Price Change Drivers

[emini.ninja 10]

After trading a little less than two years (just getting my feet wet), I'm beginning to take a step back from the TA, price action, patterns, MP etc., and find myself asking the age-old question - what moves prices?

At the macro level I understand there are several factors that include fundamental and technical, that drive price changes; however, at the micro level, is it unadulterated and pure supply-demand?

[aversano 10]

After trading a little less than two years (just getting my feet wet), I'm beginning to take a step back from the TA, price action, patterns, MP etc., and find myself asking the age-old question - what moves prices?

At the macro level I understand there are several factors that include fundamental and technical, that drive price changes; however, at the micro level, is it unadulterated and pure supply-demand?

 

I can give you my opinion with respect to trading the EMINI markets but I am almost positive that the same concepts apply to other instruments.

price moves up when there is lack of sellers at a level or the sellers at that level were hit.

i.e. lets assume that an instrument is trading at 100 and 101, 100 being the bid and 101 the ask. there are 1000 units waiting to be filled at 101 and 900 at 100

 

101 - 1000 (ask)

900 - 100 (bid)

 

if 600 units are bought at the ask + 400 are pulled (sellers decided not to sell), price will move one level up.

if 900 units are sold to the bid and no other bids appear, price will move one level down.

each level has its own discovery phase.

Edited February 11, 2011 by aversano

[joshdance 10]

After trading a little less than two years (just getting my feet wet), I'm beginning to take a step back from the TA, price action, patterns, MP etc., and find myself asking the age-old question - what moves prices?

At the macro level I understand there are several factors that include fundamental and technical, that drive price changes; however, at the micro level, is it unadulterated and pure supply-demand?

 

ninja, do you watch the DOM very often? I would encourage you to study the DOM on something relatively slow like ES with lots of contracts, along with opening a level 2 window, and get a visual of the resting limit orders at each price level.

 

I am new to trading and this has helped me tremendously in just getting an idea for how the order book works. While orders can be pulled at any time before they get filled, I visualize that a "strong" level (say, 4000 offer contracts at a known resistance level) will require a very strong market buy activity to "eat through" the contracts. Again, it happens all the time that these orders get pulled, but it helps me to think of a level with lots of contracts as a "thick wall" that must be penetrated (albeit a fickle one that can disappear instantly), and a small number of orders at a level (say, under a thousand on ES) much more "thin" which can be broken through quickly by convicted market activity.

[aversano 10]

ninja, do you watch the DOM very often? I would encourage you to study the DOM on something relatively slow like ES with lots of contracts, along with opening a level 2 window, and get a visual of the resting limit orders at each price level.

 

I am new to trading and this has helped me tremendously in just getting an idea for how the order book works. While orders can be pulled at any time before they get filled, I visualize that a "strong" level (say, 4000 offer contracts at a known resistance level) will require a very strong market buy activity to "eat through" the contracts. Again, it happens all the time that these orders get pulled, but it helps me to think of a level with lots of contracts as a "thick wall" that must be penetrated (albeit a fickle one that can disappear instantly), and a small number of orders at a level (say, under a thousand on ES) much more "thin" which can be broken through quickly by convicted market activity.

 

If only things were that simple....

[joshdance 10]

If only things were that simple....

 

Tell me about it--but I just mean that watching the DOM has helped me develop a clearer picture of how price can move. Doesn't mean I can trade using it or that it's helpful to me otherwise.

[emini.ninja 10]

I do watch the DOM regularly (at least whenever I trade), mostly to watch for breakouts. However, given the advent of HFT and the resultant loss of tradeable information in the Level II, I'm not sure L2 is very useful anymore. My understanding is that orders submitted by HFT engines are often Fill-Or-Kill (FOK), Iceberg or completely hidden which takes away from the information content of the order book.

Although Aversano's reply makes logical sense, I'm not sure that is the behavior I've been seeing in light sweet crude. Oftentimes in spite of 'thin' resistance (borrowing joshdance's term), prices will fall back ('reverse' if you will) even if no fundamental news is publicly available. Therefore my question - does price move merely based on supply/demand. Am I not seeing something?