on equity price movements, once more

N

novicetrader69

I've already asked about stock price movements and to make it short most answers pointed to supply/demand dynamics to explain them but I've been reading and thinking about it and still don't have a clear model of the thing in my head. I've numbered my questions below.

1) My biggest doubt is certainly the following: I'm told that prices move up/down due to increased buying/selling pressure but since selling , why should price move in the first place? I mean, stocks are only changing hand...

2) I could imagine that what is causing price movements are not trades being closed but imbalance between supply and demand: supply significantly exceeding demand will cause price to move down and vice versa.

3) Can price move in the absence of trades being closed for example simply due to an imbalance between supply and demand in the limit order book?

4) How can market opening gaps be explained? They seem instantaneous at market opening but are they, or should I imagine execution of hidden orders and/or market orders to cause it?

5) Does it make sense to try understand price movements in terms of what is happening in the limit order book?


Thanks
nt
 
I think it would help if you read a number of basic papers on Macro economics. The stock market is just a centralized market place for price Discovery where buyers and sellers match trades by agreeing on price and time. You are making it very complicated but it’s not. I will add that the value of a security tends to trade based on expectation of the future vs hard assets like commodities where the cash market values those assets on near term needs supply/demand.
 
novicetrader69 said:
1) My biggest doubt is certainly the following: I'm told that prices move up/down due to increased buying/selling imbalance/pressure but since selling , why should price move in the first place? I mean, stocks are only changing hand...
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Are words missing here? Impossible to understand what you're seeking. But, if you follow Bob Morse' advice -- think of a farmer's market, and four or five tables selling tomatoes. What would make their prices go up or down? The financial markets are no different.

novicetrader69 said:
2) I could imagine that what is causing price movements are not trades being closed but imbalance between supply and demand: supply significantly exceeding demand will cause price to move down and vice versa.
More...

"Exactamundo!" Nailed it.

novicetrader69 said:
3) Can price move in the absence of trades being closed for example simply due to an imbalance between supply and demand in the limit order book?
More...

Over-thinking. Prices exist for those seeking to buy or to sell. Markets exist when those persons get together to trade. Lastly, a *market*price* exists when a transaction is freely made. Nothing more complicated than that.

novicetrader69 said:
4) How can market opening gaps be explained? They seem instantaneous at market opening but are they, or should I imagine execution of hidden orders and/or market orders to cause it?
More...

Over-thinking. If a supply/demand imbalance occurred after the last market transaction, there will likely be a gap. It's not magic; it's not special. It's just a jump down or jump up. In a way, nearly every market opening will happen at a different price than that market's prior close -- "Gap" is something we humans invented to describe a chart effect. Pah.

novicetrader69 said:
5) Does it make sense to try understand price movements in terms of what is happening in the limit order book?
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Not to the degree you're thinking of, no. No magic happens in an order book; it's the increasing stacking of BIDS against the decreasing stacking of ASKs, and when the prices cross, a trade is made. That's it.
 
novicetrader69 said:
1) My biggest doubt is certainly the following: I'm told that prices move up/down due to increased buying/selling pressure but since selling , why should price move in the first place? I mean, stocks are only changing hand...
More...

tommcginnis said:
Are words missing here? Impossible to understand what you're seeking. But, if you follow Bob Morse' advice -- think of a farmer's market, and four or five tables selling tomatoes. What would make their prices go up or down? The financial markets are no different.
More...

Let me try to rephrase my idea again. If you are able to sell it is only because someone else on the other side is buying and this process of stocks changing hands is exactly the same when price is moving up or down. Why then isn't this ownership change taking place at a fixed price? What I don't get is if price movement is due to trades closing at that new price or if the new price is simply some inversely weighted average calculated on current supply and demand volumes where supply exceeding demand pushed price down and vice versa.


nt
 
Robert Morse said:
I think it would help if you read a number of basic papers on Macro economics. The stock market is just a centralized market place for price Discovery where buyers and sellers match trades by agreeing on price and time. You are making it very complicated but it’s not. I will add that the value of a security tends to trade based on expectation of the future vs hard assets like commodities where the cash market values those assets on near term needs supply/demand.
More...

Ok, but does a price movement mean trades closed at that new price?

There are numerous papers on price discovery but surprisingly no one has a precise idea of how price in a given moment is identified. In fact I read a paper that stated that the same security might be traded on different exchanges at a (slightly?) different price, which was somewhat a surprise to me. I suppose this could even be leveraged to make large profits when moving lots of money.

nt
 
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novicetrader69 said:
...What I don't get is if price movement is due to trades closing at that new price or if the new price is simply some inversely weighted average calculated on current supply and demand volumes where supply exceeding demand pushed price down and vice versa.

nt
More...

I think the problem you are having is visualizing how the market bid/ask works...See the following..

View attachment 193246

Now it is very unfortunate that I saw this post two minutes after the futures market closed. You are seeing the current price ladder of March 2019 NQ. Believe me, that gap between the bid and ask exists when the market is open, also, because the market is so thin. It will be easier to visualize when there are more bids and asks are displaying, so just bear with me.

Imagine right now that the market is open. I can place a buy or sell limit order right there in the middle, and that may very well get filled. Hell, I have been many times in the past. If it does, it means that some buyer (if I'm selling), or some seller (if I'm buying,) looking at the current bid/ask spread, decided my price was more attractive than the current bid or offer 5 ticks above or below my current bid/offer. If they trade me, they will have effectively moved the ladder to that last price. It is then up to the other people on the ladder to decide if that I the place THEY should also be pricing, and the market mechanics take off from there. It just happens a lot more quickly than a bunch of farmers in a farmer's market with fruit tables.

I'll endeavor to show a current ladder of that market when it opens in 45 minutes, will be easier to see.
 
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novicetrader69 said:
I've already asked about stock price movements and to make it short most answers pointed to supply/demand dynamics to explain them but I've been reading and thinking about it and still don't have a clear model of the thing in my head. I've numbered my questions below.

1) My biggest doubt is certainly the following: I'm told that prices move up/down due to increased buying/selling pressure but since selling , why should price move in the first place? I mean, stocks are only changing hand...

Thanks
nt
More...
%% Because we like earnings/profits stocks move .Good thing about markets;
they move .Another good thing about bull market uptrends;they move requardless of doubters.And they really can take off when the doubters finally come in, but i never wait that long. Put another way, why would anyone want to make a profit in selling a home?? Hint;most all do make a home sale profit when/if they can!!:cool::cool:
 
novicetrader69 said:
Are you saying that the price at which these trades closed is precisely (or is it just closely?) tracking the security price?

nt
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They are precise. Ignore the prices on that chart, the bid/ask spread is stupid on forward future months. But remember, this is a forward month of a future of an equity index. I am simply trying to show visually, in response to your query, how the prices can move.
 
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