Updated: Jun 22
The Forex market determines the exchange rates of all the different currencies in the world. Currency movements, as in any other market, are driven by two main forces: supply and demand. Exchange rates in the Forex market are determined by the equilibrium of bid and ask offers in the market.
The two main factors that influence the movements in one exchange rate are capital flows and trade flows.
We know that for every currency pair there is a bid and an ask price. The bid price is the price at which we can instantly sell in our trading platforms and the ask price is the price at which we can buy the currency pair live in our trading platforms.Market participants in Forex send their bid and ask orders (with volume) at which they are ready to buy or sell a particular currency pair.
The current bid and ask prices at any given moment are determined as follows:
-the highest price in the order book that someone is willing to buy at is taken as the bid price;
-the lowest price recorded in the order book at which someone is willing to sell is taken as the ask price;
-in order for the price to move either up or down, all the orders at the current price level must be cleared and matched by the same number and volume of opposing orders;
-once there are no more orders at a given price level then the price moves in the corresponding direction.
In order for the price to move either up or down, all the orders at the current price level must be cleared and matched by the same number and volume of opposing orders. Once there are no more orders at a given price level then the price can move in the corresponding direction.
The main participants in the forex market are: Forex Dealers, Brokers, Banks, Hedge funds, Hedgers, Speculators, Arbitrageurs, Central Banks and Retail Market Participants. The actions and interactions of these participants determine the exchange rates.