I`m gonna ask the big question.How is price action calculated?
And by that im not asking how a candlestick is calculated because it's basically connecting prices with a line or a bar type chart to make it more visual.Im asking how an ECN broker plots 1-5 min charts,who calculates the low timeframe price action,because if a central bank plots price action he usually announces daily averages,based on daily financial activity,which can be counted of course,but not on 5 min scale or 1 min scale…
Let’s say the ECB announces this morning a daily average for tax payment or other issues to be 1.1111 on the EUR/CHF.
But later on Jimmy will go and exchange 1 billion euro into CHF as his holiday spending money in the nice and beautiful Swiss Alps, but he decides to exchange it in 1000 different currency exchangers,not at a bank,so his money exchange is not registered electronically.This move of course would move the rate to atleast 1.1110,
which is not the real exchange rate.Even if a broker would trade the EUR/CHF at 1.1111 at that single moment,nobody knows of Jimmy’s transaction so they continue to trade it at 1.1111,which is a false exchange rate.Some currency exchangers have to report their exchanged sums daily to a bank,but some just report it at the end of the month when they have to pay the taxes,so until then all financial institutes
have a false image on the EUR/CHF,and also basing future calculations on that misleading rate on the first splace.
So my question is who calculates the lower timeframe data of an exchange rate,preferably at an ECN broker which offers “real” time data.And how does a central bank calculate the value of it’s currency at normal or on small timeframes,what information it uses,and how does it replace unknown information like Jimmy’s transaction above?
Price action is not calculated. It’s observed. The data you generally see in forex price feeds is the indicative bid-ask rate. The low for any given period will be the lowest indicated rate and the high will be the highest. There are some places where you might see actually transaction data, in which case the highs and lows are based on where trades were executed. There isn’t any averaging to it or other calculation.
Ok but from where do you get the data,since only like 10% of the forex market is made of traders.The big chunk is made of big corporations retrieving money from foreign subsidiaries, and governments borrowing fromeachother huge money.[B]This may be incorporated easily on a 1 day chart but how do you derive from this a 1min or 5 min chart? How is price action plotted so quickly with that accurate data,if most transactions isn’t even registered that fast?[/B]
Price on your charts is the last deal done on the interbank market. Easier to think of it in terms of shares and how price is displayed. ECNs depend on the interbank for the price feed but the network for the liquidity as opposed to the interbank (although it does have a connection to the interbank) so its only a derivative.
As I said, the prices you see are primarily indicative. That means they reflect the price at which the market makers are willing to trade at a given point in time - not necessarily where trades actually took place. That stuff is registered on a tick-by-tick basis, so the data is always there on even the most minute time frame.
In terms of those big transfers, if they go through the market they are instantaneously reflected in prices. Transaction speeds these days are registered in milliseconds. If those transfers do not go through the markets they have zero impact on prices and thus are irrelevant.
This is incorrect. We see indicative dealing rates - where we can do trades - not where trades have been done. The only place you’ll see actual transactional detail is maybe on the top-end dealing platforms the banks use.
They will be but slowly incorporating which may seem irrelevant.The market is everywhere you can’t just ignore it,maybe the interbank relations can give a somewhat accurate signal as you mentioned,but if you do a large transaction with cash it also will be incorporated to the market but slowly.
Ex: The example with “Jonny” as i stated in my first post,if he does not use any bank or electronic device in his transaction only pure cash from a currency exchanger, since the currency exchanger will have to do accounting he will represent his cash flow,but monthly only so after he reports his cash flow to the government the government will have a picture how much money is in that country based on monthly, companies cash flow reports.Also if he spends his money in the new currency wherever he spends it,sooner or later it will get into a companies hand and they will have to report that cash.
So it may not have a huge impact on price action it will be surely incorporated (also many events like this increase somewhat the CPI,PCE,current account,etc),after all individual transactions like this make up the bulk of the forex market.
If you want to start speaking in those kind of expansive ways then every single bit of economic activity is a factor in forex prices. That doesn’t really help address your question as to where lower time frame prices come from. No large transactions take place at the money exchanger level because the spreads there are highway robbery, so all significant volume goes through the market.
Further, your suggestion that “individual transactions like this make up the bulk of the forex market” is erroneous. The interbank forex market where prices are determined trades $4+ trillion in volume per [I]day[/I]. That far exceeds the requirements for trade and the transaction of goods. To provide some scale, in 2011 the US GDP was $14.99trln for the full year. That works out to $0.04trln per day, and only a fraction of that was trade goods.
So you’re saying that economic factors have a slow impact on the forex market,and the interbank market calculates the rates.The question is now how? As many banks exist as many exchange rates too,each one has different spread due to competition,but what is the standard exchange rate to which they refer their exchange rates, is there any centralized structure or agency which set’s it or where is it set?
Exactly. It’s confounded economists for years why fundamental models for exchange rates are useless in all but the longest of time frames.
The question is now how? As many banks exist as many exchange rates too,each one has different spread due to competition,but what is the standard exchange rate to which they refer their exchange rates, is there any centralized structure or agency which set’s it or where is it set?
No. Forex is a decentralized market. There are platforms which bring the inter-bank market together, but nothing official operates like an exchange. The main players are well aware of the rates their fellows are quoting, and hedge funds stand ready to jump on any meaningful deviations, so there’s not a lot of variation in the quotes the banks are making. In other words, competition keeps them tight. Those bid/ask rates are adjusted by the market makers as a result of supply and demand of the currencies in question.
so in the end of it all, trading on forex is mostly predicting the way other trades react on different market situations? That is what all the technical analysis based on…everybody watching more or less same picture and acting according to their ideas, while the main goal is to catch the trend?
