Who does actually determine the market price?
If there is a new trader who innocently asks that question, please do not underestimate him.
If you are a professional trader, you might consider this is a kind of stupid question. However, this is precisely a very basic intelligent question. If we want to go into a business, we must know who are the players in the industry and how the market structure prevails in the industry.
What is a market price?
According to Investopedia, The market price is the current price at which an asset or service can be bought or sold.
Thus, who does actually determine the market price?
In economics, the party who determines the price depends on the type of market that occurs.
Additionally, there are several types of markets that exist: monopoly markets, monopsony markets, oligopoly markets, and perfect competition markets.
In a monopoly market, where there is only one seller and there are many buyers, the price tends to be determined by the seller.
Conversely, in a monopsonistic market, there are many sellers and there is only one buyer. Then, the price will tend to be determined by the buyer. While the oligopoly market, there are only a few sellers and many buyers. The seller group set the price.
Well, the forex market, when viewed from economic theory, can be included in the perfect competition market type. In this type of market, prices are determined by market mechanisms, that is, the pull of the power of sellers (sellers) and buyers (buyers). This is unique in the forex market, sellers and buyers are only distinguished by the actions they take on the market at that time.
A trader can be a seller and also be a buyer. It all depends on the position he was taking at the time. This is different from the general market conditions, where usually the seller and buyer are completely different parties.
Because of the ability of traders to take a variety of positions, the price in forex trading depends on the perceptions. Besides, it also depends on traders’ expectations in the market about the price prediction. Or what we often know with the term trend. Obviously, if the majority of traders consider the possibility that prices will go down, then they will take positions as sellers.
In the end, this sell-off will further depress the price of the pair in question and the trend. Likewise, if the opposite condition occurs. Expectations of rising prices for a pair will make traders take long positions and will push prices to rise.
Read more: Keeping Trading Journal, Can You?
