Forex (F)ilosophy

Beginner Questions
#1

Hi.

I have a question with a regard to the direct cause of price quotes, as I believe having a sound knowledge of this mechanism will be of benefit.

Now, I have worked within equity markets for a number of years and can hold my own when discussing p/e ratios, management issues and all other factors we would use in fundamental analysis. Unfortunately, my knowledge of the ATS, SETS and order books is comparatively limited, and so don�t know the reason why a stock will be at 10.00 one second and then 10.05 the next second.

Hence, as far as Forex is concerned, I was wondering if anybody knew how the MMs decided (if, indeed, there is ever any cognitive input from a human) what a currency pair should stand at from one second to the next. Why will the EUR/USD be 2.0095 one minute and 2.0100 the next? Furthermore, since retail forex is presumably a subjective affair (as far as the brokers are concerned), is there any opportunity for arbitrage between different accounts with different brokers?

I would be most grateful if someone could provide an explanation.

Yours,

Sharedealer

(Potential Forex Convert)

#2

and so don�t know the reason why a stock will be at 10.00 one second and then 10.05 the next second.

Maybe this will help in answer to this question & to some extent this piece.

Hence, as far as Forex is concerned, I was wondering if anybody knew how the MMs decided (if, indeed, there is ever any cognitive input from a human) what a currency pair should stand at from one second to the next. Why will the EUR/USD be 2.0095 one minute and 2.0100 the next?

Elliott Wave Theory
or here.
The 5-3 Wave Patterns - 10th Grade: Elliott Wave Theory - Beginner’s Guide to Forex Trading, Free Forex Education, Learn to Trade Forex, Forex Training - BabyPips.com
As far as

s there any opportunity for arbitrage between different accounts with different brokers?

as all the feeds are reputedly from the same source, the only chance for arbitrage may be in the spreads.

:wishes:

PS Very thought provoking thread though.

#3

Thanks for replying DayDreamer.

Yet, I think Elliott Wave Theory is an observation of what happens, rather than how. For example, wave 1 will occur (according to Elliott) when there is an initial surge of buying. Now, lets say 100 people trade long with an immense amount of lots through, for simplicity’s sake, the same broker. Will the broker have a chap on a dealing desk who’ll subsequently raise the quote, or is there a computer which compounds the orders and adjusts the price based on some pre-programmed formula?

To extrapolate, then, to the whole forex market; what triggers a global rise in the EUR/USD quote? I’m aware that there is no central exchange, but I’m guessing that retail brokers piggyback on the central banks quote system somehow. You mentioned “the same source” - do you mean the central banks? If so, how would the 100 private investors ever have any effect on the price, if the broker’s quote is subject to the central bank’s quotes? Is it because the broker will actively trade its own account to hedge its customer’s trades?

Thanks,

Sharedealer

#4

The foreign exchange market has a daily volume in excess of 1.5 trillion USD, which is 50 times the size of the transaction volume of all the equity markets taken together. This makes the foreign exchange market, by far, the most liquid and efficient financial market of the world. Thanks to its efficiency, there is little or no slippage of market price for the execution of even large buy and sell orders. Traders are able to take advantage of intra-day volatility thanks to the low spreads and enter positions for short time periods, such as minutes and hours. Unlike equity trading, where restrictions limit a trader’s ability to profit from a market down turn, there are no such constraints on currency trading. Currency traders can take advantage of both up and down trends thus increasing their profit potential.

Types of Trading

OK I have borrowed from another source again plus it would be
advantageous for you to read the babypips school it is full of
useful information. Plus it explains the ideas a lot better than I can
here.

But a broker is a middleman who either “hedges” your trade if she feels she can handle it,
or passes it on to the main source, the inter-bank terminal ((ECN) which calculates the price),
if they feel they cannot.

Also to quickly answer what triggers the movement in the currencies
it is a number of mechanisms, countries interest rates, trade balance,
stocks, carry trade, the list is endless, but can you see the point I am
so badly trying to make?

Read the school it will open your eyes even further & remember we are
always here to help.

:wishes:

#5

Hey daydreamer I see you have a large list of elliot wave sites in your post. I was wondering if you are an expert in elliot waves? I have been trying to learn them but I have so many questions and no one to ask them to. Would you be willing to stand up and coach?

#6

Elliott Wave: IntroductionThis looks a good course.

The 5-3 Wave Patterns - 10th Grade: Elliott Wave Theory - Beginner’s Guide to Forex Trading, Free Forex Education, Learn to Trade Forex, Forex Training - BabyPips.com

Elliott Wave Basics

Hi Bazooko

Nice of you to think so but I am not sure there are
more than most members, I’ll have to check.

I am not really an expert I probably know less than most
because I am still to be convinced that they are relevant
to forex in the strictest sense of the term.

I have listed a few for you to have a look at see what you think.
That is the only way to learn about these indicators, etc.

:wishes:

#7

Hey daydreamer, I gave them a quick look see. Don’t have much time now, but I did go over babypips stuff. I have followed NZD/USD with the EW’s and they seem to be working pretty good on the weekly chart. But then last night I came across HKD/USD and it seems to throw the whole thing out the window. Anywho my main question is, What happens after the waves are done? I know it starts over but if the first set of waves went up then in theory the next set should go down. And if the “c” wave was a retracement of the whole thing then how can you tell where the “c” wave ends and the “1” wave of the next EW start? See my confusion? Or am I just wearing down my fingers for nothing?

#8

An answer to the latter part of your query will probably help to lay the ground work to answer the first part. Yes, one could arb between forex broker accounts is possible, if one can act quickly enough. Because of that, broker quotes will tend not to vary much from the interbank quotes.

Getting back to the question about what causes price to change from moment to moment, it’s the same in all markets. Prices are based on bids and offers, which change constantly. Let’s use a simple example.

We have a market with a bid of 100 and offer of 101 so 100-101. If the 100 bid gets filled (meaning someone came in and sold to the bidder at that price) or the bidder cancels the order, that bid goes away. If no one else had a bid out there at 100, the bid price will shift down to the next highest, maybe 99. The same sort of thing happens on the offer side. So as trades happen and people add or remove orders from the market, the bid/offer quotes will change in reflection.

That is the basic underlying mechanism of the markets. All the fundamental analysis, Elliott Waves, and other stuff that people use to explain or forecast price movements speaks only to the broader direction of prices over time. It all boils down, though, to the changes in the orders in the market.

#9

Thanks Rhody, that’s useful.

Is it not in the broker’s interest to increase the bid if there are no orders, though? If no-one is willing to sell at 100 then isn’t the broker or market maker obliged to increase the price at which they’re willing to buy? The lack of selling will surely initiate an increase in price… ?

Also, when we see a candle for a particular period, does that mean that during that period, every single person trading on that same pair around the world will have been offered the same open, high, low and close (and all the bits in between) that we all see on our charts?

For example, if I have a candle on my chart which states that the open for the period was 100, the high was 120, the low was 95 and the close was 110, will you have that same candle and have had access to those exact same prices as me? Furthermore, do you think that one reason for the range in available prices is because there are different brokers i.e. at 1pm exactly, might broker A offer 100, broker B offer 105, broker C offer 110 depending on their own whims etc?

Finally, is there anything in Forex akin to level 2 data we find in the stockmarkets? For example, I like seeing each and every order that goes through on a stock. You feel as though you’re really in touch with the price, and get an idea of investor sentiment. Do you think the currency markets are just too vast to offer that kind of data? I hope they’re not (or have I uncovered a business idea?!)…

Thanks,

Sharedealer

#10

The market will always seek levels where transactions will take place. That’s what it’s there for. If no one is willing to buy at the current offer level, the market will move it lower until it finds buyers. When I say market that is basically everyone involved since no one group is the sole determiner of price because of the arbing I mentioned before.

Also, when we see a candle for a particular period, does that mean that during that period, every single person trading on that same pair around the world will have been offered the same open, high, low and close (and all the bits in between) that we all see on our charts?

If you’re talking about an exchange-traded market, then yes, since they represent the focal point of pricing. For an over-the-counter market like spot forex, then not necessarily. Where someone can trade does depend on the prices they are shown by the market maker through which they are trading.

Finally, is there anything in Forex akin to level 2 data we find in the stockmarkets? For example, I like seeing each and every order that goes through on a stock. You feel as though you’re really in touch with the price, and get an idea of investor sentiment. Do you think the currency markets are just too vast to offer that kind of data? I hope they’re not (or have I uncovered a business idea?!)…

Again, because it’s an OTC market with no central quote location, you won’t find anything like Level 2 on an aggregated basis. It might be available on some systems for one broker or group of them, though.

#11

Hi rhody, sharedealer2055 (glad I didn’t scare you away :lmao:)

Again, because it’s an OTC market with no central quote location, you won’t find anything like Level 2 on an aggregated basis. It might be available on some systems for one broker or group of them, though

I have no idea about stocks, so naturally know nothing about level 2??
but isn’t the COT data something along the same lines?

Not every deal per se, but a sentiment of the market?

Or am I a long way off base?

:wishes:

#12

Yes. COT and Level 2 are completely different.

#13

Yep thought I might be as you hadn’t mentioned it, but
thanks for the explanation.