searching for holy-grail.. is this theory true?

[DionysusToast]

If there are an infinite supply of contracts, then there is infinite liquidity. Which means you can never consume the liquidity, which according to you then means that price would never move, which is patently false, because it does move. I noticed how you dodged the question re how price might move without any liquidity being consumed.

You do tie yourself in knots with this nonsense.

We can safely conclude that there is not an infinite supply of contracts for trading at any price, there is a finite amount.

Also you might want to consider what a futures contract actually entitles you to.

Also you might want to consider what is required to trade a futures contract, and what would be required for an infinite number of contracts to be traded.

Speculation in futures contracts has very little to do with the underlying commodity. In fact, speculation in futures contracts causes price instability in the underlying product.

Most people have the relationship ar$e about face. It's the futures that drives the commodity price.

Now - I have clearly stated that liquidity is not infinite at any given price.

Your other points have been countered. This is a 4 way auction. This is not like buying apples because people cannot create apples out of thin air.

This is not like buying apples because you do not buy apples with the intention of selling them back to someone else later at a higher price when prices rise.

This is not like buying apples because you would not buy apples that do not actually exist from somebody.

Anyway - let's consider that you buy a short contract. You then buy lots of short contracts and what happens? Price goes down because you brought short contracts from a liquidity provider.

This is speculation.It's a casino, price moves fastest because people got their pants pulled down.

 

[DionysusToast]

So apparently the actual, perceived, or projected supply of a commodity has no effect on prices??

Peter

On most days, intra-day price movement has nothing at all to do with supply. In most markets, the percentage of people trading because they are associated with the physical product is tiny. Most trading is speculative and is done because people believe other people will end up moving price their way.

You could argue that prices move based on the perceive supply of less informed traders.

In some markets there is no physical commodity. How about index futures, how does the supply of the end product impact price?

 

[NVP]

to get a more realistic reflection of market forces imagine that the next day the apple seller goes to a bigger fruit market and asks each buyer to make him an offer for the apple(s) they want to buy....

N

 

[Vasco da Banana]

to get a more realistic reflection of market forces imagine that the next day the apple seller goes to a bigger fruit market and asks each buyer to make him an offer for the apple(s) they want to buy....

N

Depends when you want to be paid.

 

[Liquid validity]

There are valid arguments on both sides here.
Where I think the confusion is coming from is futures prices are based on
speculative forward delivery and the futures relationship to the cash market.
That relationship is basis, the spread between cash and futures price.
That is the reason for trading calendar spreads for example.
SILVERAXIS explain basis
Economic Purposes of Commodity Futures And Options Trading

Toast is right in saying futures supply is infinite.
That is not the same as saying liquidity is infinite.
A futures contract is money in an exchange traded format.
Its also true that the futures price has a large speculative element
as its based on forward delivery.

The basis is key - difference between futures forward price and cash markets.
Cash markets are based on supply and demand of the physical commodity.
Although futures prices are speculative forwards prices, they are still
inextricably linked to the cash markets.
Futures prices are a reflection of perceived supply and demand in the future.
Due to that fact, in commodities at least, some participants are hedging,
not speculating.
Although its probably fair to say most short term trade is purely speculative.

Even with index futures, they are connected to the cash markets,
which are driven and derived from individual stock prices,
of which there is finite supply.
Stock prices in simplistic terms are a reflection of a companies perceived
balance sheet health, supply and demand of their services / products
being a large factor in driving share price.
As mentioned though, derivatives can cloud the issue of supply and demand.

So, for me, supply and demand is at the root of it all,
at least with the cash market.
Yet in short term speculative futures trading, that may not always be
the motivation or driving force for price, which I think is DT's point.
There is in fact a lot of research that suggests the futures price leads the cash price.
That fact alone points to future price speculation being more of a driver
than current supply and demand (although that is still obviously a factor):
http://ideas.repec.org/a/bla/eufman/v14y2008i5p1007-1025.html
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1284000
http://www.aae.wisc.edu/pubs/sps/pdf/stpap469.pdf
http://onlinelibrary.wiley.com/doi/10.1002/fut.3990050404/abstract
http://www.jstor.org/discover/10.23...id=2129&uid=2&uid=70&uid=4&sid=21102584938713
Interesting discussion

 

[Shakone]

Ok, definition of demand from 'investopedia' (if your definitions are wildly different then it would explain a lot)

"An economic principle that describes a consumer's desire and willingness to pay a price for a specific good or service. "

So when the trader is buying and consumes that liquidity at a particular price (or prices), that could be considered as falling under the definition of demand, right? And that's even without getting into the demand for the underlying. Whether it's speculation or not isn't really my concern, the demand is there at that price. Whether someone is buying because they want the stuff forever, or because they're speculating or hedging or whatever isn't the issue, it has an impact on price and that's people willing to pay a price for something at a particular time - demand.

Now definition of supply

"A fundamental economic concept that describes the total amount of a specific good or service that is available to consumers. Supply can relate to the amount available at a specific price or the amount available across a range of prices..."

Ok so how many futures contracts are available to me? Can I buy an infinite number of futures contracts at a particular price? If no, then supply is not infinite at a given price.

If you're saying an infinite number of contracts can be bought at various prices, then what are the requirements to buy or sell 1 contract? If you have to put up any margin at all, then you'd need to be able to put up infinite wealth for there to be infinite supply. Is there anyone who can put up infinite margin?

I think your concept of infinite supply is philosophical and not practical. At any given time, there is a limited supply of everything. Sure we can print more money, and make gold in a lab, but at any given time there is a finite amount available. Finite demand, finite supply.

I fail to see how you can believe in auction markets and not even consider supply and demand relevant. This may be that we see the terms demand and supply as meaning very different things. Anyway, I think I've said my piece and bored everyone to tears now, so I'm out.

 

[wackypete2]

When the weather is bad and there's a poor harvest season for wheat, corn, soybeans, or whatever then prices trend up. People still need to eat and that's not speculation.

/end

Peter

 

[Liquid validity]

When the weather is bad and there's a poor harvest season for wheat, corn, soybeans, or whatever then prices trend up. People still need to eat and that's not speculation.

Just to clarify in case it isn't clear, I agree with yours and Shakone's posts completely.
Longer term = supply and demand.

I think thats the main problem, timeframe.
On a longer timeframe you and Shak are right.

On a short term futures basis, I agree DT does have a point that
supply and demand isn't the sole driver, short term speculation is also an influence.
That is why calendar spreads exists.

 

[numbertea]

I have considered all that has been discussed above and it is all part of my trading plan but in doing so I have further distilled the above into this visualization for my own benefit:

-1) we all dream of making profit.
-2) we all fear having losses.
-3) the futures price has to be constantly moving to facilitate trading.
-4) the amount of buying contracts equals the amount of selling contracts at each price (transaction taking place).
-5) the amount of contracts trying to be purchased at a price in usually different than the amount of contracts for sale at that price.
-6) everyone can see the difference in contracts wanting to be bought and sold.
-7) the price movement per difference in contracts trying to be bought or sold indicates the immediate worth difference of the contract trying to be bought or sold.
-8) the worth difference indicates the future price direction.

This simplistic distillation may not do it for many of you but I personally have been trading it with amazing success.

Cheers

 

[DionysusToast]

Just to clarify in case it isn't clear, I agree with yours and Shakone's posts completely.
Longer term = supply and demand.

This makes the presumption about which is the tail and which is the dog.

Do you think oil prices in the past 10 years have really been driven by scarcity and supply? I don't - I think the whole $80-$110 oil range is created by pure speculation. Are we constantly miscalculating the amount of oil around and the amount of oil the world will use?

How about the $200 shift in gold prices? Gold is no longer in demand or speculators realize that the futures market created a bubble? Are factories/wives using less gold?

Same for coffee, the movie "Black Gold" takes a good look at this. An interesting movie.

On a short term futures basis, I agree DT does have a point that
supply and demand isn't the sole driver, short term speculation is also an influence.
That is why calendar spreads exists.

Short term speculation is the primary driver for the most popular markets. Days where long term positioning is moving the market are the exception.

The most important thing for a short term trader to consider therefore is the overall picture of speculation - where people got in, where they will defend, where they will get out.

 

[DionysusToast]

Oh yeah - and look how much speculation is going on nowadays in departments of large consumers of grains.

Hedgers are now massive speculators and why not?

 

[random12345]

I have considered all that has been discussed above and it is all part of my trading plan but in doing so I have further distilled the above into this visualization for my own benefit:

-1) we all dream of making profit.
-2) we all fear having losses.
-3) the futures price has to be constantly moving to facilitate trading.
-4) the amount of buying contracts equals the amount of selling contracts at each price (transaction taking place).
-5) the amount of contracts trying to be purchased at a price in usually different than the amount of contracts for sale at that price.
-6) everyone can see the difference in contracts wanting to be bought and sold.
-7) the price movement per difference in contracts trying to be bought or sold indicates the immediate worth difference of the contract trying to be bought or sold.
-8) the worth difference indicates the future price direction.

This simplistic distillation may not do it for many of you but I personally have been trading it with amazing success.

Cheers

You don't need to understand why the market moves in order to profit from that movement. I have always subscribed to the fact that studying movement is more important than studying extreme fundamental reasons behind that movement, certainly for the retail mob. Macro funds obviously differ. Anyway, certainly it's served me very well. It's only when you've been around for a long time that you can be bothered to argue this.

Anyway, I know who really moves the market. David at Oil Trading Academy told me it was a Freemason computer that does not subscribe to anything so petty as liquidity gaps - it's all about the code. He cracked it you see. Bzzzzzz, I'm a busy bee!

 

[Vasco da Banana]

I have considered all that has been discussed above and it is all part of my trading plan but in doing so I have further distilled the above into this visualization for my own benefit:

-1) we all dream of making profit.
-2) we all fear having losses.
-3) the futures price has to be constantly moving to facilitate trading.
-4) the amount of buying contracts equals the amount of selling contracts at each price (transaction taking place).
-5) the amount of contracts trying to be purchased at a price in usually different than the amount of contracts for sale at that price.
-6) everyone can see the difference in contracts wanting to be bought and sold.
-7) the price movement per difference in contracts trying to be bought or sold indicates the immediate worth difference of the contract trying to be bought or sold.
-8) the worth difference indicates the future price direction.

This simplistic distillation may not do it for many of you but I personally have been trading it with amazing success.

Cheers

Surely (6) isn't true, as what you can see is unlikely to represent the actual 'want'. Orders appear and disappear all the time.

Anyway, how long have you been trading this with amazing success, and how does it translate into something usable?

 

[random12345]

How about the $200 shift in gold prices? Gold is no longer in demand or speculators realize that the futures market created a bubble? Are factories/wives using less gold?

Supply considerably outstrips annual physical demand in gold (far more so than any other commodity, it's 100:1 on an annual basis I think?) and would serve as some proof to your original points, I believe, but I don't want to get into this argument.

Gold is driven by the fundamentals of psychology and you cannot use production and consumption to analyse it else everyone would be heavily short, unlike other commodity futures. Isn't everybody right?

I've confused myself a bit.

 

[barjon]

This makes the presumption about which is the tail and which is the dog.

Do you think oil prices in the past 10 years have really been driven by scarcity and supply? I don't - I think the whole $80-$110 oil range is created by pure speculation. Are we constantly miscalculating the amount of oil around and the amount of oil the world will use?

How about the $200 shift in gold prices? Gold is no longer in demand or speculators realize that the futures market created a bubble? Are factories/wives using less gold?

Same for coffee, the movie "Black Gold" takes a good look at this. An interesting movie.



Short term speculation is the primary driver for the most popular markets. Days where long term positioning is moving the market are the exception.

The most important thing for a short term trader to consider therefore is the overall picture of speculation - where people got in, where they will defend, where they will get out.

toastie

Unless you are buying something because you want to use it, or selling something because you don't have a use for it, isn't everything speculation? I buy shares, for example, because I "long term speculate" that they will give me a future income and (maybe) capital gain. And I trade shares because I "short term speculate" that the price will move my way. So does it matter if it's speculators scrabbling to buy/sell or consumers? It's still creating demand/supply.

The mind sets of the various participants and the timescales they are working to are varied and understanding those mind sets for the majority players is, as you say, important.

 

[numbertea]

Surely (6) isn't true, as what you can see is unlikely to represent the actual 'want'. Orders appear and disappear all the time.

Anyway, how long have you been trading this with amazing success, and how does it translate into something usable?

I do disagree. #6 has to be true unless everyone in the market puts in orders without ever wanting them to be filled. If you look at all the data it is actually possible to see the number of orders filled and pulled. Over time it is a very small percentage that is not intended for filling, at least on the ES.

Cheers

 

[Vasco da Banana]

I do disagree. #6 has to be true unless everyone in the market is conveniently misrepresenting their goals to either buy or sell on a regular basis. Personally, when I put in a trade it is because I am trying to get my order filled.

I have been trading this system for over 3 months. Last week I changed my system so that it only trades when a buy or sell signal on the system hits. Previously I was trading 8am to 4pm. Now I have no real draw down to worry about.

Sorry for that last question there. It has taken me a long time to build the indicator. You need per order resolution to achieve the data and creative programming to display an indicator.

Cheers

Not everyone is misrepresenting their goal, but it's a fact that some orders aren't expected to be filled. Can you work out which might be bogus faster than a computer?

 

[numbertea]

Not everyone is misrepresenting their goal, but it's a fact that some orders aren't expected to be filled. Can you work out which might be bogus faster than a computer?

I use computers. Imagine having all the data that fills your trading screen can be captured continually, reports done on the data, comparisons made, correlations discovered and results compiled for real-time trading. The cycling of bid/ask through price is amazingly informative when you draw it in a way that makes sense to you. Then when you compare that with a candlestick chart-- OMG.

Cheers

 

[Liquid validity]

This makes the presumption about which is the tail and which is the dog.

Do you think oil prices in the past 10 years have really been driven by scarcity and supply? I don't - I think the whole $80-$110 oil range is created by pure speculation. Are we constantly miscalculating the amount of oil around and the amount of oil the world will use?

No, not driven by scarcity, but certainly not by over supply either.
Yes I do agree the 2008 spike had a large speculative element, no denying that.
Traders Blamed for Oil Spike - WSJ.com
Special Report: The 1979 vs 2008 oil spike - Analyst Insight from Euromonitor International
http://knowledgeproblem.com/2010/03/31/crude-oil-prices-in-2008-was-the-spike-a-bubble/
http://peak-oil.org/2009/03/the-role-of-speculation-in-the-2007-2008-spike-in-oil-prices/
http://www.rff.org/Publications/WPC/Pages/The-2008-Oil-Price-Shock-Markets-or-Mayhem.aspx

I think 2008 oil speculation was largely driven by, or at the very least justified by the following:

1. Falls in non-opec production:
Energy & Financial Markets - U.S. Energy Information Administration (EIA) - U.S. Energy Information Administration (EIA)
http://www.eia.gov/totalenergy/data/monthly/pdf/sec11_5.pdf

2. Increasing demand from BRICS, particularly China:
http://www.usfunds.com/media/images...nk-talk/jan-jun-2011/ChinaOildCons-052511.gif
http://www.gallatinrivercapital.com/wp-content/uploads/2012/04/Oil-Consumption.jpg

3. Increasing global demand:
http://kr.nlh1.com/images/201101/GlobalOilDemand.jpg
http://www.crudeoilpeak.com/wp-content/gallery/aspo2009/china_oil_demand_by_end_use.jpg

In my view, the 2008 oil spike was no different than the dotcom bubble.
Massive speculative over reaction to an underlying, but very real and long term,
future supply and demand issue.
Truth is, no one can really say for sure one way or the other.
All you can say is yes speculation was present.
There is also a supply and demand issue.
Which was the major driving force...thats where opinions come in

As Random said though, none of this actually matters.
No one knows or needs to know why price moves.
I just find this stuff interesting, thats all

 

[DionysusToast]

L_V - there is ALWAYS a retrospective cause given to the effects of trading.

It happens ever day. Just watch CNBC. Every day it's either the sky falling in or the streets are paved with gold & honey, yet we can just be rotating around a fairly large value range.

In the grander scheme, cause is very relevant and that's why I don't agree with this idea that "it's just econ 101 supply & demand".

I've not seen anyone use that "supply & demand" argument to put forward a solid trading hypothesis, whereas speculation as cause and effect in it's own right does indeed lead you to some very solid trading theories.

What do the supply & demand guys say? Is there any predictive use for this or is it just in retrospect you can say - "look, it went up, demand exceeded supply".

On the speculation/liquidity side, you can very much nail specific prices where prior trading activity will tell you that an area might be defended or that an area about to be breached will cause a significant run because of people unwinding speculative positions that they now realize are going to run against them.