While you might assume understanding how prices move in stock market is a basic concept, it's worth pausing to consider if you truly grasp the mechanism behind price movement from one level to another. The prevailing response often given when inquiring about the factors driving stock prices is the interplay between supply and demand.
You might be wondering about the factors that can greatly affect stock market prices. When individuals with extensive trading experience are questioned about how prices transition from one price to another, they often express uncertainty about the precise mechanisms and unfolding dynamics involved in this process.
In this business, there are only two ways for anyone to succeed, regardless of the strategies they employ or how simple they may be. One must either buy something at a lower price and sell it at a higher price or sell it at a higher price and buy it back at a lower price. Do you agree with me on this, & would you also agree that everyone trades with the intention of making money? In other words, it is unlikely that anyone intentionally enters a trade with the expectation that it will result in a loss.
If the last reported price displayed on the screen is 19, how does it get to 20?
The price 19, representing the value at that specific moment. Then 18 is low & 20 is high. What is the only way for it to reach 20? Well, someone must believe that 20 is a good price, prompting them to buy at a higher value relative to the last price. Essentially, in order for this to happen, all the offers at 19 must have been executed. Anyone who had an offer to sell at 19 and desired to sell at that price would have their order filled. By taking out all those offers, the price can then reach 20.
Now, the only way to make money is by buying low and selling high or selling high and buying low, why would anyone in the world bid above the previously posted price in the market? Someone is willing to bid a market up to the next highest price if that person is stepping out, saying that my conviction that the price is going 20 or beyond is so great that I am willing to do the opposite of what I need to do to make money. Take a moment to think about what you've just read.
In every trade, there are two parties involved: the buyer and the seller, and the outcome of the next tick will determine whether one of them emerges as the winner or if one of them ends up as the loser. Every trade, there exist fundamentally conflicting beliefs regarding the anticipated future outcomes.
Have you ever intentionally raised the market high? Are there individuals who engage in such practices? The answer is "YES". We acknowledge the existence of traders who possess both financial and sociological means to deliberately raise market high or lower them.
In simple terms, price movements occur due to an imbalance in conviction between traders who expect prices to go up and those who expect prices to go down. That is the only way prices move. Regardless of the reasons people give for their trades or the explanations you hear by stock market experts about the state of the market and its movements, everything ultimately comes down to one factor: an imbalance in conviction.
Price movements occur when someone intentionally raises the bid or lowers the offer, and for this to happen, there needs to be a strong sense of conviction in their beliefs, fuelled by the belief that the next price tick will result in their favour, making them a winner.
Every trade is essentially a clash of wills and beliefs, as traders contend with each other over their expectations for the next price movement and their perception of the future. When two people make a trade, they have completely different expectations about what will happen in the future.
As you continue your journey in the world of trading, remember that buying low and selling high or selling high and buying low remain the fundamental principles for making profits. The market is influenced by individuals with varying degrees of conviction, shaping the trajectory of prices with each trade.
I invite you to reflect on what you've learned and consider how you can apply this newfound understanding in your own trading strategies. Share your thoughts and experiences with our community, as we collectively strive to gain a deeper comprehension of the intricate dynamics of the stock market.
Remember, the next time you hear explanations for price movements or witness the outcomes of trades, you possess a deeper insight into why prices are changing. Embrace this knowledge, trust your analysis, and navigate the market with confidence.
Before we conclude, it's important to give credit to Mark Douglas, whose profound insights into the psychology of trading have greatly influenced the concepts discussed in this blog. His work has provided valuable perspectives on the interplay between conviction, price movements, and the clash of beliefs in the stock market. We extend our gratitude to Mark Douglas for his significant contributions to the trading community.
Thank you for joining us on this exploration of the fascinating world of stock market price movements. Happy trading and may your future endeavour's be prosperous!
Image credits : Image by pch.vector on Freepik
