Why Does Price Move?
Have you ever looked at a chart, and seen the price suddenly fly up or down from a level and sat there scratching your head as to why? I’ll attempt to explain.
The single most important concept you can learn as a trader, and the one most often overlooked by amateurs, is that of Supply & Demand. The Forex markets, as indeed any market, or economic activity, in its most basic form, can simply be thought of as a bunch of people wanting to buy, and a bunch of people wanting to sell. Behind the scenes at the brokers there is an order book, which contains all of the buy and sell orders waiting to be filled at various price levels.
At any given price level, if there are more buyers than sellers, the price will rise. If there are more sellers than buyers, the price will fall. If there are a roughly equal amount of buyers and sellers, the price will fluctuate back and forth in a small range until one wins out. The range of imbalance of buyers to sellers at any given point will dictate how quickly the price moves.
Consider why it is that the large investment banks make all the profit. These guys have £100s of millions to play with. When they place orders on the books, they’re weighing in with some serious cash. If there is a buy order worth £100 million at a certain price level, what do you think is going to happen when the price reaches that point? Even if all of the amateur traders combined are selling into that level, it’s not even going to make a dent. The price will hit that level, and fly off it upward, under the enormous buying pressure.
How many time yourself have you seen price shooting upwards or downwards, and thought “I’ll have a piece of that”, jumped on it, only to see it then immediately reverse, stopping you out in the blink of an eye? Chances are, you missed 90% of the movement, and have just bought or sold into an institutional bank’s massive order level. You never stood a chance. The key is to recognise areas of Supply & Demand in advance, and be ready to pounce when the price approaches them.
A guy called Sam Seiden introduces the concept extremely well. It is imperative that you watch his introductory video to the concept and understand it before you move on with reading anything else. Until you understand Supply & Demand, and how it makes the price move in the markets, you’re going to be losing your cash more often than not. The video is linked here.
Great, you think, but how does this help me? How am I supposed to identify these levels on my chart? Sam briefly covers ways to do it, but to be honest, I find his explanations extremely lacking. There are much easier ways to identify levels of Supply & Demand on your charts, which I will cover in a subsequent post.
For now, go and do some more reading around the topic, and familiarise yourself with it. It’s going to be the most important tool in your kit in your future career as a trader.