3 min read

Why price moves up or down?

Economic principle

If many people buy and there are not enough sellers who would sell the asset to buyers, the price goes up because of high demand. Vice versa, if there is not enough demand and people are selling, the price goes down.

Consider the figure below. The chart shows price movement in time (X axis is time and Y axis is price). If demand is rising and supply is decreasing, the price goes to the upside. If demand is the same as supply, the price is going sideways. And finally, if demand is decreasing and supply is rising, the price is going down.

There are two factors that play an important role here. First, there must be volume to move the price. If no one sells or buys or there is a very little volume, the price does not move or moves very little. Second, the volume must be in a direction (of buyers or sellers) to move the price up or down. If selling and buying pressure is the same (e.g. buyers have the same amount of volume as sellers), the price won’t move.

In the same way, if there is a lot of buying volume, the price can go to the moon (sky-rocket to the upside) or if there is a lot of selling volume, the price can drop (dump). How much the price goes to the given direction is defined by how much volume there is to sell / buy.

The above economic principle has some consequences that traders should be aware of. First, if there is a very little or no volume, it does not take a lot of volume to move the price, e.g. small market cap cryptocurrencies. As a result, such assets are very volatile and risky because one whale, i.e., trader with big volume, can move the price and because manipulation is easy (pump & dump scheme). However, traders can exploit such behavior and have 2x, 10x, 100x or even 1000x profits but also 99.9% loss. 

Second, high-volume assets are generally not volatile, i.e. 5% is considered a high number for the assets such as index SPX500 or pair EURUSD. However, low volatility does not necessarily mean low profits. The broker (or exchange) – the company which enables trading – can borrow money in a so-called leveraged position, i.e., trader buys/sells with more money to make more profits). If a trader takes a leveraged position and the price goes against her to a specified percentage, she is liquidated (all her assets are taken by the broker) because she needs to pay the loan back. Trading on leverage is therefore considered as high-risk activity, especially for non-experienced traders.

Factors impacting price

There are many factors that can influence people who are buying and selling, and as a result, impact price. Traders should follow news, popularity / hype / marketing, growth rate (stock / market cap), market sentiment, inflation (or interest rates), overall market phase (e.g., investors move money to less risky assets, such as USD, in a crypto bear market), trends (e.g., meme coins / ICOs in the crypto bull market), time-zone (how particular news affects the market when Americans wake up), weekend/working day (less volume during weekends), events (such as, people are pulling out profits for Chinese new year).

Regarding the news, it is important to recognize the “buy the rumor, sell the news” strategy. It is often the case that the price is high before the news or event, and it goes down immediately during or after the news is released. Traders buy before the news, because people “talk” about the news before it is released, and sell during the news or shortly after it is released. 

Although the above mentioned factors influence price and traders are advised to follow them, note that all the price movement (including the above factors) is captured on a candlestick chart. Furthermore, price history influences price in the future. Therefore, one of the most important factors to follow is price, including price indicators and price action.

For example, consider asset XRP by Ripple. If there is news about Ripple that the company is being investigated for illegal activity and a trader bought XRP, he will probably want to sell it to minimize risks. However, he (the trader) will probably sell it anyways even without having that information/news mentioned above thanks to the price chart,  because he will see that the asset’s price is falling on the chart.