You've probably once thought: "Why are prices moving in graphics?" There is a currency vendor, and there is the buyer of the same currency, they make a bargain and everybody is happy. Who then needs to grow or fall in price then? After all, when you buy a bread at the store, such an action does not allow the price of bread to change. Maybe it's a global financial conspiracy or brokers hiding something from us?
Undoubtedly, you've also heard an old, good tune-up: Trend is your friend. Have you ever wondered why Forex strategies based on trend tracking work and why trend-based marketing is so universally recognized and popular?
The reason is simple. The trend is likely to continue and go on. Once the movement has begun, it is easier for it to continue the movement in the direction than to stop, let alone reverse. This is one of the axioms in the treasure.
We give this expression a variety of definitions, trend, momentum or tendency. However, what is the real reason for this? What's really going on in the market and what makes the price move after the trend?
So why are prices moving?
Some may ask, "What is the difference, why prices are moving? After all, it is important for the market to move." I think this is important because as soon as we understand why the quotes are moving, we will immediately know why the trend is developing.
The Forex market is very similar to the classic auction. Imagine a simple auction in which you, say, are trying to buy a picture. First, the initial price is announced, then it gradually rises higher and higher as people make bigger bets. The prices you see are the amounts of money that someone is "willing to" buy or sell, and these prices change without the transaction itself or the purchase - the fact of the sale.
The prices we see in our terminal charts are the supply and demand applications. These prices are liquid and are offered by market makers. In such a way that price changes are necessary in order to undergo appropriate changes in supply and demand applications. These changes can take place in two ways.
First of all, the bank as a liquidity supplier can simply change its applications. Imagine that the bank initially claims to be ready to sell you an asset at 1.15400 (bid), and after 30 seconds the bank changes its mind and says it is actually ready to sell the asset at 1.15450. In this case, the price has changed by only 5 points. However, no transaction was made, nobody bought or sold anything. Just the market maker changed the price of the offer.
The second way of determining the price movement is when something "absorbs" the market liquidity. We do not see it. In our graphs, we see only the best Bid (supply) and Ask (demand) prices on the market, but in reality there is a huge amount of other demand and supply applications on both sides of the various amounts at which many banks, funds are ready to buy or sell various assets.
If we imagine that the best bid for the 1.33373 bid for a total asset of USD 1,000,000 appears, then if a trader emerges and redeems an asset for a total of $ 1,000,000, he or she will use all available liquidity at that price, and such a proposal will disappear from the market. The next best bet for this asset will be more expensive - for 1.33377. In this example, the price has risen by only 0.4 points.
Thus, in the second variant, the price moved due to the use of liquidity on the buyer or seller side.
Now that we know the principle of changing prices, we can try to understand why the trend is developing.
Where do trends come from?
Let's imagine that I and you are speculators, and I want to buy 100,000 USD or 1 lot of EUR / USD currency pair, and you want to sell 100,000 USD or 1 lot of the same currency pair.
My order is for the purchase, uses liquidity at the Ask price, and your order is for sale and uses liquidity on the basis of the Bid price. In this situation, if market liquidity is equivalent on both sides, we will generate a surplus. However, which side of the price will actually change will depend on the volume of liquidity on both sides.
Let's assume that Bank X offers assets at the best Bid price, a total of 500,000 USD, on your market side (on the seller's side), and Bank Y offers the same asset at the best Ask price on my market side (on the buyer's side), but only $ 10,000 of volume. Next to X and Y there are other banks that offer more expensive purchase or cheaper sales prices and applications of various volumes, etc.
Imagine further that we both came to the market with our orders. You sell $ 100,000, and I buy the same amount of $ 100,000. Your sale has been executed in accordance with Bank X Quotations (best quotes for sale). However, the offer of Bank X was $ 500,000, and your order for sale was only $ 100,000, so your application was accepted, but it only used 1/5 of the total amount that was made up of liquidity. The market remained at $ 400,000 at the same price level, and in this way, the price did not really change at any point.
Meanwhile, I bought 100,000 USD but Bank Y had to offer only 10,000 USD for the purchase of the best coins, which means that my purchase order exceeded 10 times the liquidity at the best Ask price. This is because I bought 100,000 USD, and I could buy only $ 10,000 on Y's bank's best Ask price, so I bought the missing part from the second bank, which showed a bid on the market at an even higher price after Bank Y, and if the second one I did not have enough liquidity at the level, I already bought from a third bank, and so on That is, my deal was of the same size as yours, but used the full liquidity of the market and accordingly caused a rise in prices over several levels, as there was not enough liquidity at that price level at that time.
In this way, here is an example of where two two-dimensional sales orders, presented in different directions, have a different effect on the market: one warrant did not raise prices altogether because of high liquidity on your side, and at a different price, it moved at several price levels due to insufficient liquidity. From this, one can draw a conclusion on the principle of the price movement: when two equally large market orders are triggered, the price will move to the side with lower liquidity.
This is how the trend is developing: it is known that the profit of a broker is a hit, so in order to get your profit, brokers have to buy and sell quickly before the price has changed. If you sell $ 100,000, brokers buy from you and sell the same amount of money fast for me, earning a difference (gain) for you. All that a dealer needs to do is buy and sell at the same time, in order to make profit. Failure to do so quickly could lead to loss-making transactions and, as a result, to a loss.
As the price starts to rise (as in the example above, where I bought $ 100,000 and you sold the same amount) the broker who sold me the asset now is losing money. If other traders come to the market, and also buy from the same broker, their losses may be higher because they are forced to sell again in a fast-moving market and may again suffer losses.
In this way, they try to mitigate the further risks associated with reducing the amount of active ingredients they offer to sell someone else after me. They sold the amount of the asset to me, and in order to balance their application book, they need to buy the same amount of activated value for something as much as possible at the best possible price. They, of course, do not want to sell in an emerging market, because it will only increase their losses. All their efforts are now focused on purchasing, in order to complete their operation with me. In this way, in order to limit the amount that they are likely to have to sell to someone else, they reduce the number of their applications. This, in its turn, further reduces the level of liquidity on the part of customers, and therefore prices with even greater probability continue to move upwards as soon as other traders enter the market with purchases.
That’s why “Trend is your friend”
Trend is a powerful and lasting force that feeds on itself and increases the speed more and more. This is what is called a trend. That is why it is not recommended to trade before the trend.
This is a supply-side imbalance. Both demand and supply have nothing to do with buyers and sellers, as most amateurs think. The rising trend does not necessarily have to happen, as people trying to buy will appear along with people who are trying to sell (of course, the trend may also arise).
The number of traders between purchases and sales again can be perfectly balanced, as in the example above, when you and I traded in equal volumes. The trend is due to the fact that on the market side selling liquidity is lower compared to the market demand for this asset.
In this article, we found out what the principle of moving Forex market prices is and where and why trends are developing. In short, in a few words, try to repeat what we learned.
Although the market can have the same amount of buyers and sellers as you and I, however, the demand coming from me as a buyer is higher than there is in the market for liquidity on the market at that time, while the demand for you as a vendor is lower than the proposed liquidity claims. This leads to a trend towards the movement of prices towards my (demand side) side and the price goes on and on.
That is why it is possible to explain the technical trend side, market trends and its further movements.
Good luck, and trade according to the trend!