Why does the price move? The answer is here!!! - page 10
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It is not my mission to satisfy anyone on forums :) and to explain everything in a nutshell.
there is a system and it is quite simple, clear and understandable for those who bother to find information, read it and digest it. the basic principles have been explained here using simple examples.
those who write without knowing the facts can add "i think so". i and timbo do not consider it necessary to add such a phrase, for these are not our thoughts, but a statement of facts. and the fact that you do not want to take our word for it cannot negate them. the only way for you to check is to examine the issue in detail yourself.
...
You are probably familiar with systems analysis or systems theory or some of that. Here, I need to explain the FOREX market from this perspective, from a system perspective!
In order to define a system you have to:
1) determine all the links of the system
2) Define all links between links.
In other words, I have to find out how the FOREX system is organised physically, how trading is carried out, who organises and monitors everything.
Who invented the FOREX system, he also invented the rules by which the system works, a clear algorithm.
That there is a clear algorithm - is beyond doubt, because any computer works according to a clear algorithm, and we receive information from the market through the computer!!!!
Here, I need this algorithm for the FOREX system!!!!
...
Since you are familiar with systems analysis, it is probably no secret that in addition to the micro approach, which you suggest is the only one, there is also a macro approach - when the system is considered a subsystem (black box) with its inputs and outputs. In this approach, it is not necessary to define all links of the system and connections between them, but it allows to define it by its behaviour in different conditions. You don't have to understand anatomy in order to define, for example, a person as an element of society.
There are many systems for which there are no clear-cut algorithms of behaviour. To describe and investigate them, there are "fuzzy" methods, which operate with fuzzy sets - not a flawed or incomplete definition of an object, but simply one that is more adequate to its nature. There are no clear and unambiguous algorithms for such systems. Examples of such systems are evolving systems, non-linear systems with feedbacks, finally living systems.
Forex (in my opinion) represents just such a system. It emerged not by someone's idea as an implementation of some regulatory algorithm, but as a result of the world economy development, in particular its financial component, which allows it to function quite effectively and develop further. Yes, to a certain extent the big banks can regulate its behaviour, but this is usually only done to maintain its stability and crisis-free development (not always successful either).
However, everyone would be happy if you could use the deductive method to reveal the detailed mechanism of formation of the price of each financial instrument.
(AGAIN, IMHO).
Everybody reads almost the same books which are available on the net and everybody has a different opinion?
Just as a warm-up, think of the forex market, completely separate from speculation, without trying to take a few pips, as a service financial process that serves the needs of businesses (exports, imports, international direct investments and investments in financial instruments), a process in which no one tries to make money on the exchange rate difference.
"Just understanding the nature of pricing in Forex makes it more complicated than stock trading. Quoting a stock is, in terms of sense, simpler than the price of one country's currency against another country's currency. The number of factors influencing such a quotation is so large that trying to account for them all borders on madness. The presence of a ``table'' or Level 2 for a particular security makes trading more or less orderly and logical. For the retail spot-forex trader, this aspect is nothing more than a hazy haze. Alas, there is no such thing as a single ``stack'' in Forex."
" Forex is an interbank market. You could change the wording somewhat to better understand the issue. Forex is a market of very large amounts of money, whose owners are large financial institutions (not necessarily banks) of various kinds. They are the ones who make the weather in the market. And I emphasize, ``weather'' not against you (retail spot-forex trader), but for or against each other. In terms of pricing, you do not exist for them. Literally, absolutely every market participant influences the price. The understanding lies in the degree of that influence. If you are scooping water out of the ocean with a coffee cup, in principle, you will be influencing the level of water in the ocean. If there are 10,000 of you, you will influence it 10,000 times more, but in fact I think the meaning is clear."
"If the Forex market had a centralised trading venue, provided for all levels of market participants by a third party exchange, everything would be much easier in terms of understanding the price formation process. There would be a single ordering window in which participants of all levels would set buy and sell orders. Market participants would be able to see ``market depth'' and volumes. Unfortunately, this is not yet possible. Primarily because of clearing, but this does not matter now. The Forex market that exists at the moment is a collection of places scattered around the globe and a global network of places where people trade spot currencies, futures and derivative contracts for currencies. That is, we have a combination of electronic trading venues and our own stock exchanges located in many countries. The locations for ``assemblies'' are indeed very numerous. However, in terms of pricing, we can omit most of them, leaving just three. Two of them are electronic systems: EBS and Reuters. In third place is the International Money Market (IMM) division of CME (Chicago Mercantile Exchange) and its own GLOBEX electronic system.
IMM has the highest volume and liquidity of currency futures trading, both ``in the pit'' and electronically through GLOBEX. The trading principle follows standard exchange rules. Without going into all the intricacies, there is a ``stack'' or Level 2 in Chicago, in which all traders enter their buy and sell orders. One can see the ``depth of the market'' and the volumes standing at each level. Prices are formed through supply and demand. In order for the price of a contract to rise, buyers must absorb/consume sellers' offers with their bids and vice versa. Here is an example. A three-month futures contract, the underlying asset is the euro/dollar. The size of a standard contract is 125000. At the moment we see the situation with the Best Bid 1.2100. The volume of this Bid is 50 contracts. Best Offer 1.2110. The volume of this order is equal to 50 contracts. Then Offer 1.2111 20 contracts. Then Offer 1.2112 50 contracts. Then Offer 1.2115 70 contracts. 2112 501.2111 20 Offer 1.2110 50
Bid 1.2100 50
Assuming that nobody will share anything in the market. Those market participants that are on the side of
buyers must absorb all the offers including 1.2115 in order for the price to rise by 15 points. That means that buyers would have to buy 50 contracts at 1.2110, then 20 at 1.2111, then
50 at 1.2112 and 70 at 1.2115. Therefore in this example it is easy to calculate how much money would have to be spent to bring up the price by 15 pips. Of course it is possible to manage trading on IMM, and many market participants try to do it. You do not want an asset to go up? There is nothing easier. Put an offer at 1.2115 with a volume of 1000 contracts. In doing so, you must be able to support the margin on those contracts if they are absorbed. This will discourage small speculators, but if other large market participants have views on the growth of the asset, then you will have to fight by sacrificing money. If your 1,000 contracts are absorbed put in another 1,000. If you have enough money to meet buyer demand and still maintain your offer at 1.2115, you can safely consider that you hold the top of the market. But if you find yourself on your own, you will simply be eaten and you will incur substantial losses."
Well, and more.
Scheme roughly:
Chalk<--> MM<--->...Other interbank participants (including other MMs)
| |
Exchange: derivatives market (currency) <---> Other derivatives market participants
Transactions on the interbank market are carried out on a contractual basis between two participants. They do not have to make a deal and see who the counterparty is.
-Such as how much is the eur for the dollar?
...
-Will you sell it for $1,000?
-I won't sell it to you. :)
At the market, trading is done using a special marketplace, where limit buy and sell orders are shown for all participants. All orders are depersonalized - there is only the price and volume. The difference between the best buy price (the most expensive) and the best sell price (the cheapest) is the spread. But limit orders are only a passive offer - a transaction will only take place if there is a buyer/seller who will agree to the deal at the offered price. The price will move upwards if the buyers are the active side and downwards if the sellers are the active side.
For example:
100 (25)
99 (12)
98 (10)
------
96 (2)
95 (34)
94 (6)
There are limit buy orders from below to "----" and limit sell orders from above. If there is an active buyer on the market now, who agrees to the price of 98, this will be the last price. If he or other buyers buy all 10 lots that are offered, it's possible to buy at 99 and if they agree, the price will go up. In other words, the volume of buying and selling is always equal, and the price goes up or down depending on the activity of the buyers or sellers - who agrees with the offered price. There are also specialists, who maintain liquidity and perform some other functions. Here http://www.itinvest.ru/e ditorfiles/File/specialist.pdf is more detailed, but it's for stock market.
Trading with MM is basically the same, only small participants trade with one large structure. MM offers only 2 prices: buy and sell. His task is to get the difference between them. But if one of the parties (buyers/sellers) is too active, then he gets a skew in the aggregate position. For example, a large long position in EURUSD. He doesn't need that - it's a risk. It can therefore move the excessive aggregate position to the interbank (or to the exchange by buying or selling futures), or it can increase or decrease the Bid and Ask depending on where the skewness is, thus trying to cool the buyers / sellers and reduce the position. How he does it is his own business and his own risk. Depends on the MM, his risk management, limits, regulations, etc. So his job is to remain as neutral as possible and get a fixed income from trades actually between his clients. MM sees the limits and stop orders of his clients (although there are systems that hide the stop orders) because he executes them. So on some small scale he can predict supply/demand for one price or another. This sometimes helps him to manage excessive aggregate position by himself. But he only sees his own, so he can't take a large and long break in his quotes from other MMs - the possibility of arbitrage arises. This equalizes the prices between different MMs.
Spreads spread the MM during a period of strong volatility. Because of the increased risks it is forced to increase its compensation.
DC retransmits quotes of one or more MMs, also withdrawing the excessive position to the one who is ready to buy/sell it. In fact the DC is a mini MM. Thus, MM and DC are independent participants of trades oriented on intermediaries, but they have their own strategy, which is typical in some way, but also has its own specifics for a certain MM/DC. The specifics appear on small frames due to the conditions described above. But in general, the price is still driven by demand/supply from all participants. The influence depends on the volume of their interests and unity of opinion. For small speculators it is zero on average (there is no unity of opinion :)), although periodically they can be forceful. The big speculators have a real impact on the course change. Moreover, they are usually the active side in deals. This can be seen by analyzing the COT reports for example. This is a report on futures positions on the currency. The trading volume of currency futures in recent years far exceeds the turnover of the interbank. So to say that FX is a non-speculative market is incorrect. IMHO.
Somehow it seems to me that here has chewed up everything thoroughly, but I also somehow feel that over-eager and meticulous author of the topic this knowledge will NOT GIVE ANYTHING. In practical terms, of course. It is informative, persuasive and interesting but for our trade it is mostly useless. Sometimes in the search for truth, you have to stop in time. IMHO of course.
Heavy artillery has come into play. )))
For some reason I feel like it's been chewed up all the way through, but I also feel
I think for some reason the over-zealous and anal-retentive author of this thread
This knowledge will NOT GIVE ANYTHING. In practical terms, of course. Educative,
persuasive, interesting..... but for our trade mostly useless.
Sometimes in the search for truth, you have to stop in time. imho
Of course.
For you, perhaps, prediction and profit are the same thing, ie correctly predicted (guessed), you got a profit, wrong - got a loss. But you can make a profit, not only making correct predictions! In general you can make a profit without depending on the direction of price movement, ie, get rid of the trend component and work only with noise (random component).
But to do that I need to know why price moves!
Lately many financial authorities have been speaking unflatteringly of hedge funds, which have been causing speculative turmoil in the market with their huge accumulated funds. I.e., without any economic reason, the price starts flying against the market, for example, hedge fund throws in 20 billion every 5 minutes - stops are torn, then they sell rapidly and pocket the profit. And hapless traders scratch their heads - where did that candle come from? Hedge funds and pension funds in the States are worth $4 trillion - guess who the major speculator is.
I'm going to contribute to the discussion too!
For me it all became simple and obvious, why the price moves and who invented forex and why!
1. You correctly stated that Forex was created for exporters and importers of goods so that everyone could easily buy the currency they need at any time. That's all!!!! It's just a handy tool for exporting and importing, just like a translator from English to another language, for example!
If this program is used by speculators (traders), then for God's sake they do not break the rules, so they use it. But the purpose of direct forox is a convenient and fast exchange of currency, one for another!!!!
2.Who moves the prices, it is also simple, you sold gas for $ 1 mil. Bak, and counted exactly for them to buy the ship, but something did not go right in the U.S. economy, namely in the shipbuilding, and they are selling the ship at a higher price for 1.1 mil. Bak, that is the movement of prices, if earlier one ton of gas could buy a ship, and now no, then the rate has changed, which affected exactly how much gas can buy this very ship!
That is all!