So, before we get deeper into technical analysis or market profile, let´s understand it´s building blocks for both of them - price, volume and time.
"Economic theory asserts that in a free market economy the market price reflects interaction between supply and demand: the price is set so as to equate the quantity being supplied and that being demanded." (from Wikipedia)
To understand how price works, let´s use an example. The Ipad example from the "Being a Trader, what does it mean?". An Ipad today costs U$400 at Apple Store, so this is our reference (our value for now). Let´s assume we have a buyer and a seller and they meet at the Apple Market Place. This is a fictitious market where Apple maniacs go to exchange goods.
The buyer wants to find a "good deal" to acquire his Ipad, meaning he wants to pay less then U$400, otherwise he would just go to an Apple store. He is willing to pay up to U$300 for his Ipad. On the other side, the seller would like to sell it for more then U$400, but the only way he can do that (for now) is if he finds a sucker. So for the purpose of this article we will assume that both of our players are informed and the Ipad value is U$400 so no external factor will change this value. The seller would not accept less then U$350.
So the buyer and seller meet. Unless they can get to an agreement in price, there will be no deal. Next step in negotiation is to advertise price. The seller offers U$350 and buyer says U$300. They advertise price again in other to try to close the deal. The seller offers U$340 and buyer says U$310 . Still no deal, until they meet in the middle at U$ 325 just to keep things simple. If by advertising price, they found a way reach an agreement, it would be ok to say that price was only an advertising mechanism. Keep this in mind when you go shopping next time or when you decide to enter a trade.
Was that a good deal?
It was a better deal for the buyer, cause it was able to the Ipad for less than it´s actual value. But we could say that both of their needs were fulfilled. If the seller was able to sell it for more than U$400, than it would have been a better deal for the seller.
Now, think about, how does that deal affect value?
It does not. In this example, value is not affected because there was not enough volume (only one deal) and not enough time (at a random day). If you go to an Apple store the value would be still the same U$400.
How is price affected by supply and demand?
Let´s increase the number of buyers. Two buyers are fighting for one Ipad and they both want to get the Ipad for less than U$400. Now the seller has an advantage because there is an increase in demand and a short supply. The opposite would also be true, if there were more Ipads than buyers. The conclusion is that supply and demand affect price, but still, they would not change the value. I am not saying that they can not, just that in this example they wouldn´t.
What to take from this:
- A good deal is to buy something with a price less than it´s value or to sell it for more than it´s value.
- Price is just an advertisement mechanism
- Supply and demand affects price but
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