Having a solid understanding of market mechanics is essential in helping you as a trader to fine-tune your entry and exit points as well as your stop loss levels. This in turn leads to stronger and more accurate trading results.
Learning to read a currency quote is the first step in understanding forex market movements. Currencies are recorded in pairs or in terms of how much one currency is worth relative to another currency. When we read a currency quote, what we are seeing is how much of the counter currency (the second currency presented in the pair) it takes to buy one of the base currency in the pair.
For example, if a quote for a particular currency pair increases, this means that it now requires more of the counter currency to buy one of the base currency. Another way of understanding this is when a quote increases, this means the base currency has strengthened and the counter currency has weakened.
On the other hand, when a quote decreases, this means it now takes less of the counter currency to buy one of the base currency, or, when the quote for a particular currency pair decreases, this means the base currency is worth less and the counter currency is worth more.
What Leads to Forex Market Movements?Listed below are four main factors that influence forex market movements:
Buyers entering the marketWhen buyers enter the market they create a ‘bullish’ reaction, which results in upward price movements.
Sellers entering the marketWhen sellers enter the market a similar reaction is caused, whereby the market experiences a ‘bearish’ reaction, resulting in downward price movements.
Buyers exiting the marketSimilar is nature to when sellers enter the market, when buyers exit the market, this causes a downward or bearish price movement.
Sellers leaving the marketSellers leaving the market results in a bullish reaction, thus resulting in upward price movements.
Understanding Market MovementsAt any point in time a combination of the above market conditions can be experienced. As such, the final price movement you will see on the chart is a result of market players present on the market at a given moment.
For example, if the market is currently ‘bullish’ this means that there are more buyers than sellers. As those buyers begin to generate and bank their profits, this results in ‘retracement’ or a temporary reversal of trend, whereby more sellers enter the market and contribute to the downward trend. As the sellers begin to take their profits, more and more buyers re-enter the market, leading the trend to continue again, resulting in an overall bullish market reaction.
When major market news is released or a huge investor massively closes out a portion of his position, emotions tend to run high, leading countless traders from across the globe to take positions that go against the previous trend. When this happens, the net volume travels in a new direction, creating a brand new trend.
