Forex Trading Course - Part 1.8

What Makes Price Move?

In this lesson, you will learn exactly what is making the markets move on a daily basis. 

The financial markets work in exactly the same way as any other market in the world does and therefore so does the way that price moves!

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Auction.png

Firstly, let's use an example that hopefully all of you will be familiar with. Think about what happens at an auction. Similar to the financial markets, you have two prices displayed. These are the bid and ask prices. 

Let's say that a vase is being auctioned and someone has so far bid £20 on the vase. The auctioneer will then ask for £22. Straight away you can see that there are two prices shown, so what actually makes the price move...

Another person then holds up their card and bids the £22 that was asked. Price has now moved! The new bid price is £22 and now the auctioneer might ask for £25 for example. For price to move again, another buyer would have to bid at the auctioneer's asking price!

Now this example only really shows price going up, so we need to think about what happens in an actual marketplace where price is moving both ways.

Vase (1).png

Let's now pretend we are at a fish market and for the sake of this example we are interested in buying cod. Going into this market, you want to buy the cod for £10 per kg. There is a seller willing to sell the cod... but for £11 per kg.

 

Here we have another example of our bid and ask prices. We are willing to pay £10 per kg and the seller is willing to sell at £11 per kg but until one of us accepts the other price, nothing is happening and no transaction will occur. 

4 hours pass and still neither of us will budge. Eventually the seller gets worried that he won't sell anything that day so decides to accept our offer and sells his cod to us at £10 per kg. If we were the only buyer willing to pay £10 but another buyer is willing to pay £9, this is where you would see the price move! The bid price would now be £9 and the ask price would either remain at £11 or move to £10 - depending on what the other sellers are willing to sell at.

Now the example above isn't perfect because it assumes we are the only buyer willing to pay £10.

Now take a look at the below table.

Cod1.png

This table is an example of what a depth of market will look like. The current bid and ask prices are highlighted in yellow.

The key thing here is that where you see bids, these are buyers willing to buy at the price to the left. Where you can see offers, these are sellers willing to sell at the price to the left.

A bit like the earlier example, if no-one is willing to pay up or pay down, then no transactions will take place and the price won't move at all!

Take a look at the next table!

Cod2.png

Can you see the difference here? 

5 buyers have now decided to pay up and filled the orders of the 5 sellers that were previously in the offers column. Since there are no more sellers willing to sell at £11, the new ask price is £12.

When these transactions take place, only the person who is the aggressor has their transaction recorded. Therefore, these 5 orders would be shown as buy orders (even though someone has obviously sold to them). 

What do you think will happen to the bid price?

Take a look at the next table!

Cod3.png

Look at what has happened.

The buyers have now shifted their pending orders up and are now willing to buy at a higher price. You can see how the bid price has moved to £11.

Why do you think this is?

A couple of reasons why this might happen are as follows:

1) Someone who shorted (sold) cod earlier in the day needs to fill their order and is worried price won't go any lower.

2) Someone has spotted an opportunity to go long (buy) anticipating that the price will go up and is happy to enter at that price.

Hopefully you can see how the bid price has moved from £10 to £11 and the ask price has moved from £11 to £12. 

To recap-

For price to move up, all of the sellers with pending orders at a certain price need to have their orders filled. In the table above, 6 buyers would need to pay up to the £12 ask price before the ask price would move to £13.

For price to move down, all of the buyers with pending orders at a certain price need to have their orders filled. In the table above, 4 sellers would need to pay down to the £11 bid price before the bid price would move to £10.

The example above is exactly what is happening in all financial markets, whether you are looking at EURUSD, indexes, stocks, etc.