Why Is Price Doing What It's Doing? | Forex Factory

Options

Go to
Permalinks
Print Thread

Similar Threads

How and Why Does Price Move? Who and What Moves Price? 35 replies

Why did ask price of USDSGD move so far from the bid price 3 replies

Why closing price is not the same as opening price? 1 reply

What am I doing wrong with MT4? 9 replies

For those holding positions over the weekend, check how your currency is doing! 6 replies

Attachments: Why Is Price Doing What It's Doing?
Exit Attachments

Why Is Price Doing What It's Doing?

  • #1
  • First Post: Dec 21, 2010 8:53am Dec 21, 2010 8:53am
Hello, I asked this in another thread before but would like to hear some more opinions of fellow traders. It regards the following quote:

"Per the “Investors Dictionary,” liquidity is “the ability to quickly buy or sell a particular item without causing a significant movement in the price...
A high density of limit orders per price (i.e., a “full order book”) results in high liquidity for market orders. Per the definition of liquidity, a full order book should imply a small movement in the best price when a market order is placed. Liquidity is really a measure of market depth and continuity. Depth means the amount of shares available, while continuity implies orders are close together, not spaced far apart (sparse). Low liquidity can lead to large price movements when filling orders."

So what exactly is it that causes big, speedy moves and therefore big bars on a liquid pair like the EURUSD? Is it just many equal amounts of buy/sell orders lying on top of each other that all get filled one after another (and since there are so many at times they get filled pretty fast)? Or is it something like a few quantitative similiar orders at the near end of the move that were eager to get filled?

If I understood it right, it's always the nearest matching bunch of buy/sell orders that is being executed. Therefore I guess big fast moves in a liquid market are caused by a great amount of matching buy/sell orders that are just a few pips away from each other.

I'm sure there's an a easy answer to it but I somehow have difficulties thinking about it in a logical manner. Maybe you guys can help me out with that.
Thanks J16, Sam Seiden, Udine and Jacko
  • #2
  • Dec 21, 2010 10:07am Dec 21, 2010 10:07am
Quoting HanSolo
Hello, I asked this in another thread before but would like to hear some more opinions of fellow traders. It regards the following quote:[indent]"Per the “Investors Dictionary,” liquidity is “the ability to quickly buy or sell a particular item without causing a significant movement in the price...
[i] A high density of limit orders per price (i.e., a “full order book”) results in high liquidity for market orders. Per the definition of liquidity, a full order book should imply a small movement in the best...
Hey HanSolo

Today there was a large amount of buy stops sitting at 1.3200 for EUR/USD. Look what happened after 1.3200 was hit to the mark.

Also, besides cluster of stops (faded by dealers or not), an imbalance order flow can be generated by options expires/barriers with large open interest, technical points and news (duhhh...).

*You might want to find a FAILED well known pattern and track the impulses afterwards.

I hope this helps your understanding
Life is a school for the soul
  • #3
  • Dec 21, 2010 10:28am Dec 21, 2010 10:28am
Hi essufw, first of all hanks for your help. I so far understand the concept of lots of buy orders = price goes up, lots of sell orders = price goes down. But I do not really understand WHY this happens and how big moves can happen in a very liquid market.

Quoting esuffw
Today there was a large amount of buy stops sitting at 1.3200 for EUR/USD. Look what happened after 1.3200 was hit to the mark.
You mean sell stops (as price moved down), don't you?

Do I understand it right: If there are 10 sell limit orders right at 1.32, these will get covered with as many buy orders below as needed for them to get filled - starting at the nearest best price (1.3199) moving price down to the worst price until all 10 limit orders are off the table. How fast price moves depends on how many buy orders we have down there, how big the distance between them is and how far sell orders outweigh buy orders.

I hope that sounds reasonable.
Thanks J16, Sam Seiden, Udine and Jacko
  • #4
  • Dec 21, 2010 10:46am Dec 21, 2010 10:46am
Quoting HanSolo
Hi essufw, first of all hanks for your help. I so far understand the concept of lots of buy orders = price goes up, lots of sell orders = price goes down. But I do not really understand WHY this happens and how big moves can happen in a very liquid market.
Hey HanSolo

Big moves happen in a very liquid market because there are HUGE market orders coming in that overwhlems all the limit orders sitting in the Interbank, OR simply everyone wanted to go on the same side at the very same time.

There are many reasons that creates such moves. (dont let the random walk fellows fool you!) I already mentioned a few in my last post. If you cannot understand what I said yet, you might want to conduct some research on the topics I mentioned.

Also, limit orders dont move the market at all, its MARKET ORDERS. What are MARKET ORDERS? Stops and breakout chasing orders.

Regards
Life is a school for the soul
  • #5
  • Dec 21, 2010 11:16am Dec 21, 2010 11:16am
Quoting HanSolo
Hello, I asked this in another thread before but would like to hear some more opinions of fellow traders. It regards the following quote:[indent]"Per the “Investors Dictionary,” liquidity is “the ability to quickly buy or sell a particular item without causing a significant movement in the price...
[i] A high density of limit orders per price (i.e., a “full order book”) results in high liquidity for market orders. Per the definition of liquidity, a full order book should imply a small movement in the best price when a market order...
Hans,

Sounds like you need to watch Sam Seiden's supply and demand webinars. I'm pretty sure they'll provide the answers you're looking for.

http://transcripts.fxstreet.com/2007...-and-dema.html
It's not about how much you make, it's about how much you don't lose.
  • #6
  • Dec 21, 2010 11:32am Dec 21, 2010 11:32am
@esuffw: I think I have to reflect a bit on what you wrote. But so far it sounds reasonable. Thank you.

@Dhb: Thanks for the link. I will have look into it.
Thanks J16, Sam Seiden, Udine and Jacko
  • #7
  • Dec 21, 2010 11:47am Dec 21, 2010 11:47am
I think eurusd today touched 1.32 and then dropped because of a similar scenario:

1) people was buying, letting price go up untill 1.32.
2) at that point, many people had the takeprofit level there, that is in fact a limit order, a such big amount of limit orders did stopped the price from going further up.
3) at that point, price wasn't able to go up anymore because of the huge resistance (sell limit orders), and started to go down consuming all the buy limits till 3185.
4) a little upmove on a side that was still too full of resistance, and then down again, after hit 3185 it simply dropped very fastly.
This because there wasn't surely soo many buy-limits orders from 3185 to 3150, and also many people just sold at market price on the 3185 break or with a sell-stop order placed <=3185, this situation let the fast move happen.

And situation like this happen everymoment on everyscale (from tick chart to monthly), the market mechanism is very simple after all.
There are just 4 forces that sometime are not balanced and price must move to find a balance again.

Hope it helped a little nice thread!
  • #8
  • Dec 21, 2010 3:47pm Dec 21, 2010 3:47pm
When a pair moves fast in one direction, say Eur/Usd is going up quick, Eur is being bought at the same time Usd is being sold. If pair is moving slow only one side is being bought or sold. Alot of people don't understand that if someone trades Eur for Gbp , Eur/Usd will move down ect..............
  • #9
  • Dec 22, 2010 1:17am Dec 22, 2010 1:17am
Thank you guys. This helps me a lot.

It brings me to my next question: What exactly happens - in terms of trader's behavior - when price isn't nearly moving at all?
I know on some more exotic stocks/pairs/whatever this happens because there are only few if any traders trading it. But what about the situations when price "loads up" on a liquid asset, like we see it when triangles are forming? What exactly happens there in terms of order flow?

Fact seems to be that more and more orders come in until price finally breaks out. But

1. why exactly is it that price movement gets narrower until it isn't nearly moving at all? Is it because equal amounts of buy/sell orders pile up on each side of price and cancel each others potential movement out? What exactly makes this indecision and not-moving in price behavior?

2. why does price after getting narrower break out so abruptly? Is it that at some time sellers/buyers overweigh and simply take out the orders on the other side of the counter? But why does this move happen so fast and so abruptly? I would imagine it to happen slowly as buy/sell orders - after being in equlibrium for a while - will take some time to disequilibrate. Like scales getting out of balance as weight piles up and slowly tilting to one side.

Thank you very much for your help
Hans
Thanks J16, Sam Seiden, Udine and Jacko
  • #10
  • Dec 22, 2010 3:39am Dec 22, 2010 3:39am
Hello,

in response to your question i've just made a little image, let's see it:

http://img190.imageshack.us/img190/6725/narrow.jpg

This is an hypotetical ascending wedge/triangle.

And here some explaination, there are numbers in the image, every number can be commented like this:

Price was uptrending, after finding a resistance (many sell limit orders and not enough active buyers to fill all them), it get rejected and go down to the next support.
1) Price approach support, just there there are many buy-limit orders and active sellers aren't strong enough to fill all of them.
At this point all price can do is go to the next little resistance.
2) price aproach next little resistance, find resistance there and go down to the next little support.
3) again find support and go back to resistance.
4) Price find resistance here, but the move from the last support to here was a straight one without any support-poind inside it, so it find a little support soon after, and point up again breaking also some previous bigger resistances.
At this point, traders start to understand that the balance is not good enough, and the pattern start looking like a bullish one.
5) price come back to the last little support, the last one before the winner of buyers.
6) price come back to resistance, and this time nobody is willing to sell there, not many limit-sell orders, and buyers become very active and buy buy buy.

Result: ascending wedge, up trend resume and let's go up!

This is how i see the dynamic behind consolidations.

It is important to say that if in this example buyers won very clearly, during a major uptrend, even if buyers would lose a battle, such new major support created can and in many cases is seen from traders as not a good place to sell, but instead a new support where to buy even more, so in such cases the new major support would be even stronger. Moral of the story: the trend is your friend.
  • #11
  • Dec 22, 2010 6:50am Dec 22, 2010 6:50am
Hey tunera, great image, thanks.

So out of your perspective it's not so much of the rubber band that's getting stretched by orders piling up on both sides until it finally snaps apart - it's more like traders cancelling each others out, boring themselves to death, lol, until no one really knows what to do anymore. Then, when time is ripe, smart traders step in and pile up theie orders on the down/upside making price jump out of its narrow range.

Hope this makes sense.
Thanks J16, Sam Seiden, Udine and Jacko
  • #12
  • Dec 22, 2010 9:02am Dec 22, 2010 9:02am
Quoting Dhb
Hans,

Sounds like you need to watch Sam Seiden's supply and demand webinars. I'm pretty sure they'll provide the answers you're looking for.

http://transcripts.fxstreet.com/2007...-and-dema.html
Am just about to watch the video. What he says makes sense and it clears up my 2nd question:
Let's take a triangle scenario with a bullish breakout... There may be more buyers than sellers from the very beginning of the range/triangle forming. But price still stays in the range because there are yet enough sellers coming in to fill lots of these buy orders. The longer this happens, the more sell power will dry up. Finally buy orders are wiping out the last remaining sell orders - leading to a very narrow range. When this has happened and there are no sell orders left, price can't but break out above. It has to go up to the next best price level and to an area where there are sellers to fill the remaining buy orders.

Now we're talking. Thanks for your help and the video!
Thanks J16, Sam Seiden, Udine and Jacko
  • #13
  • Dec 22, 2010 9:53am Dec 22, 2010 9:53am
Quoting jfxnc
Alot of people don't understand that if someone trades Eur for Gbp , Eur/Usd will move down ect..............
I didn't. Interesting idea.

Then if there's a light dip then the same up-wave in EURUSD from 5 to 7 am EST today, only a side run then a large up-wave in EURGBP, there's more money going into USD than GBP. Thus, one may conclude without looking that GBPUSD does much less upward motion than either of the other pairs.

Please correct me if I'm wrong.
  • #14
  • Dec 22, 2010 11:33am Dec 22, 2010 11:33am
Quoting HanSolo
Am just about to watch the video. What he says makes sense and it clears up my 2nd question:
Let's take a triangle scenario with a bullish breakout... There may be more buyers than sellers from the very beginning of the range/triangle forming. But price still stays in the range because there are yet enough sellers coming in to fill lots of these buy orders. The longer this happens, the more sell power will dry up. Finally buy orders are wiping out the last remaining sell orders - leading to a very narrow range. When this has happened and there are...
Glad I could be of service.
It's not about how much you make, it's about how much you don't lose.
  • #15
  • Dec 22, 2010 12:58pm Dec 22, 2010 12:58pm
Quoting ha-pattern
I didn't. Interesting idea.

Then if there's a light dip then the same up-wave in EURUSD from 5 to 7 am EST today, only a side run then a large up-wave in EURGBP, there's more money going into USD than GBP. Thus, one may conclude without looking that GBPUSD does much less upward motion than either of the other pairs.

Please correct me if I'm wrong.

If the time period is 5pm yesterday to 7am today est. USD was being sold, gbp was being sold MORE, Eur was being bought. Think that's what your asking.
If anyone trades USD for any other currency all USD pairs will be affected.

Thats why I don't like support or resistance lines or Indicators. If someone wants JPY for there USD they could care less what support EUR/USD is at!
  • #16
  • Dec 28, 2010 9:34am Dec 28, 2010 9:34am
Here's another question I have:

Why do prices retrace?
Of course there is lots of profit taking going on in the market. But what, among this, are the other reasons that price always retraces. What is the trader's behavior behind this pattern?
Thanks J16, Sam Seiden, Udine and Jacko
  • #17
  • Dec 29, 2010 4:11pm Dec 29, 2010 4:11pm
This too can be explained by simple supply and demand.

Price moves up, because all the sell orders have been absorbed by buyers. Then, somewhere along the way up, price is becoming so high that new sellers will emerge. I don't know if you've ever studied economics or anything, but the lower the price of a good, the higher demand, and the lower supply will be, and vice versa. So as price climbs, ever more people will want to sell, either because they've already made a nice profit, or because for some other reason they believe price is too high at the moment.

So as price rises, more sellers enter the market, and simultaneously, buy orders will dry up, as price now becomes too high. Demand drops, supply increases: the price move up slows down, and eventually stops moving up. The moment all buy orders are absorbed by sell orders, price will start to move down, or retrace. Now price will continue to fall as long as there are more sellers than buyers. And these buyers will enter the market in bigger numbers as price continues to fall, because as you now know, demand for a good increases if it becomes cheaper. Supply dries up, demand overtakes supply, and the retracement has come to an end and price is on the move up again.

The same happens in a downtrend, only then there are consistently more sellers holding a bearish view than there are buyers who are bullish.
It's not about how much you make, it's about how much you don't lose.
  • #18
  • Dec 30, 2010 3:49am Dec 30, 2010 3:49am
Quoting Dhb
This too can be explained by simple supply and demand.

Price moves up, because all the sell orders have been absorbed by buyers. Then, somewhere along the way up, price is becoming so high that new sellers will emerge. I don't know if you've ever studied economics or anything, but the lower the price of a good, the higher demand, and the lower supply will be, and vice versa. So as price climbs, ever more people will want to sell, either because they've already made a nice profit, or because for some other reason they believe price is too high at...
A great explanation Dhb. I know the concept but never looked at forex with this in mind. Thank you very much.
Thanks J16, Sam Seiden, Udine and Jacko
  • #19
  • Jan 21, 2012 10:49am Jan 21, 2012 10:49am
Hello fellow traders,

here's another question. Actually two questions:

1. As I've learned with your help, a chart shows the ongoing supply and demand equation. So if there is supply and demand on the chart, there sure must be equilibrium somewhere. But how do you spot equilibrium on a chart without any indicators or trendlines? Is it possible? How do you do that?
I would guess that equilibrium often is where most of the trading (i.e. candles) takes place. Is that correct?

2. So if I know where equilibrium was in the past, is there a way to predict if equilibrium will shift to the up- or downside in the future? E.g. by the strength of demand and supply levels and bigger price moves?

Thank you very much for your help
Hans
Thanks J16, Sam Seiden, Udine and Jacko
  • #20
  • Jan 21, 2012 12:29pm Jan 21, 2012 12:29pm
Quoting HanSolo
Hello fellow traders,

here's another question. Actually two questions:

1. As I've learned with your help, a chart shows the ongoing supply and demand equation. So if there is supply and demand on the chart, there sure must be equilibrium somewhere. But how do you spot equilibrium on a chart without any indicators or trendlines? Is it possible? How do you do that?
I would guess that equilibrium often is where most of the trading (i.e. candles) takes place. Is that correct?

2. So if I know where equilibrium was in the past, [b]is there a...
1) Incorrect. Your candles and the big ones in particular are formed when there is a disequilibrium between demand and supply, i.e buyers and sellers. An equilibrium state is easy to spot on the chart. a really tight consolidation zone with low volumes is a good indication that traders more or less agree on the price the security is being traded at, currently. Unfortunately because of so many factors that affect this trader "sentiment" such as news, technical levels and bogus trading by the day dreamers this state will often break up into a disequilibrium that eventually leads to the potential opportunity to make money.

Dark star somewhere in his posts mentions the idea of a financial instrument having zero utility besides the profit potential. That potential can only be recognized by a disparity between the current price of the security and the valuation traders place on it.

2) That's what every break out system strives for! You can either choose to use the fundamentals to guide you, or use technical tools or a combination of both. I know its a general answer but that's really how it is. Any more specific and I am merely singling out a "system" from a pool of myriad such systems some successful some not so.

g.
I believe . . .
0 traders viewing now