In this thread, I will add from time to time some realistic approaches concerning the forex market. I want to show you by what forces these markets are determined. If you know that, you will understand why prices move. This is not a thread la "How the markets really work" or "do this and get rich". This is just to show you, why 90% of what you learned is wrong and only told to you in order to get your money. I will try to be as scientific as possible - by using logical consequences (which is very powerfull though unproven) and by telling some facts. These facts are difficult to prove because there is not much public sources on the background of market transactions. You are free to discuss. However, I ask you to maintain a high level of quality in your posts concerning your reasoning.
#1 Appreciation and depreciation will cause price moves
There is a reason why currency appreciate and depreciate. I used these terms and not "price movement" because appreciation and depreciation is what is happening in the background. What you see is the result: price movement. So in order to understand why prices move, you need to understand why currencies appreciate and depreciate. And guess what. The reason is fundamentals. I cannot stress this enough, especially since I observe the majority of you hailing any strategy as if it were the holy grail. In the long run you won't make profits with this strategy. Just look around at all the old strategies that worked super well. Now, they don't. Their profits vanished.
Of course there is some chart technical / mass psychologycal / behavioural part in price movement. But do you really think chart technique rules the markets? To be clear: I don't claim chart technique gives you no extra profits. I will contintue on that one later... (to be continued)
#2 Chart technique can cause price moves
If you still think that the major moves come from mass psychology, then you should also think that there is a whole lot of competition. And there are very professional traders whose job it is to exploit any inefficiency in the markets. By inefficiency I mean chart patterns or trading strategies that can give you money.
Let's consider a very popular strategy: The break out of a range. If everyone buys on a breakout of resistance (though this is not true but let's assume it for the moment), then demand would exceed supply by far. Markets are not in balance in prices will move very rapidly until every buyer gets his order satisfied. Obviously since there was not enough supply on the break out level, some buyers won't get the best price they wanted (the break out price). They get a much higher price. When now supply comes in at higher prices and some of the first break out traders close their position (they sell) the market will be under a lot of selling pressure and probably fall down. In that case those break out traders who did not get filled at the break out price (instead worse) are in negative. Now if prices do not continue to move (which is just logical because prices cannot rise forever), they will stay in red for long until they lose their nerves and close their position which will drop the market down. You see? This is what efficiency means. You cannot really influence if your order gets filled first. So sometimes you win, sometimes you lose.
However if you found yourself such strategy that you can benefit from, two things are likely: Either it is a too obvious strategy and therefore any extra profits caused by inefficiency will be exploited very soon untel the markets become effiecent (efficient = no extra profit possible) again. So your strategy does not work on the long run. Or you have a very sophisticated approach that no one else has spotted before. Then, you should not share it otherwise it get expoited and market become efficient again. In contrast to the stock market, forex is a zero sum game. In both markets winners and losers cancel each other out. In stock markets, you will get dividends from time to time. In forex you may get some swap, which is not very much.
#3 Liquidity vs. volatility
Have you ever wondered why EURUSD is so popular? Every broker tells you to come to him and trade the most liquid pairs. Liquidity means that you have less volatility. Liquidity also means that you can fill your orders at the best (= market) prices most of the time. That alone sounds pretty good. However this is also true for companies who do not trade currencies but need exchange rates for their imports and exports. You as a trader increase the liquidity by buying and selling all the time. Companies get the best prices available. They also can place buy limit orders in order to get even better quotes. Volatility can get the prices to this buy limit order. And the liquidity ensures that the buy limit order of that company will get filled at that lower price level. So in order to get price down, big events are necessary because these will create volatility. I will come to that later. So when you trade a very liquid pair you basically trade a very low volatile pair, because there are so much buyers and sellers at every price level. And before prices move they will clear out market orders. If market orders are steadily coming in, prices can't move (except if hedgefunds, investment banks or central banks intervene). If every buyer and seller sees no progress in his position, he might think "oh maybe my trade idea was wrong" and close at market, which will keep the price not moving. Some one is interested in that behaviour. As I mentioned before, companies like liquidity because they can fill their orders. But also, brokers and investment banks like that because they earn money by spreads and commisions. The more often you trade, the more they will earn. If they have this interest in you trading more frequently, they give you incentives. These incentives can be that they move price up to a breakout in order to get your buy stop or stop loss of your open short. They will create / increase volatility to incentivize you. I will come to that later.
#1 Appreciation and depreciation will cause price moves
There is a reason why currency appreciate and depreciate. I used these terms and not "price movement" because appreciation and depreciation is what is happening in the background. What you see is the result: price movement. So in order to understand why prices move, you need to understand why currencies appreciate and depreciate. And guess what. The reason is fundamentals. I cannot stress this enough, especially since I observe the majority of you hailing any strategy as if it were the holy grail. In the long run you won't make profits with this strategy. Just look around at all the old strategies that worked super well. Now, they don't. Their profits vanished.
Of course there is some chart technical / mass psychologycal / behavioural part in price movement. But do you really think chart technique rules the markets? To be clear: I don't claim chart technique gives you no extra profits. I will contintue on that one later... (to be continued)
#2 Chart technique can cause price moves
If you still think that the major moves come from mass psychology, then you should also think that there is a whole lot of competition. And there are very professional traders whose job it is to exploit any inefficiency in the markets. By inefficiency I mean chart patterns or trading strategies that can give you money.
Let's consider a very popular strategy: The break out of a range. If everyone buys on a breakout of resistance (though this is not true but let's assume it for the moment), then demand would exceed supply by far. Markets are not in balance in prices will move very rapidly until every buyer gets his order satisfied. Obviously since there was not enough supply on the break out level, some buyers won't get the best price they wanted (the break out price). They get a much higher price. When now supply comes in at higher prices and some of the first break out traders close their position (they sell) the market will be under a lot of selling pressure and probably fall down. In that case those break out traders who did not get filled at the break out price (instead worse) are in negative. Now if prices do not continue to move (which is just logical because prices cannot rise forever), they will stay in red for long until they lose their nerves and close their position which will drop the market down. You see? This is what efficiency means. You cannot really influence if your order gets filled first. So sometimes you win, sometimes you lose.
However if you found yourself such strategy that you can benefit from, two things are likely: Either it is a too obvious strategy and therefore any extra profits caused by inefficiency will be exploited very soon untel the markets become effiecent (efficient = no extra profit possible) again. So your strategy does not work on the long run. Or you have a very sophisticated approach that no one else has spotted before. Then, you should not share it otherwise it get expoited and market become efficient again. In contrast to the stock market, forex is a zero sum game. In both markets winners and losers cancel each other out. In stock markets, you will get dividends from time to time. In forex you may get some swap, which is not very much.
#3 Liquidity vs. volatility
Have you ever wondered why EURUSD is so popular? Every broker tells you to come to him and trade the most liquid pairs. Liquidity means that you have less volatility. Liquidity also means that you can fill your orders at the best (= market) prices most of the time. That alone sounds pretty good. However this is also true for companies who do not trade currencies but need exchange rates for their imports and exports. You as a trader increase the liquidity by buying and selling all the time. Companies get the best prices available. They also can place buy limit orders in order to get even better quotes. Volatility can get the prices to this buy limit order. And the liquidity ensures that the buy limit order of that company will get filled at that lower price level. So in order to get price down, big events are necessary because these will create volatility. I will come to that later. So when you trade a very liquid pair you basically trade a very low volatile pair, because there are so much buyers and sellers at every price level. And before prices move they will clear out market orders. If market orders are steadily coming in, prices can't move (except if hedgefunds, investment banks or central banks intervene). If every buyer and seller sees no progress in his position, he might think "oh maybe my trade idea was wrong" and close at market, which will keep the price not moving. Some one is interested in that behaviour. As I mentioned before, companies like liquidity because they can fill their orders. But also, brokers and investment banks like that because they earn money by spreads and commisions. The more often you trade, the more they will earn. If they have this interest in you trading more frequently, they give you incentives. These incentives can be that they move price up to a breakout in order to get your buy stop or stop loss of your open short. They will create / increase volatility to incentivize you. I will come to that later.
May the Pip be with you.
