I am new to forex and this site and spent the weekend browsing through the baypips school site and the newbie forum - it’s excellent!
My question relates to the mechanics of how the exchange rate price for a currency pair (say EUR/USD) moves on my trading chart.
I understand that currency movement is all down to supply and demand and that there are a number of different factors (including fundamental and technical reasons) why the exchange rate price is constantly changing.
What i dont understand though are the mechanics of how this supply and demand is actually making the price on my chart go up or down?! For example, I understand that if price gets to an overbought level then traders will begin to close out their positions by selling but just because everyone is selling, what is controlling that price we all see on our trading platforms when the price starts dropping?!
I guess the simplified question is what is controlling the data feed on forex platforms as i understand there is no central exchange so if we are all just trading independantly how can 1 central price/datafeed for the exchange rate exist?!
this is probably a basic question but I just cant get my head around it so if someone could help with the answer that would be great!
In my opinion it’s a waste of time thinking too much about it, because you simply can’t really have an overbought/sold situation, and there really isn’t any mechanics to the market as such, the market will always do what the market will do, the best thing to go by is that the market will continue doing what it is doing until it does something else, i.e. trend or range to varying degrees.
thanks for this but i dont think i asked my question very well as its even more basic than that!
regardless of overbought/oversold consitions and price ranging etc, my question is when the price moves up say 1 tick on my candle stick chart (for whatever market reason), what has controlled it to do so?
I presume we are all looking at the same exchange rate pricing regardless of the datafeed our marketmakers are using so what/who is controlling the datafeeds?
i understand the concepts or supply and demand but if there is only 1 exchange rate we are all working to (and 1 datafeed) how can any traders/banks actually influence the price that we see moving up and down on our charts?
for example a bank might decide that euros are worth far more than the current eur/usd rate but surely they can only exchange them at the current exchange rate? If all the banks just decided their own exchange rates at what they thought was fair, how would this produce a single eur/usd datafeed of pricing that all the retail fx traders could use?
I expect i am missing something very basic here sorry!
I see what you mean, I think the answer will be Interbank, but yes everyone will more or less be looking at the same price disregarding a little delay here and there.
This is how I understand it. I haven’t looked at the subject in depth because it doesn’t effect my personal trades, but it is an interesting subject.
We, the little people, don’t move the price. The large banks and funds do.
They use software that allows them to see all prices that other people are offering to either buy or sell at. Think of two columns side by side, one with bids and the other offers. If the bank is looking to sell they will look in the offer column for an offer that matches the price that they believe meets their price criteria. This then moves the VALUE of the price to that level.
So, say price is currently at 1.5000, and a bank wants to sell 100 lots @ 1.5010. They look in the offer column and see someone is looking to SELL 100 lots @ at 1.5010, so they click it and a deal is struck. The price VALUE now moves to 1.5010.
I’m basing this assumption of how it works because I have seen traders in large organisations operate this way, and the price respond thusly - but only on web broadcasts. What I don’t understand is how this can actually work when there is no centralised market, but I guess all brokers post their clients bids/asks to a global feed that everyone operates from?
I’m interested to find out if I’m correct on this - but at the end of the day it has no effect on my trading at all, and I’m only interested from an academic point of view.
Exactly. This I don’t know, and haven’t been able to find out. You would have thought that at the centre of all the brokers there would have to be one agency to collect all the info, then redistribute to everyone else in the network.
The other option of course is that all brokers hook up to what essentially would boil down to being a forex torrent system, where there is no central service provider but instead all clients talk together and share the information around?
Bottom line is that I don’t actually know and am only making presumptions. Hopefully someone with industry experience can shed some light on the subject.
Failing that, I might mail my broker. It is an interesting subject after all, even if only to see how the big fish operate.
The only singular centralized data source in the forex market is in futures. Obviously, that’s not really important to what we’re talking about here. The fact of the matter is that spot forex trading is an over-the-counter market in which there isn’t a central exchange or data feed. There are places where information (especially pricing) is aggregated - where prices from multiple sources come together in a singular feed (indicative, but not traded or tradable). Reuters has long been one of those places. Otherwise, what you have is a collection of market making brokers showing the prices at which they will trade.
Pricing is tiered down through a kind of hierarchical network.
The largest banks can deal with each other directly in the Interbank network through electronic brokering systems like EBS or Reuters.
It’s a credit-approved system where banks trade based solely on the financial relationships they have established with one another.
All the banks can see the rates everyone is dealing at, however each bank must have a specific credit relationship with another bank in order to trade at the rates being offered.
Other institutions such as online FX market makers, hedge funds and corporations trade FX through commercial units.
Although retail brokers will usually only access bid & ask prices from their own select bank feeds, the generic bid & ask numbers that are quoted to their competitors are pretty tightly related throughout the entire Interbank network by the relationship of the tiered participants.
For anyone interested, here are the major interbank participants, and their respective shares of the foreign exchange market (note that these shares refer to the entire $4 trillion currency market, not just the $1.5 trillion OTC forex market).
So when I make a trade to go long on eur/usd (buying euros with dollars) who is on the other end of that transaction?
Does the retail forex market-maker simply take their spread with the bank who provides their datafeed selling euros for dollars on the interbank market?
Or is that 2nd part of the transaction actually another retail forex trader like me thinking the market is going the other way?!!! (which it probably is!)
In the majority of cases their systems match & net you off with another of their internal customers trading the opposite direction.
They pocket the spread across the each way dealing transactions. So basically they’re warehousing their customers orders until such time that they need to offset any weighted risk in the market.
They’re basically managing the risk according to their own internal auditing procedures.
A great question and excellent information in the answers provided; this is something that has crossed my mind also, but never got around to asking about. Is it referenced to anywhere in the Babypips school I wonder?
Maybe we need a section called “Everything you want to know about Forex but were afraid to ask”
Has anyone heard of “price smoothing” by forex brokers ? I saw that term used some time ago I have wondered about that ever since. Does this mean the broker recieves a price feed from a bank then alters it in some way before retransmitting it to their clients ?
What was the context? On most online charts (non-feeds), price is often averaged across multiple brokers (i.e. indicative data). The other smoothing type would be lowering the packet frequency of a feed to cut down on bandwidth costs.
