I’m having hard time to grasp what makes forex prices fluctuate.
I’ve been reading some articles and forum posts online, but it didn’t help me clarify the issue.
I understand how supply and demand impact prices (not just in forex, but in general),
But I don’t understand the supply and demand ‘difference’ in forex.
The thing is, every forex transaction you make, have an opposite transaction, otherwise, you wouldn’t be able to make your transaction,
So, for example, If someone would want to sell 10 million worth of EUR/USD, and no one is willing to buy, then-
A- the supply is more than the demand, BUT-
B- he wouldn’t be able to make the sell, because there is no opposite side to take that transaction.
But if they do able to make the sell, that means that there is someone (or several traders) that are willing to buy 10 million worth of EUR/USD,
So doesn’t it mean that the supply is the same as the demand?
basic principle of supply and demand.
Money supply and interest rates-Lower interest rates, in turn, also tend to lower the value of a currency – because investors get low returns on investments in that currency.
Market stability- a buoyant housing market and increasing gross domestic product (GDP) – encourages investment and increases demand for a nation’s currency.
Appreciate your reply,
But it is still unclear to me.
Money supply, interest rate and market stability is something that can be used to set a ‘base line’ for the currency price, or if something occurs, change the pair’s value,
But it not something that changes in a fast pace as the currency price changes.
For example if you look at the EUR/USD pair, you can see that the price always fluctuating,
Maybe not by much, by it is still fluctuating,
Today’s close price is different from yesterday’s close price, which is different from the close price the day before, etc’.
However, during those days, chances are that MOST OF THE TIME, the USA / European Union money supply remained the same, interest rates remained the same, and unless something drastic had happen, most chances that the market stability remained the same.
The price, however, did fluctuate.
Perhaps I’m understanding it wrongly,
But if you read my original post,
You see that, for my understanding (which could be wrong),
Forex trading by itself does not change supply and demand and is ‘neutral’
okay I see
Am sure you are aware that the forex market is the largest financial market in the world because of the heavy demand behind the traded assets. simply there’s always a buyer wanting to buy and a seller wanting to sell
So if someone would want to sell 10 million worth of EUR/USD, and no one is willing to buy, then-
A- the supply is more than the demand, YES BUT-
B- he wouldn’t be able to make the sell, because there is no opposite side to take that transaction.
But if they do able to make the sell, that means that there is someone (or several traders) that are willing to buy 10 million worth of EUR/USD, YES
So doesn’t it mean that the supply is the same as the demand?
NO
Not exactly buyers have a certain price they think EURUSD is worth and sellers think that price is too low for EURUSD and they set their own price. But one sellers need to travel and can’t wait for the buyers to change their minds so drops the price a bit to reach a certain demand so now out of 10 sellers 1 has a different price much lower and those buyers who really need EURUSD quickly buyers it other seller see this and the do the same now imagine this process happening very fast very second.
So you see the seller(supply) think the price there getting is too big some supply who want out reduce the price buyers buy, sellers jump to that price where buyers are buying rapidly but if you are the remaining seller out of the 10 you get push you price up because you are the only seller the supply is low demand is up. Then if sellers outnumber buyers, and price will respond by moving down.
After price has moved down far enough traders will come back into the picture, this lower price presents a ‘perceived value.’
As additional buyers enter the picture, price will move up to reflect this increased demand.
This is the process of price attempting to find its fair value as it takes place on many different time frames in every market in the world
I tried my best am not good typing sorry I can do a much if I was explaining.
Hope I answered your question.
I really appreciate the time and effort you are putting into helping me understand that issue.
You did helped me a lot!
So, if I understand correctly, this is a ‘perceived’ supply and demand, in which buyers and sellers each push their own agenda,
Meaning, in an over-simplified manner- sellers are interested in selling high, so they are asking for a price that is more than market value, in the ‘hope’ that someone will be willing to buy at that price,
And the same time buyers are doing the opposite, they are searching to buy, or offering to buy, at a price lower than market value, until they find someone who is willing to buy at that price,
And usually a buy or sell as described above, creates a chain reaction in which other buyers/sellers align themselves to the last buy/sell price, to be ‘attractive’ to other buyers/sellers to exchange the money with them.
Just a last question regarding this manner-
As a retail traders, we don’t have the option to change the bid/ask prices,
We are only able to make buy/sell orders, based on those given prices.
So who are those buyers and sellers that actually push the prices?
I think that’s when brokers come in, Exchange rates vary by dealer,and I think we do have some effects on it so Bid price can be the price a forex trader is willing to sell a currency pair for. Ask price is the price a trader will buy a currency pair at. Both of these prices are given in real-time and are constantly updating. So for example, the British pound against the US dollar has a bid price of 1.20720, that’s the price a trader wants to sell the GBPUSD. A seller who thinks a currency will decline, might sell at the bid price to take advantage of the fall. If the British pound against the US dollar has an ask price of 1.20740, that’s the price a trader wants to pay in order to buy the currency pair.
The difference between the ask and the bid price is the spread.
If you look at your charts, you can obviously see that price is constantly fluctuating.
What makes this fluctuation in the price, as this minor constant fluctuation is not seems related to external events/interest rates/etc’, and as for my initial understanding (as mentioned in my original post), forex transaction does not ‘shift’ supply and demand of that currency.
