Cracks in The Law of Supply and Demand?

[smwinc]

	Quote:	firewalker
	(a) the higher the price of a good, the lesser people will want to buy it (the law of demand) (b) the higher the price of a good, the more manufacturers will produce, because selling at higher prices means more revenues and profits (the law of supply) (c) the point of equilibrium (where demandline and supplyline intersect, in a price-quantity graph) represents the price level where buyers and sellers agree upon price (d) if demand outweighs supply -> price will need to rise to form a new equilibrium (otherwise there can't be a transaction) (e) if supply outweighs demand -> price will need to drop in order to form a new equilibrium point (f) there are several determinants that influence the quantity of goods/services demanded/provided, but none of these change the fact that consumers and producers (buyers & sellers) strive towards utility maximization ............ Price behaves in this way because buyers and sellers act rationally ........... Perhaps we could move along by asking in what cases (or why) the 'law of supply and demand' does (or does not) hold up in the stock market? Take (a) for example, is this the case in the financial markets? Because volume is the highest near the end of a bull market when prices rise the fastest and the greatest number of people are attract to buying... so despite the high prices of stocks, more and more people want to buy. Some might say this demand is not 'real' because the smart money isn't playing along. But does it matter?

For the record, I believe we were previously talking about different things here.

(A) That statement is assuming that the good remains the same.

I.e. a Demand & Supply curve might be drawn for a Basketball. The good remains the same throughout the curve.

The big question is whether a market is the same "good" at different prices.

I would argue not.

As the price of a basketball is increased, it remains the same basketball.

As a technical trader, the market (the "good" ) is constantly changing. Price is linked to the actual dynamics of the good.

For example, imagine a strong double bottom with the S&P at 1300. As the price increased, the double bottom is confirmed and the good has CHANGED in my mind. Price has increased, but we are now talking about a different good.

It would be like comparing a D&S curve for a basketball, that then changed to baseball, beachball, tennis ball, etc as you moved along the curve.

In addition, Price can go out the window with futures.

I have the same limits to buy/sell X quantity of S&P contracts, whether it's at 1300 or 1800. It makes no difference to me. A tick is still worth 12.50.

I might be a buyer (Demand) at a test of Yesterdays Close. It is completely irrlevant what price the S&P is trading at.

I'm thinking as I write here, but what does make more sense if you were striving to apply this law, is Price with regards to % movement. E.g. I know for a fact certain funds have automated trading based around various % up/down. It is not the price of the good, but rather the price of the good with respect to prior prices. E.g. 1% down on YC, 1% down on YL, etc. etc.

Hence, rather than thinking of a D&S curve with the price of the good on the Y axis, it might be more accurate to have %+/- YC, for example.

(B) Yes, I think this applies day in day out. Market moves to facilitate liquidity. I.e. We move the market towards where "producers" are willing to step in - in the form of Supply (at highs in the market) or Demand (at lows in the market).

(C) This is happening every time there is a transaction. In a thin market, you can watch the process occur as the spread moves without transactions occurring, as equilibrium is attempted to be found.

(D) & (E) - Yes, that's an easy one I think.

(F) - Not realistic in the real world. They teach this one in Economics 101. The whole assumption of "participants will behave rationally" complicates it. We all should be able to think of at least 10 trades where we didn't behave rationally.

In addition, we are only ever guessing in the market - we take actions that we 'believe' will maximise benefit. After all, you wouldn't buy if you didn't think it would go up, while simultaneously someone is selling it to you, thinking it will go down. We are both striving towards utility maximization, however one of us will quite simply be wrong.

Clearly it gets more complex, I am keeping it simple here too.

[atto]

Could you elaborate on your comment regarding the "good" (of a financial market) changing? I have a very firm grasp of economics, and I've never heard anyone say that, so I'm open to your theory.

I've always believed that the "good" in an ES contract is simply $50 x S&P 500. The S&P 500 is a "good" comprised of the biggest market players, which are goods representing companies. That "good" doesn't change. The value of it may change (such as when Steve Jobs joined AAPL), but that is then reflected in the price.

In your example, how does a confirm double bottom change what the ES is? It seems like it's exactly the same thing, just at a different valuation. That is a function of supply and demand, which would also govern the price of your basketball.

[smwinc]

	Quote:	atto
	Could you elaborate on your comment regarding the "good" (of a financial market) changing? I have a very firm grasp of economics, and I've never heard anyone say that, so I'm open to your theory. I've always believed that the "good" in an ES contract is simply $50 x S&P 500. The S&P 500 is a "good" comprised of the biggest market players, which are goods representing companies. That "good" doesn't change. The value of it may change (such as when Steve Jobs joined AAPL), but that is then reflected in the price. In your example, how does a confirm double bottom change what the ES is? It seems like it's exactly the same thing, just at a different valuation. That is a function of supply and demand, which would also govern the price of your basketball.

Let's take a step back. The first problem we are keeping it simple, and everyone is going to see the ES as something different. That's another inherent problem - As an intraday trader, a lot of how I trade is based on patterns.

In my view, each pattern throughout the day is a different product.

I will always Buy (Demand) certain pattern within the market depth, and I will always Sell (Supply) certain patterns in the depth.

Price is utterly irrelevant.

If I had to compare the ES to an item, I would compared it to Lego blocks (the plastic blocks that connect to each other for any poor soul who has never seen lego).

Throughout the day, it remains Lego. It is always $50 x S&P 500 . However, it constantly forms different objects, which I base decisions off - I demand / supply these objects. Once the object is 'created', imagine a corresponding D&S curve is created.

A 'double bottom' at 1300 after the market has fallen for a week, is a different object to a market which has rallied all week to hit 1300.

[atto]

Okay, I understand what you're getting at. You're considering an upward-biased market (according to your own analysis) a different good than a downward-biased market (same).

Under that line of thinking, I agree. There are biases that cause me to value the market higher than it is, so I trade. Thanks for explaining that out.

[david111]

There is no law of supply and demand, its a fallacy.
Market movers act on "needs" and ES is used mostly for Hedging thus in essence when you trade ES the "law of supply and demand" is in reverse most of the time since the 9000 Hedge funds use the ES/SPY/SPX for Hedging against position Long/short on stocks or cross country arbing etc.

No offense, but trying to apply logical laws to Chaos is absurd, there are 1xxxxxxxxx variables that move the markets.
Its all a game of probabilities, Nothing is constant, and nothing is "law". Every day and every second in the market is unique.
Market movers don't scalp they arb...

Sorry for the harsh comment, but trading should never be your primary resource of income, you shopuld trade only what you can loose. Invest in Real estate and renovate/sell with leverage on non recourse bargains or foreclosures - let the bank take most of the risk...

	Quote:	smwinc
	Let's take a step back. The first problem we are keeping it simple, and everyone is going to see the ES as something different. That's another inherent problem - As an intraday trader, a lot of how I trade is based on patterns. In my view, each pattern throughout the day is a different product. I will always Buy (Demand) certain pattern within the market depth, and I will always Sell (Supply) certain patterns in the depth. Price is utterly irrelevant. If I had to compare the ES to an item, I would compared it to Lego blocks (the plastic blocks that connect to each other for any poor soul who has never seen lego). Throughout the day, it remains Lego. It is always $50 x S&P 500 . However, it constantly forms different objects, which I base decisions off - I demand / supply these objects. Once the object is 'created', imagine a corresponding D&S curve is created. A 'double bottom' at 1300 after the market has fallen for a week, is a different object to a market which has rallied all week to hit 1300.

[firewalker]

	Quote:	david111
	There is no law of supply and demand, its a fallacy. Market movers act on "needs" and ES is used mostly for Hedging thus in essence when you trade ES the "law of supply and demand" is in reverse most of the time since the 9000 Hedge funds use the ES/SPY/SPX for Hedging against position Long/short on stocks or cross country arbing etc. No offense, but trying to apply logical laws to Chaos is absurd, there are 1xxxxxxxxx variables that move the markets. Its all a game of probabilities, Nothing is constant, and nothing is "law". Every day and every second in the market is unique. Market movers don't scalp they arb... Sorry for the harsh comment, but trading should never be your primary resource of income, you shopuld trade only what you can loose. Invest in Real estate and renovate/sell with leverage on non recourse bargains or foreclosures - let the bank take most of the risk...

(1) There's not much I can say to that, as most of it is diametrically opposed to how I see things.

(2) I don't see the market as 'chaos', although there is a lot of irrationality in human behaviour, I consider some of the price action actually very logical.

(3) It wasn't me who said the markets moved according to supply and demand, it was Wyckoff and probably others before and after him as well.

(4) I think that it goes without saying that 'trading should never be your primary resource of income' is probably going against the purpose of what many on this trading forum want to achieve, which is trading for a living.

(5) As for risk, I'd rather take care of that myself any day, then let someone else do it for me.

[firewalker]

	Quote:	smwinc
	For the record, I believe we were previously talking about different things here. (A) That statement is assuming that the good remains the same. (F) - Not realistic in the real world. They teach this one in Economics 101. The whole assumption of "participants will behave rationally" complicates it. We all should be able to think of at least 10 trades where we didn't behave rationally. In addition, we are only ever guessing in the market - we take actions that we 'believe' will maximise benefit. After all, you wouldn't buy if you didn't think it would go up, while simultaneously someone is selling it to you, thinking it will go down. We are both striving towards utility maximization, however one of us will quite simply be wrong. Clearly it gets more complex, I am keeping it simple here too.

Thanks for taking the time to reply smwinc. You clearly have a good understanding of all of this and you seem like a smart guy. Not to mention you make interesting analogies. But... keep in mind, you don't need to convince me that market participants don't act rationally. I'm with you on (almost) everything you said, but it wasn't me who stated the markets moved according to the law of supply and demand. In fact, it was I who questioned if that really was the case... so we might be more in agreement than we previously thought.

There are basically two assumptions we make when we are talking about the laws of micro-economics. One is that the goods being offered are all the same. And you've already pointed out that is not necessarily always the case.

The other one hasn't been mentioned yet. Or at least not explicitly. The law of supply and the law of demand requires a market of 'perfect competition'. This basically means that no single buyer or seller can influence the market price... well we know this is not the case in the short term. Otherwise we wouldn't be talking about the smart money, or the professional money, versus the herd, etc.

[zdo]

	Quote:	david111
	There is no law of supply and demand, its a fallacy. Market movers act on "needs" and ES is used mostly for Hedging thus in essence when you trade ES the "law of supply and demand" is in reverse most of the time since the 9000 Hedge funds use the ES/SPY/SPX for Hedging against position Long/short on stocks or cross country arbing etc. No offense, but trying to apply logical laws to Chaos is absurd, there are 1xxxxxxxxx variables that move the markets. Its all a game of probabilities, Nothing is constant, and nothing is "law". Every day and every second in the market is unique. Market movers don't scalp they arb...

Thanks.
Harsh!
Radical!?
Out of the box??
What do you mean by "Market Makers" ??

	Quote:	david111
	let the bank take most of the risk...

In trading...just let the yen take most of the risk

[DbPhoenix]

	Quote:	firewalker
	(3) It wasn't me who said the markets moved according to supply and demand, it was Wyckoff and probably others before and after him as well.

Not exactly. As I tried to point out dozens of posts ago, the law of supply and demand as it relates to economics is not the same as the law of supply and demand as it relates to the markets no matter how much one may believe otherwise.

It was to avoid this source of confusion that I stopped referring to "supply and demand" years ago and began using "buying pressure and selling pressure" instead, which is what Wyckoff means. Unfortunately, I had to pick up the supply and demand terminology again when nic and I started the Wyckoff Forum. That, as it turns out, may have been a mistake.

The market does not sell goods and services. It sells hopes and dreams, and the "law of supply and demand" that operates in the markets is not very different from that which operates in other "tangibles" that have little or no intrinsic value such as fine art, collectibles (depending), gems, and, in certain circumstances, real estate, among other things. Anyone who doesn't understand this is in for a hard time.