What is the market and how is the price of any item on it formed? The market is sellers and buyers who want to «sell» or «buy» a certain item. Based on the demand of those wishing to buy this product and the supply of those who have it, the price is set. This is how any market and the Forex market is no exception. Only if in the commodity market we are used to buying goods for money, which measures value, Forex is an international foreign exchange market, a global exchange point where money itself is a commodity. On it buy the currency of one country for the currency of another country, on the basis of demand and supply.
The principle is quite simple: if the seller wants to sell one dollar for 110 yen, and the buyer is ready to buy it for 100 yen, it is likely that they can converge somewhere in the middle and the price that will suit both will be about 105 yen for one dollar. However, in the real market Forex want to buy or sell a lot – its turnover is more than 4 trillion dollars per day. Sell and buy currency on it central and commercial banks, pension funds and insurance companies, brokers and dealers, large international companies and transnational corporations. Each of them is interested in a certain price – so the quote (the ratio of price of one currency to another) changes almost every second. If there are more who want to buy any currency, it will be expensive, if on the contrary, the sellers of this currency predominate – the price will decrease.
Where Is The Price At The Trading Terminal From?
Most Forex traders and investors see the price of a particular currency in trading terminals – special programs where you can make online transactions over the Internet. Where do the prices in these terminals come from? They come from various news agencies – Dow Jones, Bloomberg, Reuters, which in turn get them from banks.
To understand the very mechanism through which we see the market price for a particular currency, it is necessary to understand that the Forex market is over-the-counter, that is, the formation of prices on it takes place through computer systems. At the same time, it is an interbank market where banks issue the desired quote and if there is a buyer, a transaction is made. And since there are many such banks, prices are changing quickly and thousands of transactions are being made. At the same time, the same currency may be bought or sold at different prices, so at a time of high market activity, the prices of the currency of different news agencies may differ.
Most traders gain access to the Forex market through brokerage companies that have licenses to operate in that market. Brokerage companies cooperate with information agencies, which both provide on-line quotes and make them available to their clients.
How To Understand Where The Price Is Heading?
First, by analysing currency prices on a global scale and comparing them with the banking domestic exchange rate, it is often noticeable that they do not match. Indeed, it is not clear to beginners in trading why the price in the interbank market domestically and in the international Forex market may differ significantly? As a rule, this happens only with non-convertible currencies on foreign markets, the rate of which is set and maintained artificially.
Second, to understand which currency will rise and which will decline, an analysis needs to be made. In trading, there are two main types of analysis – fundamental and technical. The foundation for any currency is the economy of the country, so for the Japanese yen to rise, Japan itself must see GDP growth, lower unemployment, stability in the banking system, etc. Such indicators will signal that the yen needs to be bought. The same is true of the rest of the currencies.
Technical analysis studies patterns of price behavior, its growth and fall on the basis of charts. It also assumes that trends have the property of continuing and recurring. Using the possibilities of Internet trading and armed with analysis, each of us can earn money in the Forex market!