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

[Liquid validity]

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

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.

I notice you avoided answering those 3 questions:
1. Who do you think were the biggest oil speculators at that time?
2. Do you think they weren't aware of Chinese consumption / non-opec production?
3. If you think they were aware, do you think that had any influence on their trade decisions?

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?

True, because there isn't a way for a retailer.
What do you think every IB energy analyst was doing in 2007?
Creating reports that said Chinese consumption had overtaken U.S. consumption,
and non-opec production was falling (2/3rds of global supply is non-opec).
Or do you think they told their trade desks that there was nothing unusual or significant?

Thats the point I'm making, speculation is usually motivated by a supply and demand issue.
Even if that supply and demand issue is not going to occur for many years, or is bogus,
the emergence of that possibility still motivates speculation.
I agree this isn't practical or available for a retailer.
That doesn't change the fact it is a major influence on speculative IB decisions
that retailers then follow.

 

[DionysusToast]

I notice you avoided answering those 3 questions:
1. Who do you think were the biggest oil speculators at that time?
2. Do you think they weren't aware of Chinese consumption / non-opec production?
3. If you think they were aware, do you think that had any influence on their trade decisions?

TBH - I don't think it's relevant to the discussion on the mechanics of price movement.

Some economist may tell the trading desks that oil prices will rise because the Chinese will be consuming more. So in that case, the price of oil futures should pretty much peg the actual increase in demand on behalf of the Chinese.

But it doesn't.

Let's suppose that Chinese consumption rose in a straight line, we all know what would happen to the markets. They would absolutely NOT move up in a straight line. This is because there's a speculative cycle which tends to get ahead of itself in both directions.

And it is THIS that we trade - presuming of course that we are still discussing actually putting on trades around this stuff.

True, because there isn't a way for a retailer.

Exactly my thoughts too - so we have a bunch of trader here saying "supply and demand causes price moves" and then having that as a dead end instead of delving into the realities of speculation which creates quite specific decision points in the markets.

What do you think every IB energy analyst was doing in 2007?
Creating reports that said Chinese consumption had overtaken U.S. consumption,
and non-opec production was falling (almost half of global supply is non-opec).
Or do you think they told their trade desks that there was nothing unusual or significant?

Thats the point I'm making, speculation is usually motivated by a supply and demand issue.
Even if that supply and demand issue is not going to occur for many years, or is bogus,
the emergence of that possibility still motivates speculation.

Yes - supply and demand can set a bias for speculators. But the speculation causes the price moves AND is the cause of a bunch of other market phenomena that are very tradeable.

 

[barjon]

............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?...........

The econ model does, I think, go some way in explaining the two steps forward one step back progression of the market. In the model the supply/demand balance changes at half way. If you "tilt" the model to take account of trend that may (or may not ) be why p&f 45 degree trend lines and fib 50% are worth a punt from a trading perspective.

 

[Liquid validity]

TBH - I don't think it's relevant to the discussion on the mechanics of price movement.

Some economist may tell the trading desks that oil prices will rise because the Chinese will be consuming more. So in that case, the price of oil futures should pretty much peg the actual increase in demand on behalf of the Chinese.

Let's suppose that Chinese consumption rose in a straight line, we all know what would happen to the markets. They would absolutely NOT move up in a straight line. This is because there's a speculative cycle which tends to get ahead of itself in both directions.

Exactly my thoughts too - so we have a bunch of trader here saying "supply and demand causes price moves" and then having that as a dead end instead of delving into the realities of speculation which creates quite specific decision points in the markets.

Yes - supply and demand can set a bias for speculators. But the speculation causes the price moves AND is the cause of a bunch of other market phenomena that are very tradeable.

You are looking at this from a retailer perspective.
I have to admit, in practical terms that is the best thing to do,
no denying that.

Point is retailers do not move markets.
This discussion, for me at least is about the root cause of
IB speculation, which does move markets.
Supply and demand, current and projected.
No major supply and demand issue, then yes its pure speculation.
Chinese consumption was not the only issue as previously mentioned.

 

[timsk]

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?

Hi DT,
Well, I'll bite and offer the obvious answer - cue the QI clanger!


Most TA approaches - which accounts for the majority of methodologies put forward here on T2W - are based on the supply and demand principle. Support and resistance being the most obvious example: traders buy at support because they anticipate (or think they can perceive through T&S etc.) that demand is - or is likely to - overwhelm supply. And vice versa at resistance. But I expect I've either misunderstood your question or the point you're making - as you know this, obviously?
Tim.

 

[DionysusToast]

You are looking at this from a retailer perspective.
I have to admit, in practical terms that is the best thing to do,
no denying that.

Nope - that is merely your interpretation.

I am talking from a market perspective.

 

[DionysusToast]

Hi DT,
Well, I'll bite and offer the obvious answer - cue the QI clanger!


Most TA approaches - which accounts for the majority of methodologies put forward here on T2W - are based on the supply and demand principle. Support and resistance being the most obvious example: traders buy at support because they anticipate (or think they can perceive through T&S etc.) that demand is - or is likely to - overwhelm supply. And vice versa at resistance. But I expect I've either misunderstood your question or the point you're making - as you know this, obviously?
Tim.

Tim

When the market moves down to a common reference point that a lot of people are watching, you say there is an area of supply down there.

So you - the trader, propose to buy at that area of supply. To wit, you are guessing what "they" will do whilst "you" are seperate to "they".

You are making a guess that "they" have supply there.

The thing is - everyone is actually doing the same thing that you are doing. You are "they", you just don't realize it.

Game theory 101...

 

[timsk]

Hi DT,

When the market moves down to a common reference point that a lot of people are watching, you say there is an area of supply down there.

I'm not saying anything! As per your request, I'm just offering an example - of how supply and demand (or, traders' perceptions of where it exists at least) can be used to trade. If price has moved down, then the trader who buys at 'a common reference point' perceives there is likely to be greater demand at that point (not supply).

So you - the trader, propose to buy at that area of supply. To wit, you are guessing what "they" will do whilst "you" are seperate to "they".
You are making a guess that "they" have supply there....

No, the opposite. I'm saying that traders in general aim to buy at an area of increased demand (not supply). How they perceive such an increase will vary from trader to trader. Some of them will have worked out to a precise percentage of probability that price will go their way when they enter a trade. Supply when buying at an area of increased demand is only relevant to the buyer in terms of possible slippage and unfilled orders.

The thing is - everyone is actually doing the same thing that you are doing. You are "they", you just don't realize it.
Game theory 101...

I wouldn't argue with you on that point but, if it works, then there's nowt wrong with that surely? And if it doesn't, that could just be because the trader in question isn't using the right tools 'n techniques or, alternatively, not using the right tools 'n techniques correctly - in order to pinpoint accurately where the areas of supply and demand really are.
Tim.

 

[Liquid validity]

Nope - that is merely your interpretation.

I am talking from a market perspective.

So let me get this straight.
2008 oil - IB's just taking a speculative punt based on orderflow.
A speculative snowball, nothing more.
Thats what you are saying yes?

No IB analysts precipitated that orderflow,
based on weakening supply and increased demand?
Absolutely nothing but pure speculation?
China overtaking U.S consumption and weakening supply in 2007 just coincidence?
Thats what you are saying yes?

That is merely your interpretation as well.
So why do they waste all that money on data and analysts then.
It was a speculative snowball that started with the supply and demand
issues I've already raised (btw I'm not saying there was a realistic supply problem, just perceived potential).
There is no proof either way, but I know which version I find more realistic.

 

[DionysusToast]

So let me get this straight.
2008 oil - IB's just taking a speculative punt based on orderflow.
A speculative snowball, nothing more.
Thats what you are saying yes?

No IB analysts precipitated that orderflow,
based on weakening supply and increased demand?
Absolutely nothing but pure speculation?
China overtaking U.S consumption and weakening supply in 2007 just coincidence?
Thats what you are saying yes?

That is merely your interpretation as well.
So why do they waste all that money on data and analysts then.
It was a speculative snowball that started with the supply and demand
issues I've already raised (btw I'm not saying there was a realistic supply problem, just perceived potential).
There is no proof either way, but I know which version I find more realistic.

This is a simple matter of whether the tail wags the dog or the dog wags the tail.

I don't see how either of us would be able to prove the point beyond doubt.

But there are numbers out there on the percentage of speculative positions in HFT vs legitimate hedges. Hell, HFT accounts for 60% of the volume - there's 60% pure speculation from the start.

 

[barjon]

.........There is no proof either way, but I know which version I find more realistic.......

With all their analysts behind them it's informed speculation. Anyone who buys something with the objective of selling it back at a higher price rather than just wanting to own/use the product is speculating. .....but so what

 

[DionysusToast]

Hi DT,

I'm not saying anything! As per your request, I'm just offering an example - of how supply and demand (or, traders' perceptions of where it exists at least) can be used to trade. If price has moved down, then the trader who buys at 'a common reference point' perceives there is likely to be greater demand at that point (not supply).

Yes you were saying something - your lips were moving.

No, the opposite. I'm saying that traders in general aim to buy at an area of increased demand (not supply). How they perceive such an increase will vary from trader to trader. Some of them will have worked out to a precise percentage of probability that price will go their way when they enter a trade. Supply when buying at an area of increased demand is only relevant to the buyer in terms of possible slippage and unfilled orders.

As I mentioned, this is pure gaming. A bunch of participants all trying to guess what a bunch of participants will do.

I wouldn't argue with you on that point but, if it works, then there's nowt wrong with that surely? And if it doesn't, that could just be because the trader in question isn't using the right tools 'n techniques or, alternatively, not using the right tools 'n techniques correctly - in order to pinpoint accurately where the areas of supply and demand really are.
Tim.

It has nothing to do with tools & techniques. It really comes down to what the markets are actually used for in the majority. With futures and stock markets, the majority of activity is not hedging/investing.

 

[new_trader]

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.

No Jon, this is incorrect. There are strong hands and weak hands; Those who know what they are doing, and the vast majority who don’t. To think that "buyers" and "sellers" operate in the way you have described is almost laughable.

 

[DionysusToast]

No Jon, this is incorrect. There are strong hands and weak hands; Those who know what they are doing, and the vast majority who don’t. To think that "buyers" and "sellers" operate in the way you have described is almost laughable.

lol - always the same thing with you - you make out that people are stupid but NEVER put forward your own take on things.

Still, I presume that "Those who know what they are doing" can't share the secret recipe.

 

[D70]

I'm so glad I have DT on ignore. Saving me reading tonnes of drivel.

 

[Liquid validity]

This is a simple matter of whether the tail wags the dog or the dog wags the tail.

I don't see how either of us would be able to prove the point beyond doubt.

But there are numbers out there on the percentage of speculative positions in HFT vs legitimate hedges. Hell, HFT accounts for 60% of the volume - there's 60% pure speculation from the start.

True about proof, and no it doesn't really matter, just something interesting to talk about

I can't entirely agree on speculative HFT though.
OK stat arb is speculating on the spread relationship holding up, fair enough.

As for latency arb, the only speculation there is on network cable length,
and having lower costs than other latency arb competitors.
If costs and speed are favorable, it has nothing to do with speculating,
its a pure speed game - fastest with lowest costs wins - zero speculation.

 

[barjon]

No Jon, this is incorrect. There are strong hands and weak hands; Those who know what they are doing, and the vast majority who don’t. To think that "buyers" and "sellers" operate in the way you have described is almost laughable.

Yes, just as much as I laugh at all that "weak hands, strong hands" bollox

 

[new_trader]

Hi DT,
Well, I'll bite and offer the obvious answer - cue the QI clanger!


Most TA approaches - which accounts for the majority of methodologies put forward here on T2W - are based on the supply and demand principle. Support and resistance being the most obvious example: traders buy at support because they anticipate (or think they can perceive through T&S etc.) that demand is - or is likely to - overwhelm supply. And vice versa at resistance. But I expect I've either misunderstood your question or the point you're making - as you know this, obviously?
Tim.

Tim, the obvious question you need to ask first is - What is support? Isn't this an area where demand has ALREADY overwhelmed supply enough to turn the market? To say that traders are buying at support implies that they are anticipating it will happen again.

 

[new_trader]

Yes, just as much as I laugh at all that "weak hands, strong hands" bollox

Laugh all you want Jon. They are terms used by traders and investors who are far more experienced and knowledgeable than either of us. I'm surprised you call it bollox, I really am.

 

[barjon]

Laugh all you want Jon. They are terms used by traders and investors who are far more experienced and knowledgeable than either of us. I'm surprised you call it bollox, I really am.

Yes, and like most such terms it is open to different interpretations - remember the debate on that very topic some time ago - of which your "those who know what they are doing and those who don't" is but one.

I expect, like your mentor, that you believe that everything is known in advance and thus there is no speculation (or anticipation) involved as there is for us poorer mortals.

So far as I am concerned, I'm just guessing all the time. The more my guess is informed and born from past experience the more I tip the odds in my favour, but I wouldn't presume to pretend I'm doing anything more than speculating, anticipating, assuming, guessing - call it what you will.