5 minute, meaning if you see a very large range 5 minute bar, lets say about 10 to 15 pips, is that orders coming into the market?
Well yes that's the crux of the matter, and this is the problem with forex. Is it possible to do this stuff with only a chart? I don't trade fx anymore, I trade a product on a centralised exchange and I rely heavily on the DOM and T&S. The principles of buyers/sellers and their reasons apply to any market, but to actually trade it "properly" imo you need to see what's actually going on in the market, not just the resulting price movements. Mind you I'm talking specifically about short term trading or scalping based on short term order flow. But you can definitely learn to read the order flow in the PA (to an extent), but it will always be "conceptual". However I would highly recommend opening a demo account at a futures broker so you can get a DOM/T&S and watch some market to see what is really going on when it moves and bounces and whatnot. Try out MarketDelta too. Even if you stick only with fx, it will still be useful in your understanding of markets.
  • #57
  • Nov 3, 2013 7:53am Nov 3, 2013 7:53am
Quoting Ishtana
Why does price change based on supply and demand?
It is to do with inventory. Holding inventory costs money. Therefore if the the inventory expansion exceeds the inventory contraction, eventually you'd go bankrupt from the ever increase cost of holding the inventory. To prevent that, the price is lowered to increase inventory contraction so that the cost of holding the inventory is offset by the income from the inventory release. This release is the supply and the rate of supply is governed by the price.

Demand would deplete inventory quickly. Once the inventory is gone, the cost of running an empty inventory, which is never zero, will cause you to go bankrupt eventually. To prevent that, you dampen the demand by increasing the price. Thereby you have ensured you will continue to have an inventory that will produce a future income to offset your costs of running the inventory.

Supply and demand is not relevant for retail forex. The banks have all the supplies you need, and they have all the demand you need should you decide to stop yourself out for a loss. Therefore, your buying and selling of forex has no effect on the price. In fact the banks can push the price to wherever they want regardless of what you do. But usually it is very profitable for them to push the price to where your stops are. After all, they know in advance how much they will make from you by the location of your stops.
  • #58
  • Nov 3, 2013 12:52pm Nov 3, 2013 12:52pm
Quoting BeginnerJoe
{quote} In fact the banks can push the price to wherever they want regardless of what you do. But usually it is very profitable for them to push the price to where your stops are. After all, they know in advance how much they will make from you by the location of your stops.

So what your saying , is that the banks move the price, so buying and selling that is done buy perpetuated by banks and not large trading instituitions and large traders?

So banks move the price for to fullfill there own orders, I don't get it
  • #59
  • Nov 3, 2013 12:54pm Nov 3, 2013 12:54pm
That statement contradict everything that Euro said.
  • #60
  • Nov 3, 2013 5:39pm Nov 3, 2013 5:39pm
our participation in forex is paired, in contract, eg: eur/usd, have usd, buy eur, then sell eur, to get uds back,
so what we going to close is known, when there is plenty buyer, it will create huge pending sell .a.k.a: overbought/oversell
exporter for example may hold two currency, and can choose to change one to another currency if wanted to, without obligation to change it back. they can buy goods with other currency to be importer too. or if work in multiple country- they may have plenty currency to work with. (and no negative swap)
there is difference about how the money flow
the money is not that liquid for one who really buy and sell goods with money, compared to trader who buy and sell money with money.
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