“Prices rise because there are more buyers than sellers.”

This is a hoary old saying that needs to be put to bed once and for all. It’s absolutely incorrect, yet it’s everywhere.

Just type “more Buyers than Sellers stock market” or “buyers outnumber sellers stock market” into a search engine for plenty of examples.

In reality, prices rise when buyers are keener than sellers, not because buyers outnumber sellers.

Example

For example, imagine a case in which Livermore Inc. shares have been trading at $100. The situation is that:

• There are two sell orders at $101 for a total of 35,000 shares.
• There are ten buy orders at $99 for a total of 95,000 shares.
• There are more buyers and sellers – so our hoary old saying tells us that the price will rise.

In fact, the situation unfolds with the price falling to $98 because one individual comes along and sells 100,000 shares at market – taking out the 95,000 shares bid at $99 and eating into the shares bid at $98.

Our seller who dumped $100,000 shares at market was the keenest market participant.

Repeat, after me ……

The keenest participants determine the market direction.

Prices rise when buyers are keener than sellers.

Prices fall when sellers are keener than buyers.