The knowledge how the prices move in forex market is very important part of trader’s knowledge simply because of the fact that forex market is actually different to most of other markets and the majority of people are oblivious to this fact.
With stocks, for instance, the price you see on the chart or the quote board are the last price that the stock was physically traded and where a transaction was actually made. The last price two people actually bought and sold with each other so for the price to move or change someone has to physically buy or sell. There has to be an actual transaction, the price can't move without a transaction happening. In other markets it is real buying and selling pressure that moves the price and that's what makes sense and that's what we all think

In forex though it's not like that because the forex market is a bona fide auction market. The prices you see are the prices that someone is willing to buy or sell at. So just think of a normal auction where you may be trying to buy a painting. The prices start low and they gradually go higher and higher because people bid

the painting hasn't been sold the price moves and changes were there without any transactions taking place. And that's what it's like with forex. Prices can and they do actually move without any buying or selling happening whatsoever. All it takes is for people. Normally banks and other market makers and liquidity providers you alter their bids or offers and most people really don't know that. They think the prices move when someone buys or sells but we can see huge price changes with absolutely zero trading taking place and that has dramatic consequences for how we trade and how we make money.ore and more so the price is changing and rising constantly even though no one has actually bought anything and the painting hasn't been sold the price moves and changes were there without any transactions taking place. And that's what it's like with forex. Prices can and they do actually move without any buying or selling happening whatsoever. All it takes is for people. Normally banks and other market makers and liquidity providers you alter their bids or offers and most people really don't know that. They think the prices move when someone buys or sells but we can see huge price changes with absolutely zero trading taking place and that has dramatic consequences for how we trade and how we make money.

Now before anyone yells at the monitor; yes stocks are an auction market as well. People do bid different prices but the way prices finally move, what causes your quote on your chart, are different. They physically have to see a trade or a transaction before the price on a stock chart changes. Forex is entirely different and prices move quite dramatically and significantly without any trading taking place and zero transactions happening. Now when you understand the micro mechanics of an auction market like Forex you can determine which direction the price is most likely to move next because price in forex are more likely to move in a certain direction. And when you know that you have a real edge that you can exploit for some profits.

Let's suppose that you and I are both speculators were both trading with the same broker and we are both looking at the euro US dollar pay chart. Now I want to buy one lot and you want to sell one lot and so we both hit our order buttons. Most people think that we would be matched against each other and we would buy and sell from each other. That can only happen with some sort of bucket shop dealers but that absolutely does not happen in the real market. It's not even possible for that to happen with the way forex is structured. If I submit a market buy order and you submit a market sell order it is impossible for us to trade with each other as retail traders. Market orders can only be matched with a limit orders. Limit orders are the bids and the offers that you see in the quoted prices in your platform. They are the prices the banks or the market makers meet public. That's the prices that you see. Limit orders provide liquidity and make the market and give us the spread that we see. Market orders on the other hand the traders like you and I use when we hit our buy and sell buttons consume that liquidity so my market buy order consumes the liquidity in the offer price or the ask price. It's often known as the Ask or the Offer the bank offered to sell at this price and I bought it now. Your market sell order consumes the liquidity in the Bid price here the bank bid to buy at this price and you sold to them. If we both submitted the same size order at the same time the spread would widen because we consumed and removed the original liquidity that was making that narrow as bid and offer in the market.

This is all for this article. In my next article I’d like to describe why price is more likely to move in the direction of least liquidity.

Copyright Note:
First Photo Captured by Stephen Chernin/Getty Images

(to be continued...)
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