supply and demand

Supply and demand is the cornerstone of economics, one of the social sciences. It is dealt with at length here, because technical analysis has its origins in supply and demand. Over the last 40 years "TA" has evolved (acquired many layers) to the extent its origins have been lost. The object here is to strip away the outer layers and get to the underlying source. If you do that you inevitably arrive back at volume. Drill down through technical analysis you come to supply and demand. Drill down through supply and demand you come to volume.

Another important building block of economics is the "law of unintended consequences"

economics and collective behaviour
Supply and demand is the measurement of the economic desires of a social collective, a conceptual crowd. The result is not representative of any one individual within the social collective. is allied to .. Gustave Le Bon (1841-1931) analysis, the crowd submerges the individual character ... where ... "an agglomeration of people present very different characteristics from those of the individuals composing it". In gathering together, the crowd reach a state called the collective mind.

economists
The primary laws of supply and demand evolved through the works of the following economists

Adam Smith, 1723-1790, Priest, economist, philosopher, Professor of Logic Glasgow University 1751
John Maynard Keynes, 1883-1946, father of modern economics, "Treatise on Probability" 1921
Paul A Samuelson, 1915- Professor Economics Massachusetts Institute Technology. Nobel Prize 1970
Richard G Lipsey, Phd, London, Professor Economics Simon Fraser University
Milton Friedman, Phd. 1912 - Professor, Nobel Prize 1976.

Joseph Granville, economist, extended these works to technical analysis 1970


theory of supply and demand
The theory of supply and demand is a central part of economics about price in competitive markets. Demand is a force which tends to increase the price of an item, and supply a force which tends to lower price. When the two forces balance one another, price will neither rise nor fall, and will stabilize. This stability leads to "equilibrium" of price. "Price equilibrium" exists when price is balanced at the point where the quantity supplied equals the quantity demanded. At equilibrium, there is no competition to buy or sell, because everyone can buy or sell however much they wish, at the going price. Whenever the market moves away from equilibrium, competition will arise and tend to force it back.

An increase in the number of buyers will increase demand simply because buying power is increased.
An increase in the number of sellers will increase supply simply because selling power is increased.

law of supply and demand
Supply = quantity offered,  Demand = quantity wanted.

The theory that prices are determined by the interaction of supply and demand - where
An increase in supply will lower prices unless accompanied by an increase in demand.
An increase in demand will raise prices unless accompanied by an increase in supply.

price determinant dictum
Macro : If government determines the price of money, the market will determine the supply.
Micro : If a manufacturer sets the price of a product, the market will determine the volume it will take.
If sellers wish to determine price, buyers will determine volume.
If buyers wish to determine price, sellers will determine volume.
Governments, manufacturers, buyers or sellers, cannot control both price and volume.

volume determinant dictum
Macro : If government determines the volume of money in circulation, the market will determine price.
Micro : If a manufacturer sets the volume of product produced, the market will determine the price received.
If sellers wish to determine volume, buyers will determine price.
If buyers wish to determine volume, sellers will determine price.
Governments, manufacturers, buyers or sellers, cannot control both price and volume.

supply and demand - what is it
Prices move up when the desire of buyers, exceeds the sellers desire.
Prices move down when the desire of sellers, exceeds the buyers desire.

from Paul A Samuelson, Economist, Massachussetts Institute of Technology USA
The demand schedule.
At any one time a definite relationship exists between the market price, and the quantity demanded.
This relationship between price and quantity is called the demand schedule, or curve.
The supply schedule - supply curve
The supply schedule is the relationship between market prices and the quantities sellers are willing to supply.
Equilibrium of supply and demand
The equilibrium price is that price at which the quantity willingly supplied and the quantity willingly demanded are equal. Competitive equilibrium must be at the intersection point of the supply and demand curves. At this equilibrium the price is stable.

Sounds like charting doesn't it. Well it is. And it was written in 1960 by an economist who is a fundamentalist. Economics began in the 17th century with Adam Smith, a priest and economist, formalized by John Maynard Keynes, and perfected by Samuelson. It is the forerunner of today's technical analysis, the only difference being, there is now about 50 degrees of separation between the two. Whichever way you lean, an understanding of supply and demand is worthwhile. Samuelson's 1960 text has classic graphs of supply and demand curves and how they respond to one another. Adam Smith was appointed professor of logic at Glasgow university in 1751. Today's Technical Analysis juggernaut began to gather significant momentum in the 1970's. Courtesy of Granville, also an economist.

measuring supply and demand
How can supply and demand be measured. Net demand is measured by adding the volume when it's a buy and subtracting volume when it's a sale. (note the necessity of identifying a trade as a buy or sell). The resulting calculation is On-balance-volume as designed by Joseph Granville, in 1963, and modified for intraday trading.


probability
probably the single most important topic   It is the "WHEN" component of all the other topics.

There is a great deal of material available on this subject. Most of it relates to mathematical statistical theory. In the book The Sphere by Michael Crichton (of Jurassic Park fame), one of the main characters is a university professor who specializes in probability of human behaviour. The professor is able to analyze shifts in social conditions and extrapolate from that the expected effects in either a group's or an individual's behaviour. (The concept of the ability to predict human behaviour (non-statistically) in response to given events is well articulated in The Sphere. see also crowd behaviour.) I have tried to obtain further details of this faculty. The only reference found was a single chapter in one of Carl Jung's 20-odd books on psychology.

Probability and the stock market
If the Dow Jones index goes up overnight, there is a high degree of probability the ASX200 index will go up during our day session. Equally, if the Dow Jones index goes down overnight, there is a high degree of probability the ASX200 index will go down during our day session.
However...
The top 10 ASX stocks comprise 60% of the ASX200 index; the remaining 190 stocks comprise 40% of the index. The five retail banks are contained within the top 10 stocks, comprise 25% of the ASX200 index. US Banks comprising 20% of the DOW are merchant banks. The NAB, ANZ and Westpac all trade on the NYSE, together with NewsCorp, BHP, RIO, WMC, TLS. So if the DOW goes up strongly but the six Australian stocks (NAB,ANZ,BHP,NWS,RTP,WBK) do not trade up strongly in New York, it is highly probable the ASX200 will not go up strongly. Should the six stocks go down, it is highly probable the ASX200 will go down against the DOW going up. As the night SPI tracks Globex, mispricing often results. The 5 banks are 50% of the ASX top 10 and 25% of the ASX200. By comparison the US auto industry, comprises 20% of total US consumption. source. yahoo finance 040804.
However...
Behavioural probability suggests there is a strong possibility the SPI would have gone up intra-night, (in lockstep with Globex) and will open the day session high and then lose the mispricing by coming back to the ASX200 by 10:15 am.
For those who are looking, here is the greatest source of mispricing that can occur in the SPI. Arbitrageurs in the physical markets will not allow the same stock in one market move too far away from the other market.



many of the New Market Wizards interviewees were professional blackjack players.

blackjack is real-time probability in action
How to practice trading and probability simultaneously.
this topic examines the concept of favourability, where it is unfavourable to enter short while commercials are hitting to the upside, and unfavourable to enter long while commercials are hitting to the downside.

Blackjack is continuous real-time probability in action.
If you have read most of the usual literature like Market Wizards and New Market Wizards, you may have noticed that a disproportionate number of interviewees were, or had been, professional gamblers. That is not a coincidence. Most successful professionals have what is known as gambler's instinct. A significant number were blackjack players. So what is it about blackjack that lends itself to trading?
The professional rules of playing the game to win are identical to the rules of trading futures.
Casino blackjack is the cheapest training course you will find. The "how to play" rules are simple and "basic strategy" can be learnt in about a day. Mastery of the game will take about a month to acquire, subconscious mastery probably longer.

The two most important rules are:
    ○ know when the game is favourable
    ○ know when the game is unfavourable
High value cards (8 and higher) are favourable to the player and unfavourable to the dealer.
Low value cards (6 and below) are favourable to the dealer and unfavourable to the player.
There are 12 picture cards and 4 ten cards in a deck of 52. That's 16 cards that have a face value of 10 in blackjack. So 1 in every 3.25 cards is a ten. In a perfectly distributed deck, every 4th card out should be a ten card. Perfect distribution rarely happens, and clumping occurs, where high cards are grouped together. For a period of time the deck will be favourable and for an equal period of time, unfavourable.
If the first two cards out are low cards, then the unplayed remainder of the deck is rich in ten cards and the probability of the next card out being a ten increases. If the first two cards out are ten cards, then the unplayed remainder of the deck is deficient in ten cards and the probability of the next card out being a ten decreases. So you would only play when the deck is rich in ten cards. Stay out when it's deficient, or even neutral.
If you are at a casino, watch a table. Judge the favourability of the table and observe the behaviour of the players at the table as the favourability of the game changes. Think about how you would behave. Think about the predictability of the behaviour of the other players. One of the advantages of the casino as a training ground is that if one table is unfavourable, you can move to another table, or another. There are plenty of tables. That's good training in mental discipline.

With the SFE there is only the one table. You can't go to another table. If conditions are unfavourable you can only get out or stay out. So you need a very clear ability to sense the condition of the market, its favourability, and whether to trade or not. I can only repeat that the two most important rules out of 20 are those stated above.

You don't need to visit the casino. There are a number of blackjack software games available. Suppose you learnt how to play the game first, then went to the casino with a bank of $200 and played until you were either up $100 or down $100. In the event you lost on each trip, by the time you had lost $1000 you would have learnt more about yourself - realtime rapid decision making, realtime money management, how you handle stress - than you would ever learn on a single weekend at a $3000 technical analysis course.

Card counting is equivalent to tape reading by Jesse Livermore in Edwin LeFevre's book Reminiscences of a Stock Operator. See Linda Bradford Raschke's article on Tape Reading.
Blackjack is the best realtime mental training exercise in probability, game (market) condition assessment and money management I have come across.

What are the advantages?
Blackjack demonstrates probability in action.
Repetition is one of the most important methods of learning. When trading futures, depending on your style, you will probably do, say, four trades on a good day. As a decision making training environment, that is not a lot. On a $10 blackjack table, you put out your $10 if it's favourable and the hand is played. A result is known immediately - you win or lose. Your total risk was $10. If you stay at the table and play every hand, you will play approximately 60 hands in an hour. That's 60 decisions, under pressure, watching the play of the cards, making constant re-evaluations of favourability, interference from other players, loud music, noise, drinks waiters...

The ratio of probability in blackjack are 51% to the house and 49% to the player. You should win 49 hands out of 100. Because blackjack does not have unlimited exposure, it will assist you to become desensitized to winning and losing.

supply and demand

Supply and demand is the cornerstone of economics, one of the social sciences. It is dealt with at length here, because technical analysis has its origins in supply and demand. Over the last 40 years "TA" has evolved (acquired many layers) to the extent its origins have been lost. The object here is to strip away the outer layers and get to the underlying source. If you do that you inevitably arrive back at volume. Drill down through technical analysis you come to supply and demand. Drill down through supply and demand you come to volume.

 

Another important building block of economics is the "law of unintended consequences"

 

economics and collective behaviour

Supply and demand is the measurement of the economic desires of a social collective, a conceptual crowd. The result is not representative of any one individual within the social collective. is allied to .. Gustave Le Bon (1841-1931) analysis, the crowd submerges the individual character ... where ... "an agglomeration of people present very different characteristics from those of the individuals composing it". In gathering together, the crowd reach a state called the collective mind.

 

economists

The primary laws of supply and demand evolved through the works of the following economists

 

Adam Smith, 1723-1790, Priest, economist, philosopher, Professor of Logic Glasgow University 1751

John Maynard Keynes, 1883-1946, father of modern economics, "Treatise on Probability" 1921

Paul A Samuelson, 1915- Professor Economics Massachusetts Institute Technology. Nobel Prize 1970

Richard G Lipsey, Phd, London, Professor Economics Simon Fraser University

Milton Friedman, Phd. 1912 - Professor, Nobel Prize 1976.

 

Joseph Granville, economist, extended these works to technical analysis 1970

 

 

theory of supply and demand

The theory of supply and demand is a central part of economics about price in competitive markets. Demand is a force which tends to increase the price of an item, and supply a force which tends to lower price. When the two forces balance one another, price will neither rise nor fall, and will stabilize. This stability leads to "equilibrium" of price. "Price equilibrium" exists when price is balanced at the point where the quantity supplied equals the quantity demanded. At equilibrium, there is no competition to buy or sell, because everyone can buy or sell however much they wish, at the going price. Whenever the market moves away from equilibrium, competition will arise and tend to force it back.

 

An increase in the number of buyers will increase demand simply because buying power is increased.

An increase in the number of sellers will increase supply simply because selling power is increased.

 

law of supply and demand

Supply = quantity offered,  Demand = quantity wanted.

 

The theory that prices are determined by the interaction of supply and demand - where

An increase in supply will lower prices unless accompanied by an increase in demand.

An increase in demand will raise prices unless accompanied by an increase in supply.

 

price determinant dictum

Macro : If government determines the price of money, the market will determine the supply.

Micro : If a manufacturer sets the price of a product, the market will determine the volume it will take.

If sellers wish to determine price, buyers will determine volume.

If buyers wish to determine price, sellers will determine volume.

Governments, manufacturers, buyers or sellers, cannot control both price and volume.

 

volume determinant dictum

Macro : If government determines the volume of money in circulation, the market will determine price.

Micro : If a manufacturer sets the volume of product produced, the market will determine the price received.

If sellers wish to determine volume, buyers will determine price.

If buyers wish to determine volume, sellers will determine price.

Governments, manufacturers, buyers or sellers, cannot control both price and volume.

 

supply and demand - what is it

Prices move up when the desire of buyers, exceeds the sellers desire.

Prices move down when the desire of sellers, exceeds the buyers desire.

 

from Paul A Samuelson, Economist, Massachussetts Institute of Technology USA

The demand schedule.

At any one time a definite relationship exists between the market price, and the quantity demanded.

This relationship between price and quantity is called the demand schedule, or curve.

The supply schedule - supply curve

The supply schedule is the relationship between market prices and the quantities sellers are willing to supply.

Equilibrium of supply and demand

The equilibrium price is that price at which the quantity willingly supplied and the quantity willingly demanded are equal. Competitive equilibrium must be at the intersection point of the supply and demand curves. At this equilibrium the price is stable.

 

Sounds like charting doesn't it. Well it is. And it was written in 1960 by an economist who is a fundamentalist. Economics began in the 17th century with Adam Smith, a priest and economist, formalized by John Maynard Keynes, and perfected by Samuelson. It is the forerunner of today's technical analysis, the only difference being, there is now about 50 degrees of separation between the two. Whichever way you lean, an understanding of supply and demand is worthwhile. Samuelson's 1960 text has classic graphs of supply and demand curves and how they respond to one another. Adam Smith was appointed professor of logic at Glasgow university in 1751. Today's Technical Analysis juggernaut began to gather significant momentum in the 1970's. Courtesy of Granville, also an economist.

 

measuring supply and demand

How can supply and demand be measured. Net demand is measured by adding the volume when it's a buy and subtracting volume when it's a sale. (note the necessity of identifying a trade as a buy or sell). The resulting calculation is On-balance-volume as designed by Joseph Granville, in 1963, and modified for intraday trading.

 

 

probability

probably the single most important topic   It is the "WHEN" component of all the other topics.

 

There is a great deal of material available on this subject. Most of it relates to mathematical statistical theory. In the book The Sphere by Michael Crichton (of Jurassic Park fame), one of the main characters is a university professor who specializes in probability of human behaviour. The professor is able to analyze shifts in social conditions and extrapolate from that the expected effects in either a group's or an individual's behaviour. (The concept of the ability to predict human behaviour (non-statistically) in response to given events is well articulated in The Sphere. see also crowd behaviour.) I have tried to obtain further details of this faculty. The only reference found was a single chapter in one of Carl Jung's 20-odd books on psychology.

 

Probability and the stock market 

If the Dow Jones index goes up overnight, there is a high degree of probability the ASX200 index will go up during our day session. Equally, if the Dow Jones index goes down overnight, there is a high degree of probability the ASX200 index will go down during our day session.

However...

The top 10 ASX stocks comprise 60% of the ASX200 index; the remaining 190 stocks comprise 40% of the index. The five retail banks are contained within the top 10 stocks, comprise 25% of the ASX200 index. US Banks comprising 20% of the DOW are merchant banks. The NAB, ANZ and Westpac all trade on the NYSE, together with NewsCorp, BHP, RIO, WMC, TLS. So if the DOW goes up strongly but the six Australian stocks (NAB,ANZ,BHP,NWS,RTP,WBK) do not trade up strongly in New York, it is highly probable the ASX200 will not go up strongly. Should the six stocks go down, it is highly probable the ASX200 will go down against the DOW going up. As the night SPI tracks Globex, mispricing often results. The 5 banks are 50% of the ASX top 10 and 25% of the ASX200. By comparison the US auto industry, comprises 20% of total US consumption. source. yahoo finance 040804.

However...

Behavioural probability suggests there is a strong possibility the SPI would have gone up intra-night, (in lockstep with Globex) and will open the day session high and then lose the mispricing by coming back to the ASX200 by 10:15 am.

For those who are looking, here is the greatest source of mispricing that can occur in the SPI. Arbitrageurs in the physical markets will not allow the same stock in one market move too far away from the other market.

 

 

 

many of the New Market Wizards interviewees were professional blackjack players.

 

blackjack is real-time probability in action

How to practice trading and probability simultaneously.

this topic examines the concept of favourability, where it is unfavourable to enter short while commercials are hitting to the upside, and unfavourable to enter long while commercials are hitting to the downside.

 

Blackjack is continuous real-time probability in action.

If you have read most of the usual literature like Market Wizards and New Market Wizards, you may have noticed that a disproportionate number of interviewees were, or had been, professional gamblers. That is not a coincidence. Most successful professionals have what is known as gambler's instinct. A significant number were blackjack players. So what is it about blackjack that lends itself to trading?

The professional rules of playing the game to win are identical to the rules of trading futures.

Casino blackjack is the cheapest training course you will find. The "how to play" rules are simple and "basic strategy" can be learnt in about a day. Mastery of the game will take about a month to acquire, subconscious mastery probably longer.

 

The two most important rules are:

  • know when the game is favourable
  • know when the game is unfavourable

High value cards (8 and higher) are favourable to the player and unfavourable to the dealer.

Low value cards (6 and below) are favourable to the dealer and unfavourable to the player.

There are 12 picture cards and 4 ten cards in a deck of 52. That's 16 cards that have a face value of 10 in blackjack. So 1 in every 3.25 cards is a ten. In a perfectly distributed deck, every 4th card out should be a ten card. Perfect distribution rarely happens, and clumping occurs, where high cards are grouped together. For a period of time the deck will be favourable and for an equal period of time, unfavourable.

If the first two cards out are low cards, then the unplayed remainder of the deck is rich in ten cards and the probability of the next card out being a ten increases. If the first two cards out are ten cards, then the unplayed remainder of the deck is deficient in ten cards and the probability of the next card out being a ten decreases. So you would only play when the deck is rich in ten cards. Stay out when it's deficient, or even neutral.

If you are at a casino, watch a table. Judge the favourability of the table and observe the behaviour of the players at the table as the favourability of the game changes. Think about how you would behave. Think about the predictability of the behaviour of the other players. One of the advantages of the casino as a training ground is that if one table is unfavourable, you can move to another table, or another. There are plenty of tables. That's good training in mental discipline.

 

With the SFE there is only the one table. You can't go to another table. If conditions are unfavourable you can only get out or stay out. So you need a very clear ability to sense the condition of the market, its favourability, and whether to trade or not. I can only repeat that the two most important rules out of 20 are those stated above.

 

You don't need to visit the casino. There are a number of blackjack software games available. Suppose you learnt how to play the game first, then went to the casino with a bank of $200 and played until you were either up $100 or down $100. In the event you lost on each trip, by the time you had lost $1000 you would have learnt more about yourself - realtime rapid decision making, realtime money management, how you handle stress - than you would ever learn on a single weekend at a $3000 technical analysis course.

 

Card counting is equivalent to tape reading by Jesse Livermore in Edwin LeFevre's book Reminiscences of a Stock Operator. See Linda Bradford Raschke's article on Tape Reading.

Blackjack is the best realtime mental training exercise in probability, game (market) condition assessment and money management I have come across.

 

What are the advantages?

Blackjack demonstrates probability in action.

Repetition is one of the most important methods of learning. When trading futures, depending on your style, you will probably do, say, four trades on a good day. As a decision making training environment, that is not a lot. On a $10 blackjack table, you put out your $10 if it's favourable and the hand is played. A result is known immediately - you win or lose. Your total risk was $10. If you stay at the table and play every hand, you will play approximately 60 hands in an hour. That's 60 decisions, under pressure, watching the play of the cards, making constant re-evaluations of favourability, interference from other players, loud music, noise, drinks waiters...

 

The ratio of probability in blackjack are 51% to the house and 49% to the player. You should win 49 hands out of 100. Because blackjack does not have unlimited exposure, it will assist you to become desensitized to winning and losing.

Additional information