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Candlestick chart: Price opened at point A ($ 30.00) Sellers moved into the market and pushed the price down , point B ($29.89)

Why sellers want to move price down? Should they look to sell for higher price instead?

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  • Then why whenever the wick is long (hammer doji): they say that the seller failed to push price down? – Elaine Apr 11 '20 at 22:39
  • Is this from something you're reading? Can you provide link or some context? – Hart CO Apr 12 '20 at 1:26
  • You should add a screenshot of the candlestick chart. – Flux Oct 23 '20 at 5:07
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In a market economy, any price movement can be explained by a temporary difference between what providers are supplying and what consumers are demanding. This is why economists say that markets tend towards equilibrium, where supply equals demand. This is how it works with stocks; supply is the amount of shares people want to sell, and demand is the amount of shares people want to purchase.

If there is a greater number of buyers than sellers (more demand), the buyers bid up the prices of the stocks to entice sellers to get rid of them. Conversely, a larger number of sellers bids down the price of stocks hoping to entice buyers to purchase.

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Stock sellers can't sell at a higher price when the price is at the current price.

Sellers may be selling because:

  • They are closing profitable long positions

  • They are going short because they believe that the stock is going lower

  • They may be delta neutral hedging long delta (short puts and/or long calls).

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They might have options that trigger at the lower price.

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Price opened at point A ($30.00) Sellers moved into the market and pushed the price down, point B ($29.89)

Why sellers want to move price down? Should they look to sell for higher price instead?

The mere presence of sellers pushes the price down. If you do a market offer, you sell for the highest price available.

Alternatively, they could place an ask offer where they ask for a higher price, but then the trade isn't fulfilled now, but at a (maybe much) later time.

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I apologize, I was pretty sick when I posted my response, and I didn’t do a very good job. Let us begin with the basics.

When a corporation goes public, it goes to an investment bank and asks it to make a market for its shares. The market maker wants to assure its own profitability and so drums up as much demand as possible going into the initial public offering. Once that initial demand has passed, supply and demand are, generally, met, and shares do not frequently trade in most cases. That is more true in some periods than others. Bubbles make an interesting special case.

A market maker does something interesting to the short- and long-run supply curves. They use their power to force a break called the bid-ask spread. For that to happen, the curves must intersect to the left or at zero. In other words, the short-run supply and demand curves must not meet. Graphically, it might look like below (please note these curves need not be straight lines).

supplyanddemand

If you imagine the short-run supply curve as including everything except the shares you want to sell, and we will imagine you enter an order to sell 200 shares at market, then you will shift the supply curve of shares to match the demand curve.

The seller is NOT driving down the price. All they are doing is making the two curves intersect at the desired quantity. Please note the short-run supply and demand curves are not the limit book. Instead, it is the limit book plus all those lurkers out there willing either to buy or sell at the desired price and quantity.

There are three dynamics present in this picture that is missing. First, the party that purchased shares from you is now on the supply curve and off of the demand curve. Second, you are now on the demand curve. That is true even if the only case you will buy shares is if the price is zero. You could decide that there is no way you would ever own the shares again. The third thing is that if you look ignore any new parties, including yourself, your counter-party, and the market maker, the curves now look like the graph below.

enter image description here

This is where inventory strategy now comes in. Assuming the market maker was at their optimal allocation of cash and shares, they now find themselves shares heavy and cash light, albeit by a small amount. The market maker wants to sell those shares at more than was paid for them and has to make a decision as to what the new bid-ask spread should be.

If that spread is too wide, then one of two things will happen. Either the market will fail, and trading will stop, or liquidity providers will step in and move the supply and demand curves.

If it is too narrow, liquidity providers will pour in because they can trade at the market maker’s risk. However, and this depends on the trading rules, if the market maker is not obligated to transition share prices from one level to another, then the safety of the liquidity providers is an illusion. If the market maker can walk away, then the liquidity providers can find themselves playing “Musical Chairs,” and the market maker is sitting on the only chair. In that case, the liquidity providers got to be the “greater fool.”

Inventory management is exactly like inventory management of retail stores, except that everything happens very fast, and the wholesaler is taking a big cut. This is not about fancy algorithms or guessing the next event. It is about getting paid to put your money or shares out as inventory to the market.

That also means that if the market is crowded, then competition will drive out all profits. The safest place is also the place you cannot make any money.

One final inventory management observation for you. If a company offers N shares, ignoring short selling for a moment, then the supply curve can never be larger than the number of shares. Likewise, on the demand side, there are a large number of substitutes. If you add in short-selling, then everything becomes complicated because of the borrowing and lending of shares.

If you are to do this, then you need to understand the drivers of supply and demand just as WalMart needs to understand summer fashion in the late winter and early spring.

If you never took a class in microeconomics, you can learn horizontal addition at https://www.youtube.com/watch?v=hy_z6ETIA88.

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  • Sellers do not push down prices, buyers do. Conversely, buyers do not push up prices, why would you want to pay more? You've got that completely backwards. Net aggregate buying volume that takes out the orders at the ask cause price to increase and net aggregate selling volume that takes out the orders at the bid drives price down. And the WalMart example is a poor analogy. The financial markets are an auction. WalMart's inventory on the shelf has a fixed price. – Bob Baerker Apr 13 '20 at 1:10
  • @BobBaerker I fixed it. Lesson learned, never answer questions with a bad fever. – Dave Harris Apr 30 '20 at 17:29

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