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

[Shakone]

"(The commodity trader) need not guard against inside cliques. Dividends are not unexpectedly passed or increased overnight in the cotton market or in wheat or corn. In the long run commodity prices are governed but by one law - the economic law of demand and supply." - Livermore

"The business of the trader in commodities is simply to get facts about the demand and the supply, present and prospective. "- Livermore

"If we can determine the supply and demand which exists for stocks, we need not know anything else.” – Humphrey B. Neill

"what actually happens is the market responds to the ageless, natural law of supply and demand. The Composite Man and the effects of the law of supply and demand are really synonymous. It is the result of the motives, objectives, hopes, and fears of all the buyers and sellers whose actions produce the net effect upon the market." - Wyckoff

""Technical analysis is the science of recording, usually in graphic form, the actual history of trading (price changes, volume of transactions, etc.) in a certain stock or in the averages and then deducting from that picture history the probable future trend....[t]he real value of a share of [a stock] is determined at any given time solely, definitely and inexorably by supply and demand, which are accurately reflected in the transactions consummated on the floor of the New York Stock Exchange." - Magee

"The technical analyst's task is to interpret the action of the market - the flux in supply and demand mirrored in the market. In this work, it doesn't in the least matter what creates the supply and demand. The fact of their existence and the balance between them are all that count."- Magee

""The recent period of prosperity, with the greatest bull market ever recorded in American history, was based upon many factors of a new era. But all the powers of science, of invention, of cost-cutting and labor-saving, of efficient management, cooperation, and combination can hardly be expected to overrule the basic laws of supply and demand, of cyclical movements based on excess, and the fundamental theory that inflation in any line does not last forever." -Schabacker

"The best trades are the ones in which you have all three things going for you: fundamentals, technicals, and market tone. First, the fundamentals should suggest that there is an imbalance of supply and demand, which could result in a major move."- Michael Marcus

"The commodity markets are driven by supply and demand for physical goods" - Kovner

"The market does not know if you are long or short and could not care less. You are the only one emotionally involved with your position. The market is just reacting to supply and demand and if you are cheering it one way, there is always somebody else cheering it just as hard that it will go the other way" - Marty Schwartz

 

[counter_violent]

This is a complete mind fek.

So the last few days we hear about chemical weapons being used in Syria and the politicians now deciding what to do about it. Gold, silver and oils go through the roof. Did the prices change because the production and/or physical inventory changed in all those commods overnight! No of course not, so the only logical explanation is that the speculators speculated. Lets all hope and pray they don't catch a cold !

 

[wackypete2]

This is a complete mind fek.

So the last few days we hear about chemical weapons being used in Syria and the politicians now deciding what to do about it. Gold, silver and oils go through the roof. Did the prices change because the production and/or physical inventory changed in all those commods overnight! No of course not, so the only logical explanation is that the speculators speculated. Lets all hope and pray they don't catch a cold !

So why didn't they all speculate that the prices of those commodities would go down?

Maybe because of the perceived future imbalance of supply/demand of those commodities?? That's not far fetched. A major conflict in the middle east area could certainly affect oil supply. Would we get the same price effect if we heard about chemical weapons in some non-oil producing country in South Africa?

Otherwise there should be equal speculation in either direction and price would remain nearly unchanged.

Peter

 

[counter_violent]

So why didn't they all speculate that the prices of those commodities would go down?

Maybe because of the perceived future imbalance of supply/demand of those commodities?? That's not far fetched. A major conflict in the middle east area could certainly affect oil supply. Would we get the same price effect if we heard about chemical weapons in some non-oil producing country in South Africa?

Otherwise there should be equal speculation in either direction and price would remain nearly unchanged.

Peter

To use your words then Pete, "Maybe because of the perceived future imbalance of supply/demand of those commodities"

So at this juncture there is no imbalance, just a presumption that sometime in the future, there might be. speculation no :-0

Here's a bit more Livermore on speculation.

To invest or speculate successfully, one must form an opinion as to what the next move of importance will be in a given stock or commodity. Speculation is nothing more than anticipating coming movements. In order to anticipate correctly, one must have a definite basis for that anticipation, but one has to be careful because people are often not predictable-they are full of emotion-and the markets is made up of people. The good speculators always wait and have patience, waiting for the market to confirm their judgment.

For instance, analyze in your own mind the effect, marketwise, that a certain piece of news which has been made public may have in relation to the market. Try to anticipate the psychological effect of this particular item on the market. If you believe it likely to have a definite bullish or bearish effect marketwise, don’t back your judgment “UNTIL THE ACTION OF THE MARKET ITSELF CONFIRMS YOUR OPINION.” The effect marketwise may not be as pronounced as you are inclined to believe it should be. Do not anticipate and move without market confirmation–being a little late in your trade is your insurance that you are right or wrong.


Don't get me wrong on this...i'm still trying to make my mind up

 

[Shakone]

This is a complete mind fek.

So the last few days we hear about chemical weapons being used in Syria and the politicians now deciding what to do about it. Gold, silver and oils go through the roof. Did the prices change because the production and/or physical inventory changed in all those commods overnight! No of course not, so the only logical explanation is that the speculators speculated. Lets all hope and pray they don't catch a cold !

I think I first read about chemical weapons being used in Syria at least a month ago...

 

[counter_violent]

I think I first read about chemical weapons being used in Syria at least a month ago...

Agreed, and I think maybe even two months ago and so on

But clearly, something is afoot, a change from last week to this week.
Also, we aren't just dealing with commods, the change extends across many instruments and classes.

DT will probably shoot me for saying this, but it's a chance i'll have to take. Markets have gone Risk Off!

 

[cointoss]

after reading all the post, i seems the price movement has nothing to do with supply and demand.. (in short term i mean)

so there are ppl trading shorter time frame, basically is the one moving the price. suppose in eur/usd, 40% of the market participants is buy, while another 60% is short... where would the price go? but the logical answer it always the majority pay.. so market price will go up in the favor of 40% ppl who went long? the profit earned by ppl who went long..suppose got it from 60% of ppl who went short.. but where is another 20% go?

can some expert pls clarify? thanks

 

[DionysusToast]

So why didn't they all speculate that the prices of those commodities would go down?

Maybe because of the perceived future imbalance of supply/demand of those commodities?? That's not far fetched. A major conflict in the middle east area could certainly affect oil supply. Would we get the same price effect if we heard about chemical weapons in some non-oil producing country in South Africa?

Otherwise there should be equal speculation in either direction and price would remain nearly unchanged.

Peter

Absolutely - people are speculating about the impact this war will have on prices.

The thing is, they are speculating about the actions of other speculators.

The line of thought is - war is bad, might make oil scarce, people will buy oil contracts, I will buy contracts ahead of them.

It's the greater fool theory.

 

[DionysusToast]

uppose in eur/usd, 40% of the market participants is buy, while another 60% is short... where would the price go?

This scenario is not possible.

Markets are a mechanism for matching buyers and sellers. Unless there is both a buyer and a seller, there will be no trade.

So there's always 50% buyers and 50% sellers.

 

[DionysusToast]

"(The commodity trader) need not guard against inside cliques. Dividends are not unexpectedly passed or increased overnight in the cotton market or in wheat or corn. In the long run commodity prices are governed but by one law - the economic law of demand and supply." - Livermore

"The business of the trader in commodities is simply to get facts about the demand and the supply, present and prospective. "- Livermore

"If we can determine the supply and demand which exists for stocks, we need not know anything else.” – Humphrey B. Neill

"what actually happens is the market responds to the ageless, natural law of supply and demand. The Composite Man and the effects of the law of supply and demand are really synonymous. It is the result of the motives, objectives, hopes, and fears of all the buyers and sellers whose actions produce the net effect upon the market." - Wyckoff

""Technical analysis is the science of recording, usually in graphic form, the actual history of trading (price changes, volume of transactions, etc.) in a certain stock or in the averages and then deducting from that picture history the probable future trend....[t]he real value of a share of [a stock] is determined at any given time solely, definitely and inexorably by supply and demand, which are accurately reflected in the transactions consummated on the floor of the New York Stock Exchange." - Magee

"The technical analyst's task is to interpret the action of the market - the flux in supply and demand mirrored in the market. In this work, it doesn't in the least matter what creates the supply and demand. The fact of their existence and the balance between them are all that count."- Magee

""The recent period of prosperity, with the greatest bull market ever recorded in American history, was based upon many factors of a new era. But all the powers of science, of invention, of cost-cutting and labor-saving, of efficient management, cooperation, and combination can hardly be expected to overrule the basic laws of supply and demand, of cyclical movements based on excess, and the fundamental theory that inflation in any line does not last forever." -Schabacker

"The best trades are the ones in which you have all three things going for you: fundamentals, technicals, and market tone. First, the fundamentals should suggest that there is an imbalance of supply and demand, which could result in a major move."- Michael Marcus

"The commodity markets are driven by supply and demand for physical goods" - Kovner

"The market does not know if you are long or short and could not care less. You are the only one emotionally involved with your position. The market is just reacting to supply and demand and if you are cheering it one way, there is always somebody else cheering it just as hard that it will go the other way" - Marty Schwartz

Thank you for those insightful and original thoughts.

How do you apply your "economics 101 supply and demand" theory to the markets? I'm interested. I've mentioned already how you trade based on speculation and liquidity consumption being the keys.

 

[cointoss]

This scenario is not possible.

Markets are a mechanism for matching buyers and sellers. Unless there is both a buyer and a seller, there will be no trade.

So there's always 50% buyers and 50% sellers.

fine, suppose thats true.. then theres still no answer for why price goes up and down. if refer back to traditional economy, prices goes up because when supply is dwindling and demand is increasing, but this doesnt seems to apply on futures/forex

however from fundamental point of view, for eg: eur/usd goes up because euro economy improved than previous month, while USA economy declined compared to previous month.. in this scenario.. eur/usd goes up? but does this situation holds true all the time? what if have 50% chances, and given the same situation, news released to public, but price gone down.. lol

another scenario is what about if both euro and usa economy shows positive data? then does eur/usd goes up or down? lol

 

[DionysusToast]

fine, suppose thats true.. then theres still no answer for why price goes up and down. if refer back to traditional economy, prices goes up because when supply is dwindling and demand is increasing, but this doesnt seems to apply on futures/forex

Yes there is an explanation as to why price moves or doesn't move.

The markets are a mechanism for matching orders and (somewhat simplifying for the pedants), market orders get matched against resting/passive/limit orders.

Limit orders represent liquidity which must be consumed by market orders in order for price to move.

All explained here:

Peter Davies presents Part 1: Introduction to Order Flow on TopstepTrader's Squawk Radio - YouTube

10:30 mins -> 20:00 mins

 

[Billy Gates]

This scenario is not possible.

Markets are a mechanism for matching buyers and sellers. Unless there is both a buyer and a seller, there will be no trade.

So there's always 50% buyers and 50% sellers.

Wouldn't that leave the markets in a state of equilibrium ?

I thought that the bigger moves happened because of an imbalance of the two. More sellers than buyers equals down move and more buyers than sellers equals up move. Of course this would also take into account the volume of orders coming in.

Please comment.

 

[new_trader]

More sellers than buyers equals down move and more buyers than sellers equals up move. Of course this would also take into account the volume of orders coming in.

Please comment.

You will never be successful at trading/investing until you get this concept OUT of your head. Do not think in terms of buyers and sellers, instead think in terms of supply and demand. If supply overwhelms demand, the market (price) moves down, if demand overwhelms supply, the market (price) moves up.

 

[DionysusToast]

Wouldn't that leave the markets in a state of equilibrium ?

I thought that the bigger moves happened because of an imbalance of the two. More sellers than buyers equals down move and more buyers than sellers equals up move. Of course this would also take into account the volume of orders coming in.

Please comment.

The difference is that some orders provide liquidity and some orders consume liquidity.

When liquidity at a price is consumed, then liquidity at the next price along is consumed and so on.

 

[Liquid validity]

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.

I'm actually agreeing with you that short term its pure speculation.
As CV has said, about the perceived impact.
Yes 2008 oil spike was largely speculation.

Let me ask you this:
1. Who do you think were the biggest oil speculators at that time?
2. You think they weren't aware of Chinese consumption / non-opec production?
Its a hell of a coincidence that those two events preceded the spike.
3. If you think they were aware, do you think that had any influence on their trade decisions?

In practical terms and in real time, yes you are correct that all a retail
punter can do is go with the flow, its all you can do without access to the
kind of analysis and data those that were driving the spike had access to.

Thats my point though, those that were driving it, did have access to that data
and analysis in real time, not after the event.
They then speculated on that information and data.

 

[barjon]

You will never be successful at trading/investing until you get this concept OUT of your head. Do not think in terms of buyers and sellers, instead think in terms of supply and demand. If supply overwhelms demand, the market (price) moves down, if demand overwhelms supply, the market (price) moves up.

And what's wrong with thinking of it in terms of buyers and sellers.

Whilst for each transaction there is a buyer and a seller, supply overwhelms demand when there are more who WANT to sell than there are who are prepared to buy. Those would be sellers must offer at lower and lower prices to tempt the reluctant buyers, hence the movement.

 

[DionysusToast]

And what's wrong with thinking of it in terms of buyers and sellers.

Whilst for each transaction there is a buyer and a seller, supply overwhelms demand when there are more who WANT to sell than there are who are prepared to buy. Those would be sellers must offer at lower and lower prices to tempt the reluctant buyers, hence the movement.

Aggressive sellers do not offer at lower prices, they consume bids at lower prices.

They aren't offering anything, they are taking best price available.

Pedantic but important when the mechanics of a price move involve the consumption of liquidity.

 

[DionysusToast]

I'm actually agreeing with you that short term its pure speculation.
As CV has said, about the perceived impact.
Yes 2008 oil spike was largely speculation.

Let me ask you this:
1. Who do you think were the biggest oil speculators at that time?
2. You think they weren't aware of Chinese consumption / non-opec production?
Its a hell of a coincidence that those two events preceded the spike.
3. If you think they were aware, do you think that had any influence on their trade decisions?

In practical terms and in real time, yes you are correct that all a retail
punter can do is go with the flow, its all you can do without access to the
kind of analysis and data those that were driving the spike had access to.

Thats my point though, those that were driving it, did have access to that data
and analysis in real time, not after the event.
They then speculated on that information and data.

Yup - and that speculation is what caused the price to move up. Not the consumption of oil.

The potential/predicted/guesstimated (not actual) supply of a commodity sets the bias for speculators, which leads to price movements in derivatives.

At the end of the day is really what supply and demand economics are all about - consumption. People demanding and consuming a product, causing relative scarcity, causing prices to rise. If buying does not result in a reduction in supply, then there is no reason for the price to rise.

Of course, there are also products that are available infinitely (e.g. an eBook) and where a seller will raise or reduce prices in an attempt to increase revenues or stimulate demand.

This is a bit different to our 4-way auctions.

Also - no-one has yet put forward a way to TRADE the "econ 101 supply & demand" model, yet it is clear how to trade around speculation. What practical value to a trader is it to say "supply and demand causes prices to move" when you then can't explain how to use that to actually trade off?

 

[barjon]

Aggressive sellers do not offer at lower prices, they consume bids at lower prices.

They aren't offering anything, they are taking best price available.

Pedantic but important when the mechanics of a price move involve the consumption of liquidity.

Yes, sorry - it's both of course.