What determines price?
Price is a monetary expression of the goods. The prospect of its changes is a fundamental factor in the decision to purchase or sell financial instruments in Forex. If there are prerequisites for the growth rates of different currencies, it is advisable to buy it. If in the future it is planned to fall, then you need to sell.
If a trader wants to make confidently the right trading decisions, he needs to know how the price is formed and what affects its changes. According to the main rule of the Dow Jones theory, price takes everything into account: all sorts of factors — economic, political, social, natural, etc — affecting the financial instrument's value. It is almost impossible to consider each of them, so there is a certain risk of making the wrong decision by novice traders and by experienced foreign exchange market participants.
If we reject the external factors and evaluate only the basic provisions of the commodity prices formation, this figure depends on the level of market supply and demand in a free market. Supply is a total amount of a particular financial instrument offered for sale by traders, and demand is a total number of purchase requests from the potential buyers.
If demand for currency or for other financial instrument increases and the number of its proposals in the market declines, price will grow. If there is a decrease in the background of increasing supply and demand, the price will fall. When supply and demand are not changed particularly with respect to each other, significant price fluctuations not expected. These are the basic principles of pricing in any market, including Forex.
What is spread?
All the sellers and buyers put the prices at which they are ready to buy or sell a particular financial instrument. The difference between the stated price for the purchase and for the sale of the instrument is called the spread. To visualize what the spread is, just look at the currency exchange. Courses on buying and selling a specific currency differ by a few units. This difference (spread) is the profit made by exchange offices or banks. Similarly, brokers earn in the currency markets. However, the difference between demand and supply prices is much lower than in the exchange centers.
For instance, the quotation of the currency pair EUR / USD is 1.2136 / 1.2139. This means that at the moment the euro can be bought at the price of 1.2139 US dollars, and be sold at the price of 1.2136 US dollars. In this case, the spread is: 1.2139-1.2136 = 3 points. If a participant in the Forex trading does not want to buy or sell currency at the current price, he puts his own and waits for price to fall or grow to the desired mark.
The magnitude of the spread depends on three main factors:
- Liquidity of a currency — in the basic currency pairs the spread value usually ranges from 10 points, while the corresponding figure in the exotic pairs can be up to several of ten points.
- The market situation — in active trading periods, associated with the emergence of major news, the spread value usually increases. Significant oscillation of this index is also recorded in the periods of the market decline.
- Broker’s policies — each broker has its own vision of the optimal spread. Some companies tend to make more money on the difference in rates, while the other take into account all interests of customers.
What is volatility?
Volatility is a measure that reflects the average range of fluctuations in currency prices or another financial instrument over a certain period of time. Volatility is one of the main factors to be considered by traders involved in the Forex trading. This rate depends on the level of trading activity as well as the magnitude of the imbalance between supply and demand of a certain currency.
The currency pairs with the highest volatility and clear price movements are very popular in the market. Traders who want to make a profit on the difference in rates are interested in this type of pairs.
Volatility in the Forex currency changes during the day. This is due to the change in trading activity during different trading sessions. In accordance with the time zone UTC / GMT 0 trading sessions of different regions are:
- Tokyo- 23: 00-08: 00
- Singapore, Hong Kong — 00: 00-09: 00
- Frankfurt, Paris, Zurich — 07: 00: 16: 00
- London — 08: 00-17: 00
- New York — 13: 00-22: 00
- Chicago — 14: 00-23: 00
- Wellington — 20: 00-05: 00
- Sydney — 22: 00-07: 00
The American and European sessions are commonly characterized as those with the greatest volatility. Additionally, intensity of fluctuations in exchange rates depends on the day of the week, month or season. For example, volatility is generally higher in the middle of the week or month. In the summer, there is always a decline while there is rise in the winter. However, these laws are not strong since the degree of volatility is influenced by many factors (important news, economic factors, political processes, etc).