Hey guys, I just wanted to discuss something I think can be slightly misleading to new traders and experienced traders alike. When I first came to baby pips and knew nothing about Forex I went through a good portion of baby pips school. I’m not sure If I finished or not… Regardless, One thing I hear from a lot of people is that what drives the market is buyers and sellers.
Here is the common misconception i would like to dispel. “If there are more buyers then sellers, the market will long, if there are more sellers than buyers, the market will sell.”
Most people accept this and do not actually think about what it actually entails. From my extensive research and some common sense, this overstated “rule” is not valid. It’s not how many buyers there are or sellers there are that drive the market. Here is an example:
100 people are buying the euro and 10 people are selling the euro usd. Based off that information, can you conclude the Euro long against the US dollar?
Most people would say long. The problem with this logic is it doesn’t matter how many people are longing or shorting It matters how much each side is backed with money.
Now If you knew the 100 people who are longing invested only $100,000 in total and the 2 sellers put in $250,000 in total, that changes the game does it not?
Now it’s clearly obvious the euro usd will sell because there is more money shorting the euro than is buying the euro, the people are irrelevant.
Hope this helps those trying to better understand what actually drives the market. Money not people.
Which is a good logic behind people who trade with volume. Volume means trades, not dollars.
However Leg0nd, what you are suggesting needs to be looked at from another angle.
How OFTEN does that actually happen? and
Is it measurable to determine if it is people or money driving volume?
At least with this concept, I think it is safe to say to not take volume as a strict movement. Think about Pin Bars. If you have a bullish pin bar with the shadow pointing up, that means there was both a high increase and decrease in the currency pair but in the end it was still an increase but that particular pin bar can be a price action signal to go short.
Volume can be a little tricky in determining what side to take on a trade, so you just have to take it with a grain of salt.
I believe this boils down to whether you are looking at fundamental or technical analysis. Forex traders who look at the fundamentals would never agree that the volume of the people trading or even the volume of cash is what effects the price. They would focus on what is going on in the country where the currency comes from as well as other world events in order to understand the direction of the currencies.