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I'm just a little confused with regards to price change. So for every buyer there must be a seller. How does price actually change? I hear it's because there are more buy orders than sell orders or vice versa. But if there's a buyer for every seller how does price gravitate in one direction?

marked as duplicate by keshlam, base64, Dheer, Daniel Anderson, MD-Tech Oct 6 '16 at 10:21

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"For every buyer there is a seller." That rule refers to actual (historical) trades. It doesn't apply to "wannabees."

Suppose there are buyers for 2,000 shares and sellers for only 1,000 at a given price, P. Some of those buyers will raise their "bid" (the indication of the price they are willing to pay) above P so that the sellers of the 1000 shares will fill their orders first ("sold to the highest bidder"). The ones that don't do this will (probably) not get their orders filled.

Suppose there are more sellers than buyers. Then some sellers will lower their "offer" price to attract buyers (and some sellers probably won't). At a low enough price, there will likely be a "match" between the total number of shares on sale, and shares on purchase orders.

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Yes for every order there is a buyer and seller. But overall there are multiple buyers and multiple sellers. So every trade is at a different price and this price is agreed by both buyer and seller.

Related question will help you understand this better.

How do exchanges match limit orders?

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That is mostly true, in most situations when there are more buy orders than sell orders (higher buy volume orders than sell volume orders), the price will generally move upwards and vice versa, when there are more sell orders than buy orders (higher sell volume orders than buy volume orders), the price will generally move downwards. Note that this does not always happen, but usually it does.

You are also correct that for a trade to take place a buyer has to be matched with a seller (or the buy volume matched with the sell volume). But not all orders get executed as trades.

Say there are 50 buy orders in the order book with a total volume of 100,000 shares and the highest buy order is currently at $10.00. On the other side there are only 10 sell orders in the order book with total volume of 10,000 shares and the lowest sell order is currently $10.05.

At the moment there won't be a trade unless a new buyer or seller enters the market to match the opposing side, or an existing order gets amended upper or lower to match the opposing side. With more demand than supply in the order books what will be the most likely direction that this stock moves in? Most likely the price will move upwards.

If a new buyer sees the price moving higher and then looks at the market depth, they would most likely place an order closer to the lowest sell order than the current highest buy order, say $10.01, to be first in line in case a market sell order is placed on the market. As new buy orders enter the market it drives the price higher and higher until the buy orders dry up.

  • So what exactly is happening when you see price completely fall off a cliff (long red candles). I know a lot of the time this is institutional activity. But how does price just completely nosedive? I hear they need a certain amount but orders to execute the size trade they want to place but I just understand how price just collapses in such a quick manner – Brian O Donovan Sep 6 '16 at 11:54
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    Because fear is a greater emotion than greed. Think of it in this way: an uptrend is like climbing up stairs to the top of a cliff and a downtrend is like falling off the cliff. If demand to buy has dried up and some bad news comes out, there may be no support for sellers, so the sellers panic and try to sell at whatever price they can, this triggers stop loss orders creating even more sell order, and then on top of this you also get short sellers trying to profit from a falling market. Not everything is created by institutional activities. – Victor Sep 6 '16 at 12:07

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