What Moves Forex Prices?

Forex market prices move constantly. This is due to the different expectations of market participants, and the imbalance between buyers and sellers. If buyers and sellers were perfectly balanced, there would be no price movement. Where there are more buyers than sellers, prices move up, and where there are more sellers than buyers, prices move down.

Unlike commodities and shares, there is no intrinsic value in currencies. This means that market movements up or down can be very large, and the value of a currency is determined purely by supply and demand.

Expectations of participants are driven by market information, such as the release of key economic data. This information is immediately acted upon and reflected in prices. Prices represent the market’s consensus. Current market prices reflect all the publicly available information, whether it is economic data, or the activities of buyers and sellers. Usually, there is a longer term price movement (either in the same direction as the immediate move, or against it) as market information is slowly interpreted and analysed in more detail.

The theory that the market reflects the consensus of all publicly available information is is called the efficient market hypothesis. This hypothesis is contentious, because on the face of it implies that it is impossible to make excess profits without taking on more risk, since all information is reflected in prices.

However, professional traders consistently make long term profits without taking on any more risk than other market participants. They make money by having a different interpretation of prices than the market consensus, as a result of better analysis of publicly available information and trading techniques, and because of better quantification and management of risk.

Some traders will look for regularly occurring patterns, and trade based on these. This can result in a self fulfilling prophecy, because many traders act on the same patterns. Similarly, large upward or downward movements will result in traders “getting on the bandwagon”. You can see that feedback loops are an important factor in the market, and result in price movements even where there is no new market information.

Whilst the efficient market hypothesis needs to be interpreted carefully due to market participants who price markets on factors other than market information and trade accordingly, it is useful for understanding the market.