How the markets are working????? | Forex Factory

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How the markets are working?????

  • #1
  • First Post: Mar 13, 2010 1:46am Mar 13, 2010 1:46am
Hi, this morning I was thinking why the price is moving in the forex, stocks, and other markets?? I didnt find an answer..so I decided to ask you guys.

I know that the price should move when there is a big selling on the market..but on the other side somebody must buy this thing so there is also a big buying..so on which side the market will go.

Another example, let say that when the george soros sell the 10bilions of GBP and the price has fall a lot that day..but on the other side somebody has buy from him this ammount of money. So what if I was on the other side alone and i would say I will buy 10bilions of GBP and he will sell at the same moment, where the price will go. I just cannot understand why market is moving if there is always the same number of buyers and sellers, becouse somebody have to buy what others are selling. And when the price is falling everybody says there is some big selling, but there should be some big buying to, becouse somebody buy the same ammount from them.

Any idea??

Thanks for answers in advance.

scoprionFX
  • #2
  • Mar 13, 2010 2:00am Mar 13, 2010 2:00am
This book goes over market microstructure and is an excellent read.

http://www.amazon.com/Trading-Exchan...8467145&sr=8-1

http://ecx.images-amazon.com/images/...SH20_OU01_.jpg
Don't wish it were easier, wish you were better. ~ Jim Rohn
  • #3
  • Mar 13, 2010 5:28am Mar 13, 2010 5:28am
Quoting scorpionFX
I just cannot understand why market is moving if there is always the same number of buyers and sellers, becouse somebody have to buy what others are selling.
But at what price are buyers willing to buy and sellers willing to sell?
  • #4
  • Mar 13, 2010 11:48am Mar 13, 2010 11:48am
Quoting pipmutt
But at what price are buyers willing to buy and sellers willing to sell?
Yes but who knows when somebody is willing to buy or sell..I understand if there are limit orders on the market..but if I do not put the limit order on the market nobody know for which price I am ready to buy or sell..I just trigger the the button when i think so.

And also there is always somebody who is willing to buy or sell at any price..becouse we can buy or sell at any price we see on the chart. When I see EURUSD at 1.3766 and I want to sell, I will not get a message that nobody is willing to buy at that price..there is always somebody on the opposite side who want to buy.

So if i tell this in short sentence...THERE ARE ALWAYS BUYERS AND SELLERS AT ANY PRICE.

Am I right?

I still cant understand..please help me guys
  • #5
  • Mar 13, 2010 1:00pm Mar 13, 2010 1:00pm
Quoting scorpionFX
So if i tell this in short sentence...THERE ARE ALWAYS BUYERS AND SELLERS AT ANY PRICE.

Am I right?

I still cant understand..please help me guys
This is a very important question your asking and I encourage you to give it considerable thought.

As pipmutt said, it is a question of what price participants are willing to buy and sell at. If more people want to sell at a given price then there are people who want to buy, the sellers will consume all the buyers orders and price will fall to the next highest price someone is willing to buy at.

Pretend price is at 100 and there are a number of potential buyers in the market:

A 1 unit buyer @ 99
A 1 unit buyer @ 98
A 1 unit buyer @ 97
A 1 unit buyer @ 96

Now pretend that someone executes a 3 unit market sell order. First the buyer at 99 will take his unit, then the guy at 98, then the guy at 97. The sellers average price for all 3 units is 98, the current bid it 96.

I kept other sellers out for simplicity, but assume all the rest of the sellers had limit orders at 101. Assuming they did nothing the spread would be 101 on the offer and 96 on the bid, average price is 98.5.

Its overly simplified, but thats the general process...
  • #6
  • Mar 13, 2010 1:12pm Mar 13, 2010 1:12pm
Quoting scorpionFX
So if i tell this in short sentence...THERE ARE ALWAYS BUYERS AND SELLERS AT ANY PRICE.

Am I right?
This is the biggest myth. This statement sounds so logical and straightforward that one doesn't bother to think twice and accept it as fact.
You left with the impression that market is s straightforward affair like an eBay auction?

Yes, you may be buying today and somebody may be willing to sell to you. However, you might be buying
only a small part of large blocks of sell orders that may have been on the market-makers' books, sitting
there, well before you arrived on the scene. These sell orders are stock waiting to be distributed at certain
price levels and not lower.

When buying activity is less active in relative to selling activity, the price drops.

Hope it helps.
  • #7
  • Mar 13, 2010 1:30pm Mar 13, 2010 1:30pm
Thanks DS, I don't want to complicate things but can I just add....

scorpionFX you're (most likely) trading in an artificial environment, with a marketmaker who is prepared to fill your order and be counterparty to your trade, he is the buyer/seller when you buy/sell. When you 'trigger the the button when i think so' that's your agreement (willingness) to buy/sell at the price your marketmaker is quoting. If he changes his mind ie in a fast market across fundamental data like say NFP, then he'll either fill you at a different price (slippage) or offer you a new price (requote - a fairer system in my opinion!).

His streaming quotes are (loosely) based on the underlying market and his liquidity providers quotes, and also his own in-house order book, that's how he makes his money.

It's an interesting topic for sure but not something you need to worry too much about as long as you're getting your orders filled at the price you want.
  • #8
  • Mar 13, 2010 2:28pm Mar 13, 2010 2:28pm
tnx all of you guys..i think i get it..i really want to know that, it is a basic. Let say i will be a succesfull trader one time and someone will ask me what moves the market and i wouldnt know ) shame )

Here is how i get it with picture included.

In the markets there are big orders all the time. This orders are put there by market makers(ofcourse there are also our orders but not so important). If somebody buy 100 units, the price will move up until this 100 units will be reached..and so on and on..here is the picture, becouse it tells more than a 1000words.

Please tell me if i am right.


Regards,
scorpionFX
Attached Image (click to enlarge)
Click to Enlarge Name: how it works.gif Size: 16 KB
  • #9
  • Mar 13, 2010 2:31pm Mar 13, 2010 2:31pm
Thats a convoluted graphic, but yeah I think you got it.
  • #10
  • Mar 14, 2010 6:57am Mar 14, 2010 6:57am
Quoting scorpionFX
tnx all of you guys..i think i get it..i really want to know that, it is a basic. Let say i will be a succesfull trader one time and someone will ask me what moves the market and i wouldnt know ) shame )

Here is how i get it with picture included.

In the markets there are big orders all the time. This orders are put there by market makers(ofcourse there are also our orders but not so important). If somebody buy 100 units, the price will move up until this 100 units will be reached..and so on and on..here is the picture, becouse it tells more...
Good graph. Question one is down.
Wudnt you say the next question a successful trader might ask you would be why ? Why does a market work like this? Why are there even people taking the trades opposite to you (forex or in a broader sense any market being a zero sum game). Why does the value really appreciates or depreciates ?

If say euro is in big trouble why would there even be people who are taking longs to my shorts? What is their motivation? To put more context, who are they really? Someone needs to provide liquidity.

As pipmutt says we are trading in somewhat of an artificial environment. The market maker being the sole dealer for us is deciding the price. What wud be his motivation to fill your short order on EU when he also watches CNN and knows that euro is in trouble thanks to Greece. (Let me add here, he can offset your gain with other losers - 95% of the traders lose but that is not the context I am talking in here.)

Taking the example from your first post :

Say George Soros does short 10billion of GBP. But as , a buyer of the GBP, why wud u do that? What do you know/believe that Soros doesnt? Someone has to provide the liquidity but they must have a sound reason to do that. No one really whats to lose money, do they ?

The thing which really bothers me is I trade a PA or a MA crossover or a Stochs cross without knowing the reason which brought the price to that level.
  • #11
  • Mar 15, 2010 11:57am Mar 15, 2010 11:57am
Quoting vicky_ag
If say euro is in big trouble why would there even be people who are taking longs to my shorts? What is their motivation? To put more context, who are they really? Someone needs to provide liquidity.
Because market makers/liquidity providers (in a simplified view) are in the market to earn (a part of) the spread - they basically don't care about the overall economic situations unless in extreme situations. The risk is offset by the spread.

Quoting vicky_ag
Say George Soros does short 10billion of GBP. But as , a buyer of the GBP, why wud u do that? What do you know/believe that Soros doesnt? Someone has to provide the liquidity but they must have a sound reason to do that. No one really whats to lose money, do they ?
Bank of England bought up all Soros billions because they had to...go read some history...
  • #12
  • Mar 15, 2010 1:42pm Mar 15, 2010 1:42pm
Quoting BlackMage
Because market makers/liquidity providers (in a simplified view) are in the market to earn (a part of) the spread - they basically don't care about the overall economic situations unless in extreme situations. The risk is offset by the spread.



Bank of England bought up all Soros billions because they had to...go read some history...
Well BM I am pretty aware of the fact that they match orders. One to another to collect the spread. The role they play is more of a broker as compared to a dealer/trader. Maybe, I got a bit off the road while rambling.

What I really meant was - As a broker they are creating a level field to play but we need players, right? As, in a short needs a long. No long to match a short and they wudnt be so keen to take the trade. So, if I am sure that the market is going south with indicators and all why wud there even be a long? why not all shorts?

Secondly, I am not good with history but I think not me but you need some history lessons. Pray tell me which history book are you referring to.

To debunk your ludicrous "had to" theory - Everyone knows Soros but the first person to have mounted an attack on a particular currency was Andrew Kreiger. Back in 87, he shorted the NZD creating a huge pressure. Through derivatives he managed to short more than the entire money supply of NZD. So, going by your "had to" theory. The NZ central bank wud have gone broke trying to "had to" cover the shorts.
  • #13
  • Mar 15, 2010 1:59pm Mar 15, 2010 1:59pm
Quoting vicky_ag
No long to match a short and they wudnt be so keen to take the trade.
Why not, they're getting the spread plus shade, they hedge (on aggregate) with their liquidity providers.

Why are other traders buying when you're selling? Any number of reasons. Profit taking, commercial reasons, different time frames, hedging......
  • #14
  • Mar 15, 2010 2:47pm Mar 15, 2010 2:47pm
Quoting pipmutt
Why not, they're getting the spread plus shade, they hedge (on aggregate) with their liquidity providers.

Why are other traders buying when you're selling? Any number of reasons. Profit taking, commercial reasons, different time frames, hedging......
Pipmutt, great explanation, thanks.

If I may ask one more question:

Wat happens in case of a full blown monetary crisis when the liquidity dries up even at "their" liquidity providers?
  • #15
  • Mar 15, 2010 3:50pm Mar 15, 2010 3:50pm
Quoting vicky_ag
Secondly, I am not good with history but I think not me but you need some history lessons. Pray tell me which history book are you referring to.

To debunk your ludicrous "had to" theory - Everyone knows Soros but the first person to have mounted an attack on a particular currency was Andrew Kreiger....
UK was obligated by ERM to keep pound above a certain limit and therefore BoE had to defend the pound against Soros and other speculators - ultimatly UK were unable to meet the obligations and had to withdraw from the ERM.

At least that's the official history.
  • #16
  • Mar 15, 2010 3:56pm Mar 15, 2010 3:56pm
Quoting vicky_ag
Pipmutt, great explanation, thanks.

If I may ask one more question:

Wat happens in case of a full blown monetary crisis when the liquidity dries up even at "their" liquidity providers?
Now the new NFA rules are in force regarding adjusting trades after they're filled, US marketmakers supposedly can't do this any more, before they would just fill everything and bust (reverse) the trade later if the trader had got lucky, a rip off basically! I suppose the choices now are to widen spreads to reflect the underlying market, or turn off the platform using the 'technical issues' excuse, or requote, or slippage, or simply point blank refuse the trade which is their prerogative. It would have to be exceptional circumstances or volume though, apparantly most of these shops fill anything up to 10 million, instantly.

Brókers ain't stupid, and they ain't in the risk business.
  • #17
  • Mar 15, 2010 4:36pm Mar 15, 2010 4:36pm
Quoting pipmutt
Now the new NFA rules are in force regarding adjusting trades after they're filled, US marketmakers supposedly can't do this any more, before they would just fill everything and bust (reverse) the trade later if the trader had got lucky, a rip off basically!
It seems I need to get updated on this - I wasn't able to sniff out this particular rule at the NFA website - do you have a link?
  • #18
  • Mar 15, 2010 4:53pm Mar 15, 2010 4:53pm
Quoting BlackMage
It seems I need to get updated on this - I wasn't able to sniff out this particular rule at the NFA website - do you have a link?
There was a lot of chat about it here on FF, the natives got a bit restless

http://www.nfa.futures.org/news/news...ArticleID=2273
  • #19
  • Mar 15, 2010 5:10pm Mar 15, 2010 5:10pm
Quoting pipmutt
There was a lot of chat about it here on FF, the natives got a bit restless

http://www.nfa.futures.org/news/news...ArticleID=2273
Shiat man - I completely forgot about this rule being passed - all this time I have been living in nameless fear of having my trades busted....

Thx for the link.
  • #20
  • Mar 15, 2010 5:13pm Mar 15, 2010 5:13pm
Quoting BlackMage
Shiat man - I completely forgot about this rule being passed - all this time I have been living in nameless fear of having my trades busted....

Thx for the link.
haha, no problem!

It kind of makes it less stressful trading those obvious off-market or news spikes, waiting to see if the broker leaves the trade or it disappears cost me a fortune is cigarettes!
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