Forex Market Structure - Q/A

Q1.) What does it mean if the price goes up or down? - In normal world, price is usually based on quantity. If there is enough corn, the price goes down because everybody has a lot of corn and they want to get rid of it so they have to decrease the price. But in forex market is not based on quantity. If I want to buy such a big size that would move 1 pip at a moment, somebody has to sell it to me. If this happens, market cannot move in any direction, correct? If for every buyer there is a seller, then how the market moves?

A1.) The number and size of orders at the particular level - If there is a big SELL order at particular price and there is not enough LONG orders to complete the big SELL order, then the price drops at lower price. If there is enough LONG orders at this lower price to complete the SELL order, the price will stop. If there is not enough LONG orders, the price will drop again. The price will drop as long as the SELL order will be completely covered by LONG orders.

----

Q2.) What is spread and how it´s created?

A1.) Please write your answer.

Of all the threads in the discussion area, THIS gets moved to the rookie section.

Unbef******lievable

Good question EQ,

When it happened, I was wondering if the moderator who moved it, is able to answer my question. hehe

Because every pair is correlated. For instance if you buy EUR/USD you're buying the EURO but selling the Dollar, and this is represented on USD/CHF, the Euro's sister pair, and if everyone is buying EUR/USD, then people are selling the dollar hence a fall on USD/CHF. Maybe someone can explain this better.

Thank you very much for taking your time to answer, but I´m afraid that it doesn´t make sense at all. Correlation is a result of the move. You wouldn´t have correlation if the market doesn´t move a 1 pip, right? So, my question is what is behind this 1 pip movement.

This thread might be of interest to you.http://www.forexfactory.com/showthread.php?t=7484

I guess this thread beats the "Found Holy grail" threads by a yard..you have already answered your own question, sort of and do review the other replies. Find it hard to believe that such basic queries get posted in FF when just a simple search online would have helped..smh

Thank you very much Steve, but I´m not sure if I understand DarkStar correctly. Here my thought:

So, The price of let´s say EURUSD went down one pip from 1.3254 to 1.4353. What happened? In order for the price to drop 1 pip, there must have been somebody who sold EURUSD in an amount that was too big to be filled from actual long orders at that price. So, the SELL order at 1.3254 consumed all the buy orders at 1.3254 and still wasn´t completely filled so the price had to drop 1 pip lower, where were other BUY orders. If there is still not enough BUY orders at 1.3254, the price will drop another pip for more BUY orders.

Am I correct please?

Forexnuts, I don´t know if you´ve tried to done this search, but you would be surprised that this basics are very hard to find. Everybody everywhere describes just the commonly knows things. Just try to find how spread is created. Everybody writes that it is difference between bid and ask price, but nobody writes how it´s created. I think that without DarkStar´s post you would have quite big difficulties to find the same information that he shared.

Anyway, thank you for your answer and I hope this thread will become more interesting for you as we will discuss more details.
Cheers, EQ.

Read from the start of this thread concentrating on FTI's post's.http://www.forexfactory.com/showthread.php?t=57639

Thanks a lot Steve, but I didn´t find the information that I need in that thread.

On the thread being interesting, sure hope so..as for the basics questions being answered already, granted some of the brokerages list sparse info but there's a wealth of info online..just to put it in perspective we all did exactly that, online research, gummed up on all the info we could get our hands on and yeah, all the info was free.. And today, we are better off for it..will review the thread later for more interesting comments..

Let's keep in mind there are two basic types of orders, market and limit. There is a lot more complexity to it than this but for the moment it will be sufficient. A market order could be considered an active order as it draws on the liquidity of existing limit orders which we will consider the passive counterpart. Limit orders are also the origin of the spread.

A limit order states that you will transact at a given price, and we are given two groups of people with alternative desires in the market. One group wishes to sell, the other to buy. The sellers put forward limit orders to sell at $1.10 and the buyers express interest to buy, but will only pay $1.09 so in this contrived example the spread is $0.01.
Nothing happens, no-one buys or sells, then for whatever reason the sellers decide $1.10 is to low a figure.
They pull their limit orders and say they will now sell at $1.11 the price has changed with no trade having taken place and the spread is now $0.02. The buyers acknowledging that the price is rising concede and raise the price they will pay to $1.10, yet again the quoted price changes, yet no trades have taken place, and the spread shrinks and returns to $0.01.

Throughout the example so far we have seen changes in price though no trade has taken place, this change has simply occurred by the two opposing parties as a collective changing what price they transact a trade at. Let's continue.

I've decided that I would like to buy 500 lots of whatever exciting thing we are trading, looks like a great opportunity to raise my blood-pressure and swear at the screen. There are two ways I can go about this, I could place a limit order to buy 500 lots at $1.10 and hope that someone will come along with a market order and sell at the price I have quoted, this leaves me open to the chance that I will miss the expected rise in market price however means I avoid having to cross the spread to trade. My limit order in the situation means that the bid price cannot go below $1.10 until my order is filled, this is the liquidity I mentioned earlier, heavy liquidity means that there are a large number of lots for sale and also will normally have the effect of tightening the spread. Low liquidity leads to price slippage and a widening of spread amongst other things, as a general rule we want to trade when there is high liquidity.
The second method is to place a market order, which will instead of quoting the price I will buy actively goes and purchases from the sellers at whatever price is available. Lets say that the market depth (that we sadly cannot see in Forex) is along these lines:

$1.13 - 500 Lots
$1.12 - 250 Lots
$1.11 - 150 Lot

I will have my trade filled, 150 lots at $1.11, 250 lots at $1.12 and the remaining 100 lots at $1.13. This is what traders commonly refer to as $#*&ing slippage, and one of the reasons the game changes when you start trading quadrillions of dollars.
After this has happened we will see the quotes have changed, sellers are now $1.13 ask with 400 lots and the buyers remain steady at $1.10 and the spread widens to $0.03.

The price collapses in an unprecedented move, and I lose everything.

hi hoot,

the method mentioned above in regards to the market order is for big players right where after a particular price level is consumed,the price qouted will be of the next price level? is it applicable to retail traders like us who deal with, for e.g in mini lots? kinda confused with how prices rise and fall for brokers like oanda..hoping you could enlighten me. thanks.