The Form of a "perfect" bid/ask Curve

[bb113]

If it were only robots bidding and there were no externalities, what would the support and resistance plots look like?

Log functions? Sigmoid? Linear?

The rate of bitcoin generation is known beforehand while supply (Total amount - hoarding) and demand are unknown (but estimable) variables.

[bb113]

To clarify, I mean to refer to cumulative support/resistance.

[bb113]

Maybe if I provide an image:



Support=linear (within the bounds of the chart)
Resistance= sigmoid

[bb113]

Thanks for answering my clumsy question but it does not fully explain what I see, and it is unrealistic to expect a true parabola. For example, there seems to be a ceiling after which the parabola tapers off. Is there an indicator that takes the values at which this occurs into account?

[gewure]

i had this thesis about the perfect BID/ASK price-psychology, and now found myself to paint this lousy picture:



P* is the balance price

the grey and violet sprinkled lines suggest that if the bid/ask side looks like that, it is either a bullish or bearish divergence.

my thesis for this psychologically bid/ask schema:

if everybody thinks the price will be high in future (bullish divergence): people are in a hurry to buy, therefore set there bid-walls higher
if everybody thinks the price will be low in future (bearish divergence): people are in a hurry to sell, therefore set there ask-walls lower

got my point?!

interested what you think about it..

a psychologically-balanced price would look bearish on the BID side and bullish on the ASK side (just as MTGOXlive looks, when we have a stable price)

btw: psychology-bid-ask-balance-price-thesis copyright is MINE!
ps: don't judge my ugly painting, i did not have a lot of time..

[arepo]

the perfect form is when there is a central authority that control this

-9000

[FreeMoney]

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Everyone wants the coin, sellers do it cause they need to and don't wait.

[notme]

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Everyone wants the coin, sellers do it cause they need to and don't wait.

+1

[Spekulatius]

@ gewure:

if everybody thinks the price will be high in future (bullish divergence): people are in a hurry to buy, therefore set there bid-walls higher
if everybody thinks the price will be low in future (bearish divergence): people are in a hurry to sell, therefore set there ask-walls lower

Thats right, yet the spread chart doesnt look like the one in your image. In fact the bullish & bearish divergences are directly inverted.
Just check on mtgoxlive when there is a clear up or downtrend.



The reason behind this (as I understand it):

When there is an uptrend (bullish divergences show), the balance price (P*) moves up and up (to the right in our picture) quicker then the majority of traders can adjust their BIDs, therefore the BID side takes the shape of an drawn out function with its lower "belly" pointing to the left. The ASK side at the same time shows a clinched function with its lower "belly" pointing to the left also, because ASK orders are "eaten up" earlier then traders can react to the price movement by setting higher ASK orders.

Same game with downtrends, only the other way around.

[gewure]

hmmmm.. @spekulatius:

i think what you said is partly right, but there is a lack of communication between my model and your correction:

my model tells you what the bid/asks look like BEFORE a movement of the price takes place, your 'correction' of my thesis applies to the time WHILE a movement takes place.

it is hard to do any serious empiristic studies on my thesis, since i don't have the time, the knowledge and the resources to do so, and it is at all questionable if the bitcoin price on mtgox applies at all to such a pschologically trading scheme (after all, how do i know that what i see is because of the psychology i imply and not cause of other reasons?)

but anyway, im gonna watch this quite close in the next time and do some additionaly study on it.
think about my time-thesis: the divergences i painted are what the bids/ask look like before something happens,, they reflect the approximation of traders to the P* of the future!

thank you very much for your input!

[bb113]

Ok, so I began thinking the answer is an inverted normal curve. The reason volume decreases with spread is because the likelihood of that order being filled drops with distance from the current price. Bulls and bears use positive and negative skewed curves respectively, while a neutral participant believes there will only be random fluctuations. There is a point at which each participant believes it is not worth it to place a bid/ask. In the chart below I chose < 5% but this will obviously differ amongst groups of participants. Wherever the probability curve crosses the "line of implausibility" you will see the cumulative volume flatten out. Large walls appear where the neutral curve crosses the "line of implausibility" because this is as bearish or bullish as you can be while still believing there is a chance of getting your order filled on average.



The lower chart is similar to gewur's except that I have used an inverted normal curve rather than a triangular function. I am still digesting chodpapa's second post but I believe this is consistent with what he described.

Critiques?

[Spekulatius]

@ bitcoinbitcoin123:

- I think you confused bearish with bullish sentiments in your picture
- The alteration with using parabolas instead of triangular functions is IMO a good idea and a more realistic approach
- The accumulated volumes likewise (good job!)

@ gewure:

Ahh, O.K., makes much more sense this way.
I hope I can contribute to even further explore the matter, although I have to admit not to have any emperical data at hand as well.
Therefore the following is only product of my own observations and reflections. Any comment or support by emperical data would be
welcome:
 - In times of bullish or bearish sentiments (clear trends indicated in either direction, visible to the mayority of traders)
    the two "price movement spread shapes" show, because of their shape Ill call them "UV"- and "VU"-shapes:



 - In times of uncertainty or contrasting estimates by equal amounts of traders wheter the price will go up or downwards, the other two
   remaining shapes "U"- and "V" shapes appear. The U-shape may be typical for times of sideways trends or neutral triangles, when
   traders wait for clear signals before they feel save to place their bets, in consequence there will be low volume on both sides of the
   spread and little price movement. The U-Shape can therefore be seen neutral

 - In times of contrasting estimations caused by numerous signals pointing in different directions, e.g. during a large doji
   (http://en.wikipedia.org/wiki/Doji) or anomalities during trends I would expect a V-shape to form, because high volume on both sides
   of the spread keep the spread small and price movement little. As long as a V-shape consists, it can be seen to be neutral as well.

Actually, someone must have asked those questions before. Im sure the answers are out there already. Maybe someone can provide some helpful links?

Please comment, thx

[bb113]

@ bitcoinbitcoin123:

- I think you confused bearish with bullish sentiments in your picture

I thought about this... using the bitcoin market as an example:

If a bull believes the price of bitcoins will rise, which will he/she choose to do?

1) Place a large bid at a price below the current market rate. (even though he does not think the price will fall)
2) Place a large ask at as high a price as they think the market will reach before correcting.

It is vice versa for bears. So it makes no sense in your chart that bears will think to place more asks at high prices (which they do not think will be filled, because they are bears) than the bulls.

Then again I know almost nothing about trading so maybe I'm confused.

[bb113]

Another way of putting it is:

Why would a bull sell to you for cheap (near the current price) when they think they can sell to you for a higher price later?

[Spekulatius]

If a bull believes the price of bitcoins will rise, which will he/she choose to do?

1) Place a large bid at a price below the current market rate. (even though he does not think the price will fall)
2) Place a large ask at as high a price as they think the market will reach before correcting.

Ok, I think its the same issue like before with gewures model and my "correction". His and your picture show spread shapes BEFORE a trend sets in while mine try to show what the spread look like WHEN a trend is in full motion (UV, and VU- shapes). Whether or not these proposed shapes apply to reality needs to be confirmed by some empirical data.

It is vice versa for bears. So it makes no sense in your chart that bears will think to place more asks at high prices (which they do not think will be filled, because they are bears) than the bulls.

True, but thats not what they do. They simply cant adjust their orders as quickly as they are eaten up. Therefore the ASK-slope becomes increasingly steep. Same for the BIDs: the majority of bears cant adjust them as quickly as the price wanders, therefore a drawn out UV-shape forms.

P.S.: Good way to visualize whats going on before and during a price movement would be, if someone could film mtgoxlive for a day or two (hypercam, etc.) and then make it a time lapse.

update: http://vimeo.com/35204706

up-update: http://vimeo.com/35383261

[bb113]

Yea, I see what you're saying. It is interesting that a bull movement (as in your chart) causes the shape of the curve to go bearish (according to my chart) until it stabilizes.

[bb113]

Oh yea, definitely not practical for predicting future bitcoin price. I don't trust the depth chart at all.

[gewure]

wow, thank your for your incredible painting skills

..and the discussion, offcourse! i agree to both of you in all matters, you made some good observations.

i became interested in this aspect mostly cause i study economics, am very interested in psychology in relation to economics, and saw a bid/ask orderbook in realtime for the first time while discovering bitcoin some months ago and it immidiatelly caught my attraction when i saw how 'easy' it was to manipulate for some individuals/some individuals (lets call him 'the manipulator') and force people into drawing conclusions from the bid/ask table. remeber at this point: drawing the conclusion that you ignore how the bid/ask tables looks like, is also drawing a conclusion! (perhaps not the most rational, since you could also draw the conclusion that 90% is fake and therefore have more information to operate on..)-

if you don't mind i will use your figures to discuss this matter with some fellow students at my university and look what they think about it.

greets
gewure

[gewure]

@bitcoinbitcoin113

i especially like your charts. makes more sense if you also include probabillity and volume into it, very good idea!
now the question is how to scale this model, to get usefull interpretations on future-price-movement-probabillities out of the mtgox bid/ask table.. (if at all)

there are a lot more systemvariables that need to be included into the modell, in order to have good interpretations.
if you have time, take close looks at the mtgox table, and write in here, if you observ any relations to our theory. i will do so.

thanks

[bb113]

if you don't mind i will use your figures to discuss this matter with some fellow students at my university and look what they think about it.

Go for it. It is very theoretical right now, but if someone had enough money to map the true depth on both sides it may be useful, at least for a short time.