Depth of Market. Advice

Discussion in 'Trading' started by Grant, Oct 6, 2006.

  1. Grant

    Grant

    Gentlemen (that includes women),

    Only recently, following posts on this forum, have I started to look at the depth-of-market.

    Despite the abundance of good advice from here (saved and printed) I haven’t found the time for due attention.

    Therefore, I would like info on the basics, please. The following show my (jumbled/contradictory) thoughts, hence the need for clarification.

    A minor query to start: do sellers “offer”, while buyers “bid”? But we buy on the offer and sell on the bid. I keep hearing references to ”X on the bid, Y on the offer”.

    I watched the dom for DJ Euro Stoxx future briefly today (Friday) trying to making sense of what I was seeing. The following index levels are guesses but the volume are fairly accurate:

    800 at 3953, 3954 for 200 (if that is the correct terminology).

    How was this to be interpreted in relation to possible price action?

    There were 800 sellers (supply), but only 200 buyers (demand). More sellers than buyers usually indicates a potentially weakening market but there is only 1 buyer per 4 sellers.

    Therefore, all the potential sales (weakening market) cannot be filled; and therefore, the market will not fall . But using the housing market analogy, a lack of a sales (lack of buyers) will drive down house prices, ie will become a buyers’ market.

    But is this analogy correct? I don’t think so. House buyers are looking for a good price for something tangible, eg pay £175,000 for something that’s worth £200,000.

    Our traders – buyers – are paying 3954 for 3954; they are not paying 3950 for 3954 (I’m excluding fund managers, etc re relative dividend yield considerations, and using the future as a proxy for the underlying).

    Buyers want to buy low, sellers want to sell high. Because of the imbalance in favour of the buyers, prices should weaken - limited demand, surplus supply. Therefore, the bullish buyers will be buying a falling market.

    If this is the case, then they won’t buy a potentially weakening market. But paradoxically, this could mean a rising market. If buyers are desperate enough, ie sure of their bullish convictions, then will pay higher prices, and the seller will achieve his higher price. I presume this is where higher prices on low volume appears.

    (I’m getting a headache.) What tangled webs we weave.

    Don’t tell me all this is a crock of shit - I won’t learn anything. Tell me the flaws and correct my assumptions.

    Thank you.

    Grant.
     
  2. Grant

    Grant

    Dccraig,

    Thank you for the link - plenty of info, there.

    Too late to read. Bookmarked for tomorrow.

    Goodnight.

    Grant.