The ratio of the value of the currencies of different countries ultimately depends on fundamental factors. This is the efficiency of the economy, the value of imports and exports, the movement of capital and the like. However, the change in rates does not occur simultaneously but moves gradually. A currency rate is its price, expressed in units of another currency. The market price is always rising or falling. What are the reasons for the rise or fall in prices at certain intervals? It is very important for Forex traders to understand the influence of these reasons since most trading strategies are based on following the trend of price changes.
WHY ARE PRICES MOVING
The term “trend” is known to all. With regard to the market in general, including the Forex market, this is the direction of price changes over time. To understand why the trend is developing, you need to understand what causes the quotes to move. This can be explained by the example of an auction. For the goods put up for auction, buyers are offering ever-higher prices. Although it happens, and vice versa, when no one wants to buy at the suggested price. Then the price drops until a buyer appears ready to buy at that price. The meaning of the example is that prices change without concluding a transaction, but only on the basis of applications from bidders.
Similarly, the prices displayed on the screens of trading terminals represent the display of offers of buyers and sellers. These prices are offered by market makers and are called liquid, that is, the market maker has enough currency to buy or sell. Therefore, to change the price in the terminal, it is necessary that the values of supply and demand levels change.
HOW DOES THE PRICE CHANGE
There are two options for change. The first is when the liquidity provider changes its claims. Suppose, at the moment, he reports that he is ready to sell a unit of one currency for 1.2455 (offer price) of another currency, but after a few seconds, he is already offering a price of 1.2460. That is, the price rose by 5 points, although there were no trading operations. The market maker simply changes the price of its offer based on its considerations.
The second option, which determines the movement of prices on Forex charts, is determined by the absorption of market liquidity. On the chart or in the list of quotes, market participants see only the closest to the balance of the price of demand (Ask) and offer (Bid). In fact, a large number of other Ask and Bid bids are located below and above the current market price. At all prices, levels are orders of various volumes. Let’s say that at the level of 1.2460 there is an order for the sale of 1 million USD, and at the level of 1.2461 – an application for any other amount. If the broker buys the entire million from the market maker, then the price will move up one point. If the application is not fully redeemed, the price will remain in place. In this example, the price movement occurs as a result of a transaction.
Knowing the reason for the price change, you can understand why the trend is developing. Suppose there are two traders, one of whom wants to sell one lot of currency, and the other wants to buy one lot of the same currency. The volume of liquidity with the prices of bids will satisfy a sell order, and purchase orders take liquidity at the prices of bids. If there are orders of equal volumes on both sides, then only the spread will expand. If on one of the parties the order volume is less than the order volume, then the price will shift to the level of the next order. That is, the direction of the price change depends on the difference in liquidity amounts.
Suppose one liquidity provider offers for sale 5 lots of USD at its price, and the other puts up the same amount of currency at a price one point more expensive. On the side of buyers, banks by market makers put forward several applications for one lot at different levels. If a buyer and a seller appear with the same applications for 4 lots, then their orders will be executed, but the price will change. The fact is that the application for the sale will not be fully executed, and the application for the purchase will be executed at different price levels until complete satisfaction.
Thus, it turns out that a high level of liquidity prevents price changes and even the transaction does not move it. And vice versa, if an order absorbs liquidity at several levels, then the price is rapidly moving in this direction. This property of the market is sometimes used by the Central Banks of some countries. They carry out the so-called “currency interventions”, throwing a huge amount of liquidity into the market in order to depreciate their currency.
HOW IS THE TREND DEVELOPING
The profit of independent Forex brokers, which are displayed by our rating of Forex brokers in Russia and the rest of the world, consists of the spread that they receive from traders. Therefore, they need to buy and sell almost simultaneously in order to make a difference. A broker sells a currency to a trader at one price and buys a liquidity provider from a provider at another. After the transaction is completed, liquidity decreases and the following orders are executed at a different price. Market makers and dealers, in order to avoid losses, withdraw applications with a price that is not favorable to them. The more traders go shopping, the more likely the price will move up.
This is a schematic description that only approximately explains the ongoing processes. But across the entire Forex market, it is a powerful force that continues and develops itself, quickly gaining momentum. On market charts, intraday trends can be observed as strong impulses. The price continues to rise or fall until the liquidity on the opposite side exceeds the volume of demand or supply. This, however, does not mean that the market will turn in the opposite direction. A strong impulse is followed by a pullback, and then the trend continues to develop.
Knowledge of the causes of price changes and the emergence of trends can be used in technical analysis. In conjunction with other tools, this will help in determining the levels of support and resistance, possible pivot points. Although the Forex market analysis on the volume of liquidity is difficult. This is an over-the-counter market and it does not have a single glass of prices. However, some brokers, such as Oanda, publish such statistics in the form of diagrams. Price glasses are also available in the ECN systems of many ECN brokers, for example, the popular Forex broker Markets , which also offers an ECN model for executing transactions.