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Jens Clever
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What makes stock prices move?

by Jens Clever
Copyright 2003

Every day trader needs to know why prices move.

Unless he or she understands what pushes prices up and down, they canít plan how to act in the market. It is fundamental to successful day trading.

Letís try to analyze what force moves the stock price and then further our understanding of how to apply it to real day trading.

We usually say that the buyers move the price up and the sellers move it down. It seems obvious but many still ask the following question:

Since every trade is a buy and sell at the same time, why does it affect the price?

The difference is, which market participant was actively trading. Only active market participants can really move the stock price.

If the buyers are active, they are hitting the ask, bidding a stock up and chasing it higher. In this case, we would expect the stock to move higher. If the buyers are passive, they are sitting on the bid, willing to buy only if the selling is not too active and ready to drop the bid lower if selling increases. This type of buying wonít cause the stock to move higher. The same applies for the converse case of selling. If active selling came about where sellers were hitting the bid sizes while lowering their ask price, the stock would most likely move lower. Therefore, price movement is a matter of confidence and beliefs in different market participants that determines the supply and demand ratio.

Obviously, stocks do not go straight up or straight down. Therefore a day trader needs to learn how to determine the points, when the stock will reverse in direction in order to capitalize on such an event either with an entry or an exit.

Suppose a stock price started to rise because the buyers strongly believe it represented good value at the current level and should trade higher. Sellers consequently are willing to lift their offers because they are convinced by increase in buying pace that the current price level is too low and the stock can be sold higher.

At some point, we can see how this set of beliefs changes. The buyers start to doubt that a stock still has a significant upside and want to take their profits. The sellers doubt they can sell a stock higher and start to increase selling pressure. As a result, the stock shows a possible turn. This is a fundamental for day traders. (More articles on day trading.)

©2003 DayTradingCoach.com