Why is the Price Moving and How?

[januson 10]

Hello

 

Back to basics

Just sitting here wondering what actually makes a stock price move up or down. Offcause news etc., fundamental stuff could affect it somehow, but if we disregard that in this technical thread.

 

I know there's a lot of discretionary traders out there, but what makes them enter a trade? A system? A gut feeling?

Also there's alot of algoritmics going on, is that only reserved the pros?

 

What is a price move then? Is it a 0.4% move or 1.2% move or even more? For a discretionary trader it must be more than an algo? Is the algos driven by discretionary traders or is it the other way around?

 

This is a purely academic and hyphotetical discussion!

[johnjohn1hew 10]

Price moves are caused by an imbalance between supply and demand. Volume is the quantity of contracts that have been traded and volume is what supply and demand are made up of. Every trader bases their opinion on something. There are a lot of methods out there. You cannot just say that a move is the result of professionals because you most likely have no way of knowing that. A lot of people just want to put a name or a face to action that they cannot make any sense of.

 

When you strip the market down to nothing and you start to examine it for what it really is, then you will start to see truth. You know, there is a lot of bullshit on top of everything, but if you just keep digging you will eventually find what was buried there long ago.

[sevensa 10]

Did you see the question was asked almost a year ago? How did you find a post like that?

[johnjohn1hew 10]

Yes, i did see that it was asked a year ago... Does that have any reflection on the validity of the question? I found this question when searching the TL forum. It popped up, no one had answered it, so anyone who can use this information is free to do so. What is your view on market action (since this is that type of thread)? Thanks.

[Kiwi 16]

I'd be interested to know what the op figured out in the mean time and, thus, their response to the one genuinely helpful post in this thread

 

(Not claiming that I'm always genuinely helpful, especially when faced with an ego-bloated guru type)

[sevensa 10]

Yes, i did see that it was asked a year ago... Does that have any reflection on the validity of the question? I found this question when searching the TL forum. It popped up, no one had answered it, so anyone who can use this information is free to do so. What is your view on market action (since this is that type of thread)? Thanks.

 

What is your definition of market action?

[johnjohn1hew 10]

The action of the market. The character of price movements revealed through price spread and volume. Price and volume are the result of: supply and demand, effort and result, cause and effect. Effort is to result is as volume is to price. Effort is supply and demand and price reflects the imbalance/balance. The cause drives volume (effort) to produce an effect on price. The cause is what causes trades to be submitted, which causes the supply and demand to imbalance (effect). People base their trading on a lot of different methods, and their action makes up the cause. You weigh and measure these through price and volume to form a judgement.

 

A few quotes from Wyckoff:

 

“Tape reading and chart reading enable one to judge the future course of stocks, by weighing the relation of supply and demand. This can sometimes be done from price movement alone, but if you consider also the volume of the transactions you gain an additional and vitally important helpful factor.”

 

“When you study charts, look for the motive behind the action which the chart portrays. Aim to interpret the behaviour of the market and of stocks – not the fanciful patterns (“gaps,” horns,” “flags,” “pennants,” etc.) which the charts may accidentally form.”

 

“From the volume and price movement we find the greatest aid: (a) in determining the direction of the coming moves; (b) deciding wen to buy or sell, when to go long or short; © when a stock is on the springboard, and (d) when a move is culminating.”

Edited October 30, 2009 by johnjohn1hew

[sevensa 10]

The action of the market. The character of price movements revealed through price spread and volume. Price and volume are the result of: supply and demand, effort and result, cause and effect. Effort is to result is as volume is to price. Effort is supply and demand and price reflects the imbalance/balance. The cause drives volume (effort) to produce an effect on price. The cause is what causes trades to be submitted, which causes the supply and demand to imbalance (effect). People base their trading on a lot of different methods, and their action makes up the cause. You weigh and measure these through price and volume to form a judgement.

 

A few quotes from Wyckoff:

 

“Tape reading and chart reading enable one to judge the future course of stocks, by weighing the relation of supply and demand. This can sometimes be done from price movement alone, but if you consider also the volume of the transactions you gain an additional and vitally important helpful factor.”

 

“When you study charts, look for the motive behind the action which the chart portrays. Aim to interpret the behaviour of the market and of stocks – not the fanciful patterns (“gaps,” horns,” “flags,” “pennants,” etc.) which the charts may accidentally form.”

 

“From the volume and price movement we find the greatest aid: (a) in determining the direction of the coming moves; (b) deciding wen to buy or sell, when to go long or short; © when a stock is on the springboard, and (d) when a move is culminating.”

 

So you are really talking about Wycoff then when you say price action? DB is running a good Wyckoff section on here and you are probably better of posting there. Other people will define price action differently. As so far as what my opinion about "price action" is, this is like asking me what my opinion is about blue sky. It is what it is. If there was no "price action", no one would be making or losing money. I am not really sure what you are looking for as far as a response.

[johnjohn1hew 10]

You asked me to define market action and not specifically price action, so I defined market action. Price action (effort, effect) is a part of market action.

 

There can't be much less to what I stated. If I have missed something then please point it out so that it can be better understood. I know that everyone's trading methods are all subjective and based on personal opinions, but i still like to believe that their is value in discussing all the various definitions and perspectives.

 

Also, I find the Wyckoff section to be very useful in understanding market action, but market action has been around since the beginning of the financial markets So, the principles apply to all methods based on market action (but not so well to methods that are not based on market action).

[sevensa 10]

You asked me to define market action and not specifically price action, so I defined market action. Price action (effort, effect) is a part of market action.

 

There can't be much less to what I stated. If I have missed something then please point it out so that it can be better understood. I know that everyone's trading methods are all subjective and based on personal opinions, but i still like to believe that their is value in discussing all the various definitions and perspectives.

 

Also, I find the Wyckoff section to be very useful in understanding market action, but market action has been around since the beginning of the financial markets So, the principles apply to all methods based on market action (but not so well to methods that are not based on market action).

 

 

Just do a mental replace for price action with market action in my post. I would have written nothing different.

[DugDug 10]

I have always had the belief that Markets/prices sometimes move for a very, very simple reason. That reason being that there is literally no one who is willing to take on the other side.

 

While this is a bit broad..... think about it in terms of the recent global meltdown, the internet bubble and in market making situations.

Recent meltdown - people just were not prepared to buy many assets. It did not mean that they were actually bad assets, though some were horrendous. If you had cash you just sat and waited.... hence the sellers rushing for the door found few buyers.

I think definitely fundamentals win out in the long term, but in short term moves sometimes its the LACK of people willing to sell or buy. Think about the internet bubble. Everyone knew there were no fundamentals there, but few were prepared to short it, and those that did generally lost a lot a money. When this blew up, no one wanted to buy.

market makers - if you have a pit with ten market makers your chances of getting a good, fair price ALL the time is greatly improved, but with only a few market makers, then clearly there will be times where the market makers will not wish to anticipate - regardless of the price.

 

How this helps - well it generally means you have to ask the question of when entering a market are there going to be people who will follow me in here, or is there a better place for me to enter. It helps me by forcing a little bit of patience into the decision making.

[johnjohn1hew 10]

Ya, we aren't contradicting each other. You have described the laws of supply and demand. It is very basic stuff and I don't mean to make it sound complicated, because it isn't. Supply and demand make price. Effort (makes up supply and demand) drives price (the result).

 

Individual methods make up volume, and thus price movements. That is, the traders behind price are driving the market to move and the majority of them are basing their actions on a method of analysis. If the majority of these methods are telling the traders there is strength in the market, then there will be strength in the market and someone who is looking at price and volume can usually determine the presence of strength. They can determine the balance of supply and demand and trade accordingly. This could be called cause and effect. In order for a movement to take place, then there has to be a reason for the other side to not take the other side. Thus, if strength has presented itself, then the supply side will be light and the demand side will accumulate and overcome the supply to drive prices upwards until supply comes in again (there are a lot of things unaccounted for in this statement, so do not be too critical).

 

All judgements using volume and price need to be flexible because who really knows what the hell is happening? We can only observe and form an opinion on what we see and believe, and then trade accordingly if we feel confident in our analysis. All definitions and theories need also be flexible to be in-sync with the flexibility of markets.

 

I am not trying to change opinions nor to make myself look like someone who knows anything. I am trying to learn what the hell there really is to all of this and try to really learn it. I learn best by explaining everything i believe in because it helps me understand it more thoroughly. I applaud you for showing some courage in stating your opinion and for not being one of those people who hide behind their method and contribute to a discussion nothing but "my opinion differs from yours" - LETS DICUSS WHY THEY ARE DIFFERENT AND MAYBE, JUST MAYBE, WE WILL BOTH LEARN SOMETHING NEW! If there is a flaw in my understanding of the dire basics, then i can't go on until that flaw is worked out and corrected. If there is a flaw in my understanding of what there really is, then I am wrong, and i need to become correct or else i am doing nothing but hiding behind my method. I also realize that all of this theory means nothing until applied in real-time and in foresight.

 

 

I liked this statement the most:

How this helps - well it generally means you have to ask the question of when entering a market are there going to be people who will follow me in here, or is there a better place for me to enter. It helps me by forcing a little bit of patience into the decision making.

Edited November 1, 2009 by johnjohn1hew

[Kiwi 16]

You might consider two elements to the grouped buying and grouped selling (trying to avoid jargon).

 

One element that is most considered is the amount.

Another that is less considered is the desperation.

 

For example, if there is a perception that price is moving out of the intended buying zone before one could get filled, then desperation will increase pressure without increasing volume necessarily. I like to ask myself this question:

 

- based on what I am seeing, will the volume guys think they can wait and get a better fill before this move really happens or will they perceive that it's on its way.

 

If the first then price improvement is on the cards; if the second then I'd better just go with the move (even chase it just a tiny tiny bit).

 

 

 

 

PS, There is an excellent (well?) book on market microstructure by Harris and the draft is legitimately obtainable on the internet at various places

[Kiwi 16]

Here's the old draft of the book. Not sure where it is currently.

 

Its a 7zip file so u need to change the suffix from zip to 7z to open it.

 

.

Market Microstructure.zip

[johnjohn1hew 10]

Thanks, i have the book. I got it months back.

[JBWTrader 10]

My belief is this....the market is controlled by a couple of big players...they know exactly where price is going and are very precise on where they want to take it...to the tick...

they have various options to change direction in order to change the order of pattern completion....but ultimately they will use volume to get them where they need to go....99.999% of the rest of the players are trying to figure out our odds of success relative to these 1 or more big players...

 

Best

John

[johnjohn1hew 10]

My belief is this....the market is controlled by a couple of big players...they know exactly where price is going and are very precise on where they want to take it...to the tick...

they have various options to change direction in order to change the order of pattern completion....but ultimately they will use volume to get them where they need to go....99.999% of the rest of the players are trying to figure out our odds of success relative to these 1 or more big players...

 

Best

John

 

I don't know. Based on the volume of the e-mini contracts traded daily a large trader that could gain a following would have to be absorbing a hell of a lot of activity in-order to manipulate price and gain a following. I know there are large traders present in the market, but if you look at the tape, exactly when are they buying or selling? I never see any huge orders going through that would need to in-order to cause any significant movement. I think thinking about who is trading is irrelevant and that either way price (+volume) will show strength or weakness on its own, no matter who is or isn't driving it. All we need to do is measure the movements and act on our judgements.

[JBWTrader 10]

Hi Johnjohn1hew

 

Some good comments you made.

Lets just say there are large players and very large players and many . many small to medium players...

I agree also we dont need to know Who they are but rather what they seem to respond to ...

 

the price movement/structure I am trying to describe is anything from 1-4 ticks to 200 ticks....not neccessary the big moves only..

 

I have personally been watching tape for nearly 5 years now and these days its much more difficult to spot the reasons for subtle changes in price...too many games and too many ways to conceal...rather I find it easier to look at the structure of price ie anything from 60 ticks (and you can go smaller of course) to 60,000 ticks +

 

As for your comment "price (+volume) will show strength or weakness on its own, no matter who is or isn't driving it. [/b]All we need to do is measure the movements and act on our judgements" I also agree with this...this is always the outcome of the decisions made by those that can easily influence buying and selling pressure....for us retailers we hope to get in on the action once these collective patterns become more obvious to us and hopefully not too late...

 

What I have learned is that the market is very precise on where it wants to go and is using predetermined price goals/positions (for want of a better term) and it uses volume to get there with price being the final outcome...the volume I am referring to here does not have to be large volume...just enough pressure to move price anything from 1-100 ticks say...

 

we all struggle with determining the price(t) goals....so the rest of us look to volume and price (not always both ) for our belief system / trading system confirmations and act accordingly and hopefully get a stastistical advantage over the market in that way(s)..

 

Best

John

 

 

All the Best

John

 

I don't know. Based on the volume of the e-mini contracts traded daily a large trader that could gain a following would have to be absorbing a hell of a lot of activity in-order to manipulate price and gain a following. I know there are large traders present in the market, but if you look at the tape, exactly when are they buying or selling? I never see any huge orders going through that would need to in-order to cause any significant movement. I think thinking about who is trading is irrelevant and that either way price (+volume) will show strength or weakness on its own, no matter who is or isn't driving it. All we need to do is measure the movements and act on our judgements.

[zdo 20]

januson ;)

 

I can already venture how these comments will be dismissed as unnecessary to application – but they do have some bearing on the original question so… here goes.

 

Price moves to stay as closely aligned to the underlying valuation of an instrument as is possible. The underlying valuation ‘moves’ much more than price. This valuation is the collective’s valuation and can only be guessed at by individuals. This underlying / accompanying is the ‘general projective’ of valuation. Price is ‘objective particular’ of valuation. It attempts to stay not too far behind the underlying valuation – and the attempts sometimes overshoot… This underlying / accompanying ‘general projective’ of valuation is ignored or neglected by most, attacked by a few, sidestepped by some as being only ‘demand’, etc, etc. The ‘general projective’ is one of the unspeakable, irrational numbers in markets… but

 

If that accompanying valuation didn’t exist then MP’s would have no reason to approximate value areas, etc.. Wave traders would have no underlying basis from which to build counts, etc. SR ‘participants’ (a la Wycoff and progeny,etc.) would have not the slightest motivation to attempt to step in and participate in or ‘protect’ support (or resistance). More manipulative SR participants would have no motivation to look for the heavier participants’ attempts at exploitation via pricing campaigns. People would never bother writing trading books, etc. Soros, Buffet, etc would have washed up... Without the underlying, valuation, 3+ sigma events would be ignored by all… Black swans would all stay beyond the horizon… The conscious or unconscious assumptions about this underlying collective valuation of traded instruments can be explored and partially uncovered about every single method of trading (including random entry)

 

Generally speaking, the ‘heavier’ in size a trader gets, the more conscious s/he becomes of his own valuation projections. (and not necessarily via fundamentals btw). Small, ‘technical’ trading is in some ways an easy luxury…and how

[johnjohn1hew 10]

I think value is just a natural occurring phenomena inherent in all markets. It's not a method; it's not a setup. It's just a result of what is. It is extremely hard for me to put it into words. I don't think about value as being a mechanical 70% area - that is just too fixed and inflexible for me. Prices at which volume is most abundant are levels at which traders want to trade. This is where i would classify value taking place. I wouldn't say that traders seek value; it is something that they just run into. Something that is forever changing with the swings of their fear, greed, and need.

[Kiwi 16]

januson ;)

 

I can already venture how these comments will be dismissed as unnecessary to application – but they do have some bearing on the original question so… here goes.

 

Price moves to stay as closely aligned to the underlying valuation of an instrument as is possible. The underlying valuation ‘moves’ much more than price. This valuation is the collective’s valuation and can only be guessed at by individuals. This underlying / accompanying is the ‘general projective’ of valuation. Price is ‘objective particular’ of valuation. It attempts to stay not too far behind the underlying valuation – and the attempts sometimes overshoot… This underlying / accompanying ‘general projective’ of valuation is ignored or neglected by most, attacked by a few, sidestepped by some as being only ‘demand’, etc, etc. The ‘general projective’ is one of the unspeakable, irrational numbers in markets… but

 

If that accompanying valuation didn’t exist then MP’s would have no reason to approximate value areas, etc.. Wave traders would have no underlying basis from which to build counts, etc. SR ‘participants’ (a la Wycoff and progeny,etc.) would have not the slightest motivation to attempt to step in and participate in or ‘protect’ support (or resistance). More manipulative SR participants would have no motivation to look for the heavier participants’ attempts at exploitation via pricing campaigns. People would never bother writing trading books, etc. Soros, Buffet, etc would have washed up... Without the underlying, valuation, 3+ sigma events would be ignored by all… Black swans would all stay beyond the horizon… The conscious or unconscious assumptions about this underlying collective valuation of traded instruments can be explored and partially uncovered about every single method of trading (including random entry)

 

Generally speaking, the ‘heavier’ in size a trader gets, the more conscious s/he becomes of his own valuation projections. (and not necessarily via fundamentals btw). Small, ‘technical’ trading is in some ways an easy luxury…and how

 

 

Very nice model (because all these discussions create mental models of the market that are true or untrue and useful or useless to varying degrees).

 

I particularly like the resulting ideas that

- what you need to imagine is where projected value will be, is going, might hold

- that being small you don't have to go early because if you wait for the projection to give itself away in the move after accumulation the slippage won't kill you so you get a reduction in risk vs the participants who have to scale into possible reversals

 

and one of my own

- that signs of the movement of projection can result in an immediate move but may not, allowing larger participants (and you) time to accumulate a position with price improvement after the signs of movement.

[zdo 20]

Kiwi, Will give some thought to your “resulting ideas”. Thanks.

 

re:

...mental models of the market that are true or untrue and useful or useless to varying degrees...

Thanks again. Prompts me to add the following:

 

My answer to the question was an answer – not the answer.

 

Our ‘ways of peeking in’

1 the general projective

2 the particular projective

3 the general objective

4 the particular objective

are all valid. Most of us are blind to (even defended against) 1, 2, or 3 of them.

Also, as one’s awareness of them increases, the test about which ones take precedence often leads us to some downright goofy conclusions re cause and effect, etc

[beyondMP 10]

The question by the OP, is actually the question every trader must answer. The answer is also different for equities or derivatives.

The reason price moves is because of a difference between buying and selling in the micro and overall sentiment in the macro. In order to make sense out of price movement, in the eminis (derivatives), you need to know:

1. the difference of buying volume to selling volume-micro

2. the correlation of that difference to overall volume-micro

3. the overall position and movement of the market in general and its relationship

to the instrument traded-macro

(all of these are measurable, verifiable and repeatable)

 

For individual stocks, in addition to above, you have to have a method of measuring and verifying the overall sentiment and opinion of the issue's future fundamentals and news info. Since, the volume of buying and selling in stocks is confused and obfuscated by the specialists and market makers and measuring sentiment and opinion is almost impossible; and, as the eminis trade in an enviroment that more closely resembles a "free market" you can deduce that they are actually easier to trade

 

Value is a perception, everyone has their own idea of what something is worth, thus, it is of little use, if any. In terms of MP, it is only the statistical representation of where price has been. Sometimes it works and other times it doesn't. But, the above definition always works.

[DugDug 10]

just to add a few points to think about in a slightly different slant.

The idea of value is interesting - think about it in terms of option markets.

 

Most market makers have their calculations of fair value. this is generally a price based around what the other players in the market were demanding or supplying. It is not necessarily based upon what value they think the fair value might be. They can skew their books in the manner in which they like based on views of volatility, but unless their pockets are very deep taking on the market regardless usually leads to problems.

Now what happens when clients of the market makers start talking about fair value. It becomes interesting as fair value to a MM is about the fair value compared to other options they can spread off to taking a small clip - a vary different measure. Many clients want to trade at fair value - but what does that mean to them?

example; fair value to a market maker is 25 - they make a market bid 24-offer 26. How many clients wish to trade at 25 their idea of fair value. No if the market maker moves the prices to 30-32, those same clients still wish to trade at 31.

It just an interesting take on what people think is fair value.

 

also - not to cause an argument - but do people really believe that the market is controlled by a few big players - if so they must be fabulously wealthy. I take the belief that the market is bigger than anyone player and there are plenty of times that it proves it to those who think they can tame the markets.