Any change of the price for goods on any market is explained by the dynamics of demand and supply, and on financial markets, it is the same. The rate of a currency is formed chiefly by various economic factors, defining the necessity to exchange one currency for another. What is taken into account is the price of import, export, capital movements, and lots of other things that can never form the rate at once. It requires time, and, practically, the exchange rate is the price of one currency related to another one in a certain time.
Financial markets are used not only for currency conversion but also for speculations. This is the process that traders take part in. And for making money, the trader should be sure about all the peculiarities of price changes; in this article, you will find out:
- Why price movements happen on Forex
- How price changes happen
- How a trend emerges
- Types of trends
- What is a flat
- Types of flats
A price movement is a directed change in the price of an asset in a certain period. Such a movement in the direction of a certain tendency is called a trend. A trend can only emerge in the presence of a difference between demand and supply.
A couple of examples:
- I come to the bank. I want to by 10,000 USD for the euro. The bank has this sum and sells it to me. In this case, the price of the currency will not change.
- I need to buy 100,000 USD. I come to the bank, but they only have 10,000 USD, which I buy and then go to another bank. There, they also only have 10,000 USD but the buy rate is higher. I buy the dollars and go to a third bank. And again, they only have 10,000 USD and the rate is even higher than in the previous bank. Imagine I had to visit 10 banks to gather the necessary sum. Thus, I involuntarily took part in propelling the trend for the growth of the USD price.
On the market, there are always sellers and buyers, and sometimes liquidity deficit happens, which means the impossibility to buy or sell a certain asset. If there is a deficit, the price starts moving in this or that direction.
The main participants of trades are market makers. They are the largest banks, transnational companies and Central banks of various countries. The daily volume of trading operations on financial markets all over the world is 5 trillion USD. The market makers sell and buy money in the volumes that influence the price movements of the world currencies.
The traders on the market do not have such volumes of money, so they can only try to forecast the vector of the price movements and join them in time. To be successful, a trader should be keen on fundamental and technical analysis.
At any taken moment, there is demand and supply on the market. Imagine you have come to the Forex market and want to buy 50 lots.
On the screenshot, you can see a market depth, which reflects the market applications for sell and buy real-time. If you buy only 4 lots, you get them at the price of 1.3208, and the best supply price will not change. But if you decide to buy 50 lots at once, you will engulf the whole of the second line that goes next and a part of the third line. The price of the best supply will move to 1.3210, i.e. grow.
And if you want to sell all the 50 lots, your order will cover for the volume of four subsequent lines, and the price will stop at 1.3203. Thus, the price will decline.
We have found out that if demand and supply are balanced in volume, the price does not change. An imbalance leads to a directed movement.
Now imagine the behavior of a market maker. When demand emerges for any asset, it should fulfill it and supply the same volume for sell. If you keep buying additional volumes of the asset from another dealer, the price of the buy will grow. The first dealer will stay with the volume for sell at a low price.
In other words, if your next – more expensive – buy involves a second seller, the first one suffers a loss, and the process repeats at every next trade. To decrease the losses, the first seller will decrease liquidity steeply, thus engulfing the next line in buys. The process produces a directed impulse until demand and supply volumes balance with time. Such a directed movement during a certain time is called a trend.
The main directions of market movements are as follow:
- A bullish trend is an uptrend when the price grows.
- A bearish trend is a downtrend when the price falls.
- A flat is a sideways movement when the market stagnates.
In terms of length, trends may be:
- Short-term ones, taking from a month to six months.
- Mid-term ones, taking from six months to a year.
- Long-term ones, taking more than a year.
It is rather easy to see and identify a flat on the market is a stable price range, in which frames the price remains for a certain time.
It is thought that after each directed movement there comes a pause, necessary for the market to gather for a new movement. The market remains in a flat for 75-80% of the trend time. And only for 20-25% of the time it moves. Many traders recommend against trading in a flat, because it is rarely wider than 30-50 points, and the price may escape this range at any moment.
There are 2 types of flats:
- “Accumulation area” is a flat, which the price enters after an impulse of decline and then escapes downwards. In such cases, upon escaping the flat, the price covers the distance more or less equal to the previous impulse.
- “Distribution area” is a flat, which the price escapes back upwards upon entering it. In this case, the price almost always covers the second impulse.
We have discussed in detail the processes that happen on financial markets, and this knowledge will help you in trading. The more experience you gain, the better you will orientate in these processes. To get your initial experience, try using a demo account before trading on a real one.
Successful trading to all!