Market Theory Definition
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Market is a system of commodity-money relationships that runs according to appropriate laws, connects purchasers (demand reps) and also vendors (supply reps), and forms buy/sell prices. The rate acts as a primary spots for the market connections. It holds (based on the labour theory of value) the monetary value of products as an item of work 
As a whole, 3 kinds of markets can be differentiated:
- Monopolistic competitors with open pricing based on the price competitors, the supposed open market. In this market seller’s earnings is lowered with the boost of products’ list prices, and the other way around. The earnings elasticity coefficient from the list prices is always adverse, and the revenue varies with the modification of list prices adhering to the complex pattern. This market kind is common for numerous items and services markets.
- Perfect competition where sellers are not ready to change the goods’ sales price as a result of a high competition among sellers. Any sort of efforts to transform the cost force the individual to leave the marketplace. This kind is most typical for wholesale markets.
- Monopolistic market where a seller or a team of sellers have a possibility to establish the goods’ prices that is most lucrative for them. Their earnings and revenue is increased according to the rise of products’ list prices, and also, consequently, the suppleness coefficient in such markets is always good.
The researchers felt that the rate has a paramount duty on the market administration mechanism, which is called 3 axioms of Dow Concept  It still continues to be unidentified, how the rate takes care of to regulate the market mechanism and also develop its single correct worth as a market value degree that forms the market in a fantastic as well as strange way that is not yet recognized.
The objectives of this article are:
- Discover the part of price out there administration mechanism based on the principle of balancing interests of its individuals to make certain market stability.
- Determine the types, development nature, reasons of look as well as the extent of communication between various degrees of genuine and virtual market prices.
- Determine the market kind by the nature of transforming the current price as well as by finding out the system of their interconversion.
- Set up a common pattern in between the market of services as well as products as well as the Forex market
- Learn the reasons of formation as well as change of patterns.
- Generate signals for market entry and leave.
- Set up the concept of the Forex market operation.
- Study the significance and also potential of using the market theory final thoughts in order to produce and make use of various signs as well as Professional Advisors for trading.
We are going to begin the development of the marketplace concept by recognizing the passions of its individuals. It is natural to think that the market participants are driven by the possibility to get revenue or various other advantages to please their product and also spiritual requirements. Consequently, we will choose it as an element for keeping the equilibrium of passions for all sides of the market– both sellers and purchasers. Because out there conditions earnings primarily relies on the goods’ list prices, initially we are visiting recognize this reliance.
Dependence of return on the goods’ sales price
Generally, in order to calculate the return (R), all types of costs (C) (variable (Cv) and fixed costs (Cf)) are deducted from total sales (S):
As simple and obvious this formula may be, it also includes the dependence from the goods’ sales price (Ps) in the implicit form, which complicates the analysis, if Ps changes. Let’s try to obtain the dependence of return on the sales price in the explicit form.
We know that in the market conditions the dependence of the quantity of sold goods (Q) on the sales price (Ps) can be expressed with the hyperbole equation that reflects the law of supply and demand:
By multiplying both parts of the equation by Ps, we obtain the dependence of total sales (St) on sales price (Ps), and since QPs = S, then:
Therefore, in the market conditions the dependence of total sales (St) on the sales price (Ps) is linear, and now the coefficients in equations (2) and (3) acquire a clear physical meaning, namely, the S coefficient is the maximum virtual sale achieved by the unlimited decrease of Ps to its insignificant values, and it indirectly reveals the potential market demand for these goods. We will mark Y coefficient as the elasticity of total sales from the goods’ sales price, which numerically reveals the change of total sales when the goods’ sales price changes by unit in the payment currency of goods’ price.
Obviously, if there is a competition in market conditions, the elasticity always holds a negative value, i.e. Y ≤ 0 and the increase of sales price (Ps) by unit leads to the decrease of total sales by Y units in the payment currency of goods’ price and, vice versa, the decrease of sales price (Ps) by unit leads to the increase of total return by Y units.
If there is an actual data array consisting of n sets of Ps and St values, numerical values of Y elasticity and virtual S sales are defined using the method of least squares:
Now, if we zero out the equation (3), we will find the limit realization price (Pl) above which goods can’t be sold on this market because it exceeds the allowable value, and goods lose their attractiveness to buyers:
We will introduce the concept of the competition level (C) on the analyzed market and determine its numerical value as the ratio of difference between the sales price and the original price (Po) (its buy price and the production cost) towards the difference between the limit realization price (Pl) and the original price (Po):
For example, the current or actual level of competition Cs on the market at the sales price (Ps) is calculated accordingly:
Let’s introduce the degree of excess Ps sales price (ds) the original price (Po) and the degree of limit realization price (dl):
Variable costs (Cv) consist of expenses for buying or producing merchantable goods (Cg) and other variable costs (Co) that depend on the total sales (St). We will define them through the fraction of costs for obtaining goods in the total sales L (level of competition) at the current sales price (Ps) and the fraction of other variable costs (v) in the total sales (St):
Net revenue Sp will be presented through its h fraction in the total sales (St):
The impact of fixed costs (Cf) on the return will be considered with the coefficient of fixed expenses (df) calculated accordingly:
Presence of other variable costs (Co) from their v fractions leads to the increase of prices for goods, obtained at the Po price, to the Pv value:
Let’s introduce the market price (Pm), which will be defined numerically using the dm market coefficient as follows:
Now, if we introduce the concept of optimal realization price (Popt) that guarantees the maximum return (Rmax), the equation (1) becomes a formula to determine the return (R) at any values of sales price (Ps):
If we zero out the first derivative from (25) by Ps, we will obtain the ratio to determine Popt:
The concept of an optimal level of exceeding the realization price (dopt) is entered here:
By placing the Ps=Popt in (25), we will get the form to define the maximum return:
If we zero out the return formula (25), we will obtain the ratio to determine two break-even points P1 and P2 as solutions to the obtained quadric equation:
Now the equation (25) can also be presented as:
By comparing (25) and (35) we get:
Therefore, the market price (Pm) is an arithmetic average, and the optimal realization price (Popt) is a geometric average price value corresponding to two break-even points.
A French mathematician Louis Cauchy (1789-1857) proved that the arithmetic average of two non-negative numbers is no less than their geometric average, and equality can only be achieved when P1=P2:
Therefore, the optimal realization price of goods (Popt) is always less than the established market price (Pm) depending on the existing competition level, actual values of fixed and variable costs based on the ratio (24):
We are going to name it the Cauchy difference:
Now the ratio for defining the maximum return (28) becomes:
In general, the price hierarchy on the market is built as follows:
The general break-even point (Pg) occurs when meeting the conditions:
Based on (23), (24), (26), (27) and (39) we conclude that the following inequation is always valid on the market:
By solving the inequation (45) towards Po we come to conclusion that to get the return in the current market conditions, the buy price or the regular price (Pr) of goods shouldn’t exceed its maximum value Pol:
Similarly, by solving the inequation (45) towards v, we find that the proportion of other variable expenses is limited with the ratio:
By solving the inequation (28) towards the fixed costs (Cf), we discover that they are limited by the ratio:
Genuine as well as virtual price levels on the market
According to the analyzed theory, multiple actual and online price levels are developed and also operate on the marketplace. Let’s note them and also offer a brief description to all the price levels.
Real price levels:
- Po– get price or manufacturing price (cost rate) of items;
- Pol– maximum buy cost– when surpassed, the return from re-selling it on the marketplace can not be obtained, specified by ratios (46) – (48);.
- Pv– purchase rate provided variable expenditures exist, specified by (21) and also (22);.
- Pfc = df * Po– price of repaired prices provided variable expenses exist, defined by (20);.
- Ps– prices of goods.
Online price levels:.
- P1– first break-even or charitable degree, computed as (30-34);.
- Popt– ideal price level that permits to obtain an optimum revenue when marketing products at this cost, in some scenarios could come to be a worldwide break-even degree, for instance, when reaching optimum variable value and/or repaired costs, calculated as (26);.
- Pm– typical market price, computed as (23-24);.
- P2– 2nd break-even or charitable level, determined as (30-34);.
- Pl– optimal sell cost– when exceeded, products on the market can not be marketed, computed as (6).
Approbation of theory final thoughts making use of the example of selling goods on the marketplace.
We will certainly utilize values of price levels and also matching of actual and also estimated return values as an example, as well as see to it just how precisely the formula, which presently evaluations the Forex market, explains and analyses the scenario of the trading process on the actual market of products as well as services based on the instance of the solitary business owner evaluation.
Supposedly, the business owner has actually acquired the goods at the price Po=ONE HUNDRED bucks each in order to re-sell them on the market (in the shop, supermarket and so on). Throughout the initial day of trading, while marketing items at the price Ps1=112 dollars each, he acquired profit of St1=59300 bucks. On the second day he boosted the prices to Ps2=118 dollars and also his return amounted to just St2=8800 bucks. Variable expenses, including taxes, represent 10 % from the revenue, as well as repaired prices lie at the level of Cf=200 dollars daily.
We have to establish the entrepreneur’s return (R) for two trading days, break-even factors P1 and also P2, maximum values of items’ buy rate (Pol), variables (Cv) as well as dealt with prices (Cf) that after being exceeded cease earnings gaining, and also to evaluate the marketplace in order to identify the optimum prices of goods (Popt) that guarantees optimum profit (Pmax).
This is how the trouble is resolved by the formula, which after being assessed will leave no question that the actual market theory has been in fact uncovered:.
Examining the concept on genuine Foreign exchange market information.
Allow’s consider the market concepts that are most famous amongst investors who attempt to use them in order to acquire a figure advantage when arranging profitable trading and also developing rewarding trading approaches on the Forex market based on them. There are 3 primary theories:.
- Gann Theory is an item of sensible study of the model, cost and also time proportions and their influence on the marketplace.
- Elliott Wave– through practical research study Mr. Elliott concerned the verdict that any sort of fad includes the very same restarted standard versions (sections) that are divided right into 2 kinds:. a) impulse section (“Impulse”) that consists of 5 sectors and also functions as a relocating part with a fad development;. b) rehabilitative part (“Modification”) that includes 3 sections and also makes up for the previous impulse movement.
- Strategy based on the Ichimoku Indication– related to “Ichimoku cloud” which is a product of the writer’s useful study of Three Decade.
They all have a typical attribute– the absence of a strong logical base revealing the real connection to the process of real trading with goods and solutions. These concepts are the result of functional investigations and also assumptions of their writers. Additionally, they are gotten in touch with a joined suggestion, specifically, the understanding that along the rate activity there are some levels and powers impacting its pattern, and also the writers have devoted their lives to the agitated look for uniformities of forming the indicated levels and pressures.
Applying indicated theories in the trading technique brought about variable success, however, because of the lack of more trustworthy concepts, the scientists aimed only at the good results, no matter the convention of their application and the actual money loss, clarifying this as the “incorrect” analysis on the investor’s side or offering it as the drawbacks of one or the other theory.
I am attempting to convey the importance of the brand-new market theory that doesn’t have actually any type of drawbacks specified above. This concept is based on a solid theoretical foundation, with equivalent sophistication it describes the process of real trading of goods as well as Foreign exchange trading on the basis of price interaction between 3 online price levels, that the brightest males committed their lives to discover, but, unfortunately, never ever succeeded.
These are the degrees:.
- Present price level that could become favorable or bearish, relying on the circumstance. When the market is bullish, the rate ends up being bearish, and the other way around.
- Online price level is formed by the market, and also, like the existing rate, might transform bullish and also bearish, relying on the scenarios.
- Online handling level of the ideal market value– lion degree.
- Digital managing level of the typical market price– leopard level.
The figure shows genuine and also virtual price levels based on the considered market concept throughout the years 2010 as well as 2011:
Sign idea based on the brand-new market theory and also concepts of market entry as well as exit.
To produce an indication you should keep in mind that it need to plainly reveal the market condition at any time, specifically the bearish market as well as the advancing market, the pattern of market price as well as line level motion, the change in fad, whether calm or revealing quarrel between bulls as well as bears. The indication has to clearly show the moments as well as degrees of the marketplace entry and exit based upon the concept:.
- bulls handle the marketplace– buy;.
- bears take care of the market– sell;.
- lions handles the marketplace– past market.
The future indication will certainly look according to the charts here.
Market condition on 11.06.2015 00:00 Moscow, EURUSD; referral to purchase, since bulls are leading the market:
Levels of real and virtual market prices at this moment:
GBPUSD. All levels will be able to gather at the lion level shortly. Until the situation is cleared, it is recommended to buy:
The proposed market concept is based on the pattern analysis for gaining earnings, depending on the prices of items. It was uncovered that by analyzing the marketplace condition, we can approximate the maximum online return that indirectly reflects the marketplace demand in these goods, and also the flexibility of return to the list prices which enables to assess the maximum degree of items’ sales price on the marketplace, named the “market level”.
As established, an online optimal level of goods’ list prices, presented as a geometric value of two break-even levels that allows to obtain the maximum earnings when setting the prices at this estimated degree, is formed on the marketplace. Furthermore, it was revealed that the income formation is also influenced by the virtual level of the ordinary market value, which is based on the market and stands for the typical value of 2 break-even degrees. This level was called the “leopard level”.
Based on the marketplace condition analysis from the point of view of necessity to arrange the trading procedure around the particular price levels on the marketplace, the following was revealed:
- The best outcomes on the real market of products and services are accomplished with arranging trading around the ideal level of the goods’ prices, called the “lion level”, which ensures the maximum return. Business organizations could use this short article as a standard for maximizing the trading procedure.
- Aside from the real level of actual cost, 3 even more online degrees– market, lion and also leopard degrees– are formed on the Foreign exchange market. Rate and also market levels resist each other and can take rely on come to be favorable and also bearish.
- When trading on the Foreign exchange market is organized around the initial reduced break-even level, the price transforms bearish and intends to take this degree– the market downtrend occurs, and the market degree comes to be favorable, and vice versa, when it is convenient to arrange trading around the 2nd top break-even level, the cost becomes favorable in the effort to remain at this level, therefore the uptrend is developed, as well as the market level transforms bearish. These metamorphoses are arranged and managed by the digital lion as well as leopard levels.
- Trading on the Forex market can be arranged around the 3rd worldwide break-even level– the lion level, just in extraordinary cases. This circumstance is accompanied with an extreme flat market.
- Normally, there are two means the fad modifications:. a) at any moment and any price level by a sharp treatment of the handling degrees of lion as well as leopard in the process of trading with the following transfer of the cost management to the contrary side and/or the consequent battle of the resisting sides: present price formed by sellers and also customers versus the uncertain market;. b) voluntary transfer of the rate management from bulls to bears on the lion level.