What Makes Prices Move?

Last updated 11/6/2009 6:34 PM EST (GMT -5) 45 Comments

Bradley W. Gareiss

Technical Analyst, GFT

Today I will go over what I think drives price movement in the markets, why I hold these beliefs, and why I think it is important to understand the forces in price movement. Keep in mind the following theories are my opinions, not absolute fact. I believe in technical analysis much more than fundamental analysis, which will be reflected in this feature. There are people out there that will probably disagree with some of my statements below, which is fine. However, it is my hope that this information will provide value for our readers and at least make people think.

People often ask "did fundamentals trump technicals on that trade?" or something along those lines. No offense to anyone out there, but that is a ridiculous question. There are not two boxers names "fundamental analysis" and "technical analysis" slugging it out for trading supremacy. Sometimes a major news announcement will shoot the price past a strong technical level, but that's why I don't enter trades right before a major news announcement. How do we measure "fundamentals" though? Does that mean an announcement today, the overall economic scope of a country over the past century, or something in between?

The reality is that the only force that moves prices in any market is the buying and selling of the financial instrument. For our purposes, we will use currency trading as an example, but this is true in all liquid, openly traded markets. Currency prices don't fluctuate on their own. They only move up when traders are willing to buy at a price higher than the current price, and the only move down when traders are willing to sell at a lower price. That sounds incredibly simple, but this is a very important fact to establish.

The reason it is important to determine that traders move the market, is that this means no one can predict exactly where the market will go. Only probabilities at certain ranges can be determined, and usually the probabilities aren't overwhelming (they don't need to be). So the next time you hear someone say "XYZ is going to hit (black price) today!", take those predictions with a massive grain of salt. They are saying that they know exactly what every trader is thinking, how much each of those traders will buy or sell, when they will buy or sell it, how the buying or selling of others will affect their own buying or selling, and how every trader will react to news announcements (both scheduled and unscheduled). Let's presume that some incredible genius figured out a way to create artificial intelligence that could solve each of those issues (and more I am leaving out). That model would assume that people are rational (like fundamental analysis does). Unfortunately, there is no limit to how irrational traders can act, individually and as a group. Therefore, it becomes obvious that no one person can ever know exactly where a price will go.

This seemingly endless list of variables, along with the irrational behavior of traders, is why I believe in technical analysis. Technical analysis uses various ratios and drawings that, in my opinion, are designed to measure the behavior of traders. We aren't trying to explain why they are doing what they do. As we discussed above, it is impossible to know what is going through every trader's brain. Instead, we are trying to determine certain levels where traders are more likely to act one way then another. With technical analysis, you can do basically the same thing every time. If you watch the patterns we post, they are basically the same patterns on different pairs every day. We try to eliminate as many random variables as we can. It is important to have a robust strategy, as we do, that works over all markets and all time frames. If a strategy only works on one financial instrument with one time frame, chances are that strategy won't work for long. After doing this, we can measure if we have an "edge" over a very large sample of trades. This isn't a guarantee that what once made money will always make money, but it is a lot better than nothing.

I am sure you can guess where this is going regarding fundamentals. Now there are different type of fundamental trading. If you trade based off of an announcement that came out today, that is very different from a trader who looks at long term macroeconomics. If you trade strictly off of new announcements, that is a steep uphill battle. First of all, there are a lot of people out there that think the markets move ahead of the news. I am one of them. Second, markets can gap immediately after news announcements and can really hurt your execution with every broker. Third, markets often don't react according the exact numbers released in these news announcements. This goes back to the fact that traders are irrational and you have no idea how they will perceive news announcements. This can lead to wild swings, moves opposite of what makes sense, and other crazy events.

So how can someone consistently profit over a long period of time (at least 100 trades) by looking at individual news announcements? You've got me. Even if a trader won at times, how can you be consistent when every reaction is so different? A trader who looks at the big picture over a longer period of time faces a similar problem. Sure, a currency may be "supposed" to move one way based on the economic measures a trader uses, but that only matters if traders buy or sell in that direction. How does this trader know that other traders will rationally interpret this information like he did? On top of that, one of my favorite trading quotations is "the markets can stay irrational much longer than your account can remain solvent." This means that the market could finally come around your way to the rational economic price, but you could already be knocked out by that point.

I could talk forever about this topic, but I will cut myself off for now. The point is that we don't know exactly why prices will move, where they will move, or why they moved where they did. That is why we take the approach of applying a consistent, technical method that has been tested over a long period of time. I will probably write a follow up at some point, because I have a lot more to say on this topic. Hopefully you enjoyed this article and it makes you think about the markets in a slightly different light.

Comments (45)

madmoney101

November 07, 2009 at 01:00 AM ET

Thanks Brad,
I just recently started my trading adventure. My plan was to be at my computer at the medium to high impact news announcements that FX360.com posted. In my account I did pretty well at first for about a couple weeks. Well, you know what happened. Irrational market behavior set in and it just stopped working for days. I chose to do it this way because of greed. I saw the movements and I wanted to grow my account quickly to change my life. Instead it shrunk my account. I’m glad I was at least using proper money management in my trading plan. Your article explained what was happening. I am dropping this plan right now. Thanks.
I would like to know how we use those news announcements to our advantage. Are they only posted on FX360.com to keep us from being in a trade at the time of the announcement? Also, do you recommend any books that cover technical analysis in the FOREX market?
Thanks for your time

alexjbrandt

November 07, 2009 at 07:45 PM ET

When I first started trading, I was very much like you. Visions of making tons of money in a very short time frame, the only thing that happened was that I wiped out my account. After refining my strategy and going back to the drawing boar one year later now, I have become a very successful trader.

In regards to your question about book to read, I highly recommend a book written by J. Welles Wilder called "New Concepts in Technical Trading Systems". Based on my experience, I wouldn't trade during high impact news events.

Trading Stats:
http://alexjbrandtfx.mt4stats.com

Semaj

November 08, 2009 at 01:48 PM ET

Impresive stats. Veryd teep stop loss for 10 pip gains it seems. Care to discuss your entry signals or are they directly from Wilder's book?

Doobp

November 08, 2009 at 02:23 PM ET

Man, i wanna be like you. i grew my account in the beginning. But it didnt last very long.. I shrunk my account. So i'm evaluating and testing now.. i definitely wanna do well. THANKS!

FXDragon

November 08, 2009 at 04:30 PM ET

Really Alex, how do you decide when to enter and where it will go? Do you open during dead hours and just chase swings or smt? I trade for at least 100 pips and 5.00 leverage. And why would you not put a stop loss somewhere bec. you just chase 10 pips anyway.

Regards,

Doobp

November 08, 2009 at 09:55 PM ET

he once traded 300+ pips. (he lost 310 pips)


-3.75 -310 -1,443.69


I guess everyone has different trading style. if his entry is really good enough, a break even stop loss is reasonable.


i personally goes for 40-80pips.

FXDragon

November 09, 2009 at 12:37 AM ET

I just dont have the guy's patience. Often i make his 2 month earnings in a matter of hours. Anyway its enlightening to hear different styles folks. Good luck to everybody...

FXDragon

November 09, 2009 at 02:22 AM ET

I havent read that book but i think one has to be an angel to give her secrets away. Becasue its worth a lot more than the book will sell. You just have to figure it out yourself.

koolraul

November 09, 2009 at 10:53 AM ET

Everybody has his/her own trading style. Any event can be traded as long as you have your money management and trading plan in place. As a matter of fact, everytime we do a trade, it's based on some events, although it might not high impacting e.g., news releases. I trade news events e.g., Non-Farm Payroll announcement and usually do it post-news release. At least at this time, volatility has settled down. I don't bet the farm. I just trade a very small portion of my account so it doen't hurt me when I'm wrong. I don't get greedy as well. I always have a established stops and limits so I know my risk and reward.

And Brad is absolutely right, trading the news is an uphill battle. So, don't make this your only trading strategy. I follow Brad and Roger's technical analysis and trade them as well.

bgareiss

November 09, 2009 at 06:20 PM ET

Personally, I only use news announcement calendars to know when to stay away. Some people use news announcement to trade, but that is not my style. As far as books, I would check out Larry Pesavento (search his name on Amazon and check out his newest book) for analysis, and Mark Douglas (Trading in the Zone) for the psychology of trading. Brad

bgareiss

November 09, 2009 at 06:23 PM ET

I do not see much logic in going for a certain number of 'pips'. The reason is that this number is relative to the size of move, current volatility, which pair is being traded, etc. It is best of have a more defined reason to enter and exit, and then to change position size based on how much you want to risk combined with the distance between the entry and the stop. Brad

FXDragon

November 07, 2009 at 02:25 AM ET

I dont even put stop loss. I just set up good entry levels, take the profit on winning trades, and wait to break even on losing trades. The markets will eventually come to the levels you want, you just need a large account or take risk accordingly! You also should have the guts to stay calm while losing some(which is hard for most people). Daytrading is nickle n' dime chasing anyway. Fundamentals do trump techs; example: the last audcad recommendation; greed was mixed there too. Kangaroo is a rising star with interest! Analysts who separate techs and fundamentals make a mistake. Goood luck...

enslinFX

November 08, 2009 at 03:54 PM ET

FXDragon - your the first guy I meet that has the same strategy as I do. Equity management wise that is. Do you mind if we chat?

koolraul

November 09, 2009 at 11:00 AM ET

You're right FXDragon. I both technical and fundamental analyses align, your stars align as well and that means CACHING!!!

bgareiss

November 09, 2009 at 06:28 PM ET

Trading without a stop and hoping the market comes back to break-even works until it doesn't, and then your account is basically busted. Just a friendly warning. Also, if you think separating technicals from fundamentals is a mistake, that is an opinion, but I would bet a large majority of pro traders use one or the other (or weight much more heavily on one of them and barely acknowledge the other). But that is one thing that is interesting in trading, everyone can have their own opinion. Brad

deanbo

November 07, 2009 at 03:05 AM ET

I think confidence in a countries economy is an important factor in what makes currencies move. I also think large players have a say in a currencies value. I think the influence that these companies and the like is what keeps a currency range bound. It takes a lot of money to "return" a currencies value to where it came from. Too much probably for all the small players combined.

bgareiss

November 09, 2009 at 06:30 PM ET

To be honest, I am not sure what you are getting at. Of course parties who control more money will move the market with more influence, but that isn't to say that is a bad thing. It is just a fact, not good or bad. Brad

Victor

November 07, 2009 at 09:14 AM ET

Not so fast logging out the AUD/CAD bearish recommendation. Friday's high was nine pips short of a 78.6 fibonacci extension of the 7OCT08 low, the 4JAN09 high, and a 1FEB09 618 fibonacci retracement low. The entire cycle of price action took 13 months to complete. Thirteen is a fibonacci number and the regression, implies an 8 month downtrend for a Gartley of some kind. If this analysis is correct, I would expect a 354 pip drop within the next week.

A potential fundamental driver for this price action would be profit taking in gold and bullish resumption in crude oil prices.

FXDragon

November 08, 2009 at 04:26 AM ET

I dont deal too much with fibonaccis and gartleys. I trade on instincts and worthy info:) Cad wont make you happy with those rates and unemployment. Good luck waiting...

FXDragon

November 09, 2009 at 04:07 AM ET

However since our names both start with V, I recommend usdcad Victor. It shall head south nicely. Good luck...

bgareiss

November 09, 2009 at 06:36 PM ET

After double checking the AUD/CAD, I don't see an possible bearish Gartley on the horizon. Perhaps you could shoot me a screen shot to bgareiss@gftforex.com? Regardless, it is pretty tough to forecast such accurate moves, such as a drop of 354 pips. Brad

bgareiss

November 09, 2009 at 06:39 PM ET

Also, I am curious as to what worthy info is? I would also be cautious when trading with instincts, since a trader's natural instincts are one of the leading reasons why trading is so hard. But that is for a whole other article. Brad

Jeff Burke

November 08, 2009 at 06:51 AM ET

Brad,
Good article. I totally agree. I've also heard it expressed another way: every market is driven by supply and demand (which comes from traders). Would you also agree that the longer time frame charts such as 8 hour and daily are much more accurate and dependable than an hourly or 15 min chart? My trading goes better when using the longer term trends.
Jeff Burke

bgareiss

November 09, 2009 at 06:44 PM ET

Supply and demand plays a role in the markets, but there is more to it than that. Markets move when traders buy and sell, and they often do not trade in accordance to perfect supply and demand. Of course, supply and demand would be difficult to accurately measure to begin with when it comes to currency pairs. Since traders are not perfectly rational, market prices can stray far from the price that would be based on supply and demand. Longer term charts obviously absorb one time news announcements better than short term charts, but it is hard to say that they are more accurate in terms of supply and demand. Brad

jdgilk

November 08, 2009 at 04:34 PM ET

You know all of you have good ideas probably. And they could all be profitable over time. Even the one with the no stop loss. The key here folks is not so much the system or whether you are a fundamentalist or technician, but do you have enough funds to grind these markets out. IF you dont, downsize your trades and get some more money. You can stay in the game that way.

bgareiss

November 09, 2009 at 06:46 PM ET

Without proper funding, not strategy will work out for very long. For the record, if you are trading strictly directionally on a relatively short term basis without a stop, you are going to feel some big pain sooner or later. Brad

enslinFX

November 10, 2009 at 03:06 AM ET

The key here is funding. If you wager £1 for £8000 in your account the market needs to move 8000 pips against you to wipe your account. Not likely over a medium to short timeframe in the Majors. If your not happy realising losses and happy with the direction you initially traded you can always hegde your position and wait for things to calm down.

bgareiss

November 10, 2009 at 06:21 PM ET

Again, funding your account properly is very important. I won't throw out specific numbers, but you aren't going to get very far with a tiny account in my opinion. As far as hedging goes, all this means is that you are exiting the position, or at least a portion of the position. I don't mean to sound overbearing, but hedging is simply paying the spread twice to have no position. For instance, buying 4 lots of USD/JPY and then selling 4 lots of USD/JPY is not hedging, it just means you don't have a position. Anyway, I favor risking a certain percentage of your account. I would bet most successful traders who are trading on a directional basis risk between 1% and 3% on each trade. Brad

zaidi

November 09, 2009 at 02:02 PM ET

A good bussiness plan is always the key of success in Forex Trading.i usually trade on daily basis and always to be an intra day traders. i never keep my positions for so long and try to get them closed before i go away from trading.my simple idea is ... IT IS BETTER TO TAKE 10 PIPS PROFIT INSTEAD LOOSING 50 PIPS.for that i always prefer to the quantity of trade opens in a day and hedging is my second tool if the trade start going agaisnt my open positions. i usually prefer to book a hedge at a far distance instead of stop loss option.may be this option wont work in most of the cases for others but through my practice and experiance i ve learnt how to trade with hedge.i usually prefer to open atleast 30-40 trades in a day to make atleast 150-200 pips a day... and untill now they r working perfect for me.... for sure most of my forex buddies would have some better idea of day trading and could oppose my hedging idea.....

bgareiss

November 09, 2009 at 06:52 PM ET

I agree it is better to make 10 pips than lost 50 pips (even though I don't like measuring the success of trades in pips), but I am not sure what that means in an applicable way. As far as hedging goes, I have never heard a valid explanation for how hedging by simultaneously being long and short of the same pair accomplished anything except paying the spread twice. Any further insight on your hedging? Good luck with your plan, but this is not my style so I can't add much more insight. Brad

Doobp

November 10, 2009 at 02:21 AM ET

brad.. why don't GFT hold a seminar for Live FX Traders? I'm sure it will be fun.

bgareiss

November 10, 2009 at 06:13 PM ET

At this point we don't have any seminars planned, but that may happen sometime in the future. I don't have any details or a timeline, but it is something we are discussing. Brad

zaidi

November 10, 2009 at 01:33 AM ET

well.. here i will try to explain my Hedging idea. first of all i must describe how i trade as a intrady trader.i always consider both fundamental and technical analysis before i start my trading day. my idea is very simple,
1: i only trade in GU or EU. i dont run after too many currency paisr though i know other Currency pairs would make big profit. i still prefer to stick with my trading plan to trade in two currencies only. the idea behind this is volatality of these two pairs.i ve learnt through my practice and experiance that at what time frame these two pairs moves fast and which kind of data effect on these pairs thats why my ratio of trading is 90:10 means uptill now my 90% trades have been successfully closed in positive.i dont go into complex details of signals. i always remain simple by simple reading of momentum and volatality in certain time frame. and that is why my daily trades goes between 30-50 a day.

My hedging idea is simple as well.... i dont wait for a perfect position to open a trade but still look into the trend of the currency and major events on that certain days and go accordingly. i keep book a hedge against my open trade on a distance so if my signal fails i still know what will be my ultimate loss in this case so i remain prepared of it and if the trade reaches to the hedge level and cut it i then wait by keeping an eye on market volatality and time frame of the market. i must say... a trader who prefer to play with hedging must be very well aware of market movement i.e Asia time.. Euro Time and US Time.... each time frame has their own market movement according to their own local Stock markets as well (i consider Gold and Oil prices always). so i use to keep my hedge open unless i m sure that the certain currency would ve certain resistance or support and i cut my heade trade if i feel the currency has reached its maximum resistance or support and then i start recovering my orignal trade,(in the event of fire its is better to save the least) not only this but i also open another trade in the same direction to make my profit double. and usually it works perfect.

i still prefer this trade idea wont work for all as every trader have their own unique psycology with their capacity to handle the situation.and every trader have their own readings and idea of looking the market with their own view.

MAKE YOUR OWN BIZ PLAN ... LEARN AND PRACTICE ON IT TO GET EXPERT. The point is..." U CANT WIN UNLESS U LEARN TO LOOSE"

Doobp

November 10, 2009 at 09:23 AM ET

I'm wondering now. Isnt it the same as you not trading when u are hedging? U only started trading when u closed 1 of the position.

Why don't you trade after u r sure? u r paying double spread anyway. or is hedging a psychological thing? Unless, u hedging 1 lot at 4 X 0.25

zaidi

November 10, 2009 at 11:53 AM ET

well......i wonder as well .. why most of the traders rejects the idea of hedging... is it coz of paying twice the spread to broker or what? i said... hedging is like an emergency first aid kit....not a trading method for sure....i dont obsolete the idea of hedging though i use it only when the trade goes against me... btw paying the spread twice is not bad once u can recover ur looses and secondly we r paying the spread from the running market.. not from our own pocket... Doobp i think u didnt get my whole idea.....it is for sure... i always open a position once i m sure... if my biz idea is totally wrong then why my 90% trades goes in profits...now i raise this question to all of my FX Buddies........

bgareiss

November 10, 2009 at 06:07 PM ET

I am still not too sure what your hedging strategy is, but it appears you are buying and selling the same currency pair at the same time. In effect, this is simply exiting the position and paying the spread twice to do so. Some people do this for some sort of psychological reason, but I see absolutely no reason to pay the spread twice to effectively have no position. To win 90% of your trades 30-50 times a day is pretty remarkable. But keep in mind you can win 90% of the time, lose the big one, and still come out down on balance. Good luck with your trading. Brad

bgareiss

November 10, 2009 at 06:11 PM ET

I agree with that Doobp, but everyone is entitled to their own style. If Zaidi is making big money, that is great for him. However, I would warn new traders against following that type of system, because it can be very risky. Also, that is not true hedging, it is simply closing the position as I understand it. Zaidi, please correct me if I am interpreting this incorrectly. Brad

zaidi

November 11, 2009 at 01:51 AM ET

i think i've been unable to describe my hedging idea untill now to a understandable level...my point is.... i only run after small profits instead of big margins...YES ... i open the hedging on the same currency but not at same time...NEVER....for sure open the two differnet trades on same currency at same time is like fooling urself...my simple idea is like today the GU is trading around 1.6750 and my technical and fundamental analysis shows me the resisitance of this pair around 1.6780 .. so what i do simply i will open my SHORT trades at 1.6750 and instead of putting a Stop Loss at 1.6800 i will simply book a LONG at 1.6800 and if my signal fails and trade start goes against my position and reach upto 1.6800. so in this case i wont loose but my LONG position will automatically open and i will wait it untill the market volatality will calm down and i will close my Long position at a distance and again i will open another SHORT position at same level. this all biz stratagy only works once a person knows the time frame of differnet markets around the globe.. the best chart reading ability and forthcomming events study...and last but not least... THE LUCK........... GOOD LUCK to all my FX Buddies

FXDragon

November 10, 2009 at 03:14 AM ET

I think i get this guy, he does what i do Brad. Because for not to break even on losing trades or lose little, the pairs should shoot straight up or down without pullbacks. For example last spike in gold; even in that, the spike was after the pullback, so you wouldnt sell during a deep pullback anyway, if the bigger trend is up. Or it would have to be like the meltdown last fall or smt. major. Do you get my point?

thanks for feedbacks,

bgareiss

November 10, 2009 at 06:26 PM ET

To be honest, I am not sure I get your point. It is impossible to determine which way a price would spike (right before it moves quickly) without risking a spike in the opposite direction. Also, pullbacks and spikes are extremely subjective. One man's pullback is another man's trend. I am still unclear what point you are going for here. Feel free to clarify further. Brad

m.hollingshaw

November 10, 2009 at 08:48 PM ET

I do not pretend to be fully competent or have some greater understanding so forgive my naivity. Why would it be truly a negative thing to help another trader (this is brought up by FXDragon's comment of hw one would have to be an angel to give away trade advice/secrets) I guess I'm confused by this as it appears that is precisely what you (Brad) and Roger do. Am I missing something in general psychology of traders?

bgareiss

November 11, 2009 at 02:45 PM ET

I am not sure what you are specifically referring to, but I think it would be a huge mistake to listen to everything posted on forex forums (this is not direct to FXDragon at all, just boards in general). Anyone can post anything on there, and a lot of the information I see on some forums is not good and potentially harmful. The difference is that Roger and I have a lot of experience doing this stuff, are well read in these subjects, and put our money where our mouth is by posting trades (which isn't always easy when you can only update once a day). Brad

Marc S

November 11, 2009 at 06:49 AM ET

Everything retraces, I have a simple strategy that I use to take advantage of this. You just need a benchmark to base your retracement off of. I also do not use stop losses, I have an exit rule but it is dynamic and not a set price. The key is to trade the size of your account accordingly so you can have a measured drawdown while you wait for the retracement. Also you have to know when to enter your trades and finally break your entries into a minimum of 3 potential levels as price falls into your buy area. The deeper price falls from your benchmark the higher the probability of the retracement

spunky

November 11, 2009 at 09:49 AM ET

yes, is price is plastic. I trade short term charts, and mathematical probabilities, and price will return to mean, depending your time frame; that mean is different, for different time frames

I agree with you MarcS

Great discussion here



regards
Brad

Marc S

November 11, 2009 at 10:31 AM ET

I use a 60 minute time frame, however I have looked at other time frames and you can make a case that it is pretty universal.

Agree, great discussion!!! It's nice to chat with people using a similar method.

Marc

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