I have been thinking about whether I should write posts like this or not.
Everyone's journey in trading is different. We all go through our own wins, losses, mistakes, and lessons. Those experiences are unique and cannot really be copied.
But knowledge is different.
Knowledge can be shared.
So from today onward, I want to start a new section on my blog called Concepts, where I will write about the things I have learned so far during my trading journey.
One thing I should mention before we begin: this is a simplified explanation. Real markets are much more complex, but I think understanding the basics first makes everything else easier.
Let's start with a simple question.
How Does Price Move?
Before talking about how price moves, let's first talk about what trading actually is.
Trading, in simple terms, is buying and selling.
Every trade happens because a buyer and a seller agree on a price. That agreement is what moves the market.
Let's use a simple example.
Imagine there are 100 apples for sale.
Some sellers are willing to sell an apple for $1.
Others want $2.
Some won't sell for less than $3.
Now imagine a new research paper comes out saying apples can eliminate harmful bacteria from the body.
Suddenly, more people want apples.
The buyers who are happy to pay $1 quickly buy all the apples available at that price.
Now the cheapest apples left are selling for $2.
Those get bought too.
Then buyers start paying $3.
Then $4.
Then $5.
The price moves higher because the cheaper apples keep getting bought, leaving only the more expensive ones available.
Now imagine another research paper comes out proving the first one was wrong.
Demand starts falling.
Sellers who wanted $5 realise nobody is willing to pay that anymore.
Some lower their prices to $4.
Others lower them to $3.
As buyers and sellers agree on lower prices, the market price moves down.
The news itself does not move the price.
People reacting to the news is what moves the price.
The Order Book
There is one thing I left out of the example.
There is never just one price.
At any moment, there are many buyers and many sellers, all willing to trade at different prices.
That collection of buy and sell orders is called the order book.
Price usually moves from one nearby price level to the next as buyers and sellers continue making trades.
Sometimes price can jump quickly if there are very few orders between two price levels, but most of the time it moves one step at a time through the available orders.
One Last Thing
This is only the basic idea behind price movement.
As this Concepts series continues, I will talk about things like market orders, limit orders, liquidity, and why price sometimes moves much faster than expected.
But before learning any of those, I think it is important to understand one simple idea:
Price moves because buyers and sellers agree on a new price.
I hope this helped you understand the basics a little better.
Bye for now, take care.
0 Comments