Understanding Forex Market Structure
In this article
Market structure is the backbone of trading in any market as it tells the traders the ideal trading position and time. The same goes for the Forex market. Understanding Forex’s market structure enables you to see the financial world from a bigger platform.
The Market structure is an important tool for deeply examining the market’s secrets. This article will provide a comprehensive understanding of the Forex market structure and the method of analysing it. So, let’s evaluate the Forex market structure together.
Defining market structure
Market structure defines the movement of the market by tracking the price changes or following the trend. Thus, it usually deals with the price or, to say, asset movement according to which the whole market moves.
If the traders only want to know the price action, they can also understand this through the market structure. However, it also includes the trends and anticipated outcomes for the investors who want to consider the overall market movement.
Markets are of different types and move in different directions in different time frames. All these aspects of the market require keen consideration because who wants to gain maximum profit with fewer hurdles.
According to the market type, time frame, and movement, the market structure offers a designed structure to the traders. It includes the trading’s highs and lows, support and resistance, and supply and demand areas.
It offers a trend-following tool to the traders to make trading easier for them. Therefore, a comprehensive understanding of the market structure is necessary to stay one step forward from your competitors and make calculated decisions about trading.
OTC forex market
The term OTC stands for over-the-counter trading in which two parties deal with each other directly without involving any other resource. The dealers act as market makers who set prices, and then they buy or sell financial resources based on the set prices.
OTC can produce a solid profit for you, but it is risky. OTC is not very favourable for those who trade for low prices. Sometimes it can create difficulty if the traders want to sell or buy a product urgently because you have to deal with a second party directly.
In the OTC Forex market, you can owe a lot of shares just by little money, which could turn anytime into a large sum of money and make your company successful, and buying OTC stock is way easier than others.
It is because OTC stocks can be bought or sold through most major online dealers. Yet, with ease comes the risk of a higher scam, especially when the traders don’t have enough knowledge about the OTC Forex market.
What does the term market structure mean in the forex market?
Forex Market structure is unique in its style because of the continuous price fluctuations that it undergoes, and thus the changing value patterns. As a result, the forex market supports multiple currencies having different values at different times.
It is because of the market’s volatile nature. The quotes and bases also differ from each other from one individual to another. So, the forex traders get multiple options in this decentralised Forex market. Therefore, reading a Forex market structure is essential to understand the market ladder from top to bottom to avoid possible risks.
Let’s evaluate what we mean by the ladder. The forex market structure, or market, is divided into several parts. These parts follow the points that the Forex traders have to cross before Investing or trading. On the topmost position of the hierarchy comes the banks and the trading industries.
Multiple traders participate in banks and industries both individually and collectively, and some individuals also hire brokers for trading. It may include the EBS market or Reuters matching. These broker companies offer different currency pairs having different liquidity in the Forex market.
For instance: EBS market currencies like EUR/USD, USD/CHF, or USD/JPY show the highest market liquidity. Reuters matching offers AUD/USD or NZD/USD as more liquid currencies.
Small companies and retail marketers that have less credit money hold the second position on the Forex ladder. Therefore, the traders involved in these types of trading trade through banks commercially rather than directly.
Last but not least comes the retailers. This type of trading in the Forex market requires less capital, to begin with but calls for more effort. However, now the trading has also become easy for the retail traders as they can now trade electronically.
In short, the Forex Market structure provides a roadmap to the traders that helps them analyse the price patterns, market trends, and an ideal time and position of investing in trading. It is important because successful trading depends on the price movements and resistance over it.
Market participants are the companies that are involved in the market of selling and buying benefits legally. Therefore, the long list of market participants also causes an increment in the quality of fair market value information.
Banks are considered one of the major market participants as they play various notable roles in the money market. In addition, many brokers, investment advisors, and hedgers earn their living through Forex. Therefore, these traders fall into the category of market participants.
Moreover, transfer agents, stock exchange, custodian, and portfolio managers, are also the major market participants who play vital roles in the Forex market. The chief role of all these major market participants are given below:
Brokers play a vital role in linking buyers and sellers in return for charging fees. Brokers buy the securities from the customers who are willing to sell them. They also sell securities to customers who are interested in buying them from their inventory.
Brokers provide value to their clients. They assist them in acquiring the best price they can for them. Therefore, collaborating with brokers can be very profitable for you as it anonymously enhances trading ability, which offers the key benefit to them.
Portfolio managers are those who control the collection of securities of their clients. These managers give suggestions on whether to sell or buy that portfolio.
Transfer agents are those who manage security and hold the record for the issuer. Thus, transfer agents are the middle ground between issuing corporations and security holders. The goal is to make it easier to settle security transactions quickly while keeping the assets and cash of the respective parties secure.
The stock exchange is a market that helps you in trading financial instruments in the market. The stock exchange is the trading of financial instruments between sellers and buyers. They meet each other to sell or buy financial instruments in working days. It is open five days a week.
Retail traders are the traders who buy or sell securities from personal accounts for any company or group that they manage. Retail traders do not make solid profits. Most retail traders lose their money only because they make wrong decisions, so they should have enough practise in managing money.
Non-commercial traders are individual traders. Non-commercial traders are those who do not trade their goods or assets directly. Instead, non-commercial traders usually take risky positions in the market to maximize profit gain through changing price movements.
When non-commercial traders bet with each other, it results in a rise in the asset’s and good’s price. Their main motive is to earn maximum profit. Non-commercial traders play a major role in keeping future markets running by providing liquidity, which is one of the main requirements of the market.
Liquidity providers are the market brokers by whom particular assets are bought and sold at certain prices. The main purpose of liquidity providers is to facilitate sellers and buyers as much as possible to ensure that they can trade easily without contacting other individual traders.
The purpose of these market makers is to facilitate trading in terms of financial instruments with the help of healthy shares, which they own. There are two major types of providers, which are given below:
Tier 1 liquidity providers:
Tier 1 liquidity providers are those who buy resources from the issuers. The most common example of this is big banks.
Tier 2 liquidity providers:
Tier 2 liquidity providers are those who facilitate retail brokers and traders. The most common example of this is small companies.
FXCM is presently the most popular liquidity provider with a great number of providers. In general, they can offer more liquidity and market depth when they have more partnerships. They do partnership with one or more than 1 tier providers.
Directive movements of forex market structure
Forex Market structure moves in three directions. These directions, in actuality, mark the movement of the trend that is directly proportional to the currency value. Moreover, these trends are irrespective of time frames, and you can find a price trend at all times.
Up-Trend or Bull trend
Uptrend movement of the market structure is also known as the Bull trend and is characterised by higher highs and lows. The key to understanding this is to see the consistent high movement. The higher highs come after higher lows.
The higher lows are the first part of the Bull trend because when the market opens, the traders are keen to invest and even embrace the risk to gain more profit. As a result, it increases the prices of the Forex currencies, and thus the market structure moves upward.
In other words, if one currency is moving upwards like Euro and the other is moving downwards like Yen, you can avail of the benefits from both the market conditions. Usually, the Forex traders following bullish trends invest when the prices are at a peak.
For example: Considering Euro, the movement in the upward trend shows the higher currency value. In the case of the Japanese Yen, this currency strengthens in the bear trend. So, it is easy for the traders who trade Euro/Yen Forex pairs to indicate ideal buying or selling positions.
Downtrend or bear trend
Down or bear trend, as the name suggests, moves downwards and shows the lower high and low price range. So, for example, if the asset’s price marks the decline of nearly 20%, it falls under the bearish trend and shows the downward motion in the Forex market structure.
Bearish traders enter the market when the market price falls, ensuring increased profits or demands on the selling product. Conversely, when the market structure moves downwards, the traders get a larger platform to gain additional returns on their holdings.
However, there is no fixed time or position when the bearish trend converts into bullish and vice versa. It both depends on the price breakage in either direction. So, it is important to prepare for both market trends before entering the market.
With the same example of the Euro, if the Euro moves down, it is most likely that the currency is losing its value. Therefore, it depicts the right time for selling the currency or asset. Thus, the selling rate gets higher in the bear trend or when the prices fall.
Sideway trends show equal highs and lows, and the price movement is under consolidation or moves in the horizontal direction. Thus, the market structure follows a sideways trend when both the supply and demand are in the same range.
Initially, it moves in a narrow band and breaks when the price action moves up or down. It marks the beginning of either the upward or bull movement or bearish or downward trend. It also marks the higher support and resistance price levels in the market.
Basic elements of forex market structure
The topmost element of the Forex market structure is the price trend. It is determined by the price movements in upward or downward directions undergoing reversal or consolidation. Therefore, it is one of the very important aspects of understanding the Forex market structure.
In terms of bull trend, it leads to the overruling of the secured currencies like NZD or USD by high-risk currencies. However, in the Forex market, this price structure in either bullish, bearish, or sideways trend doesn’t call for higher risk because it operates cross currency pairs.
Support and resistance levels
These terms refer to the barrier that stops the prices or values from moving in a certain direction on the Forex charts after reaching a level. In other words, the support and resistance points mark the possibility of the continuous trend coming to a halt or undergoing a reversal.
It is determined through the trend lines present on the Forex market charts. When the downtrend breaks, it is referred to as support, and the resistance occurs when the prices moving upwards are near to pause.
Patterns or charts
Price patterns or charts depict the changes in prices and highlight the buying and selling points to identify the ideal entry and exit points in the Forex market. The traders use these charts to examine the pattern of the price movements to anticipate the next movement.
Through the chart patterns, the traders can also analyse the asset’s supply and demand before buying a position in the Forex market or selling one to maximise profit. The price patterns note both the continuous movement and breaks in price action.
It aids the traders in tackling the potential risks and understanding the nature of the market structure. LikeDan Zenger, who earned $42 million in 23 months, the proper understanding and usage of the price patterns or charts can help you convert your thousands into millions.
Timeframe constructive forex market structures
The market structure identifies the trend and price action, where the market trends and prices are different at different time frames. So, the Forex market structure also differs in terms of the timeframes that the traders have chosen for trading.
For instance: the traders reviewing the Forex market structure can see the difference between the day traders and intraday charts. If they identify a currency moving in a bullish trend throughout the day, the zoom-in results of a certain time like 10 minutes may also show the bear trend and vice versa.
It depicts that the prices fluctuate more often. It also changes the trend and the entire Forex market structure. However, the market structure does have the trend that the Forex traders follow even if it is prone to change. The difference occurs in identifying the points of selling and buying.
Luckily, it doesn’t bound Forex traders from choosing the timeframe as per their preference. They can still do so and continue trading in the Forex market. The traders only have to follow the market structure of the timeframe they have chosen.
How to read forex market structure?
After understanding the principles, elements, and movements of the Forex market structure, let’s study how the traders can utilise them in reading the Forex market structure. However, market structure only provides a map of movements, trends, and patterns of the prices.
The first step of reading the Forex market structure is the usage of previous price patterns to anticipate the following new price. It is done by pointing out the supply and demand lines on the Forex chart, and this price direction then helps the traders estimate the possible new price.
In this way, the traders can determine their next step beforehand, without wasting any time on analysis while trading. The traders can also identify the points showing most selling or demands to identify the asset’s value at the given time.
Moreover, the market structure offers the traders the tool to follow the market trends or make decisions according to the price patterns. Therefore, the traders need a proper understanding of the trend’s nature as to whether it is impulsive or corrective. These terms are already discussed above.
However, considering that the impulsive market trends stay static for comparatively longer, it may still move to either consolidation, in other words, move in sideways or start moving reversely. Here the role of energy and gravity is also very prominent.
The impulsive price pattern is more energetic as compared to the corrective. Thus when the price momentum falls, the gravity of the impulsive price increases and leads to the conversion of the price movement into corrective.
Why reading a forex market structure is important?
Trading in Forex Market involves luck and diligence and also strategies. It calls for the ability to opt for less risky trading opportunities at the time of extreme chaos. Understanding the market structures can help in achieving this as it forms the backbone of all markets.
The forex market structure helps make calculated investments in trading that can emotionally burden the traders at times. By analysing the market trends and patterns, the traders can set their estimated range and strategy. Then, they can also try to improve any of their pitfalls.
Moreover, the extensive knowledge about the prices, sales and demands, and the high and low market risks that Forex market structure provides the traders can also open new trading opportunities for them, if employed carefully.
Above all, the Forex market is volatile. It means that the prices or values of assets in the Forex markets are highly prone to upturns and downturns. Thus, tracking these changes through the Forex market structure offers a wider view of the changes in the Forex prices.
Before entering any market, it is important to understand its structure to get the most out of it. It is of different types, and all offer multiple benefits to its consumers. Forex market structure apparently seems complicated, but a thorough reading makes it worth a while.
Forex market structure involves several market participants like Brokers, hedgers, and several forms of traders. However, a good liquidity provider is significant for the brokers to build up the high standards of your brokerage company in the market.
It has three basic elements, namely market trend, support and resistance, and price patterns. Trends move in three directions: upward, downwards, and sideways having support and resistance points while the price forms a pattern to guide the traders about its movement and value.
Jason Morgan is an experienced forex analyst and writer with a deep understanding of the financial markets. With over 13+ years of industry experience, he has honed his skills in analyzing and forecasting currency movements, providing valuable insights to traders and investors.
Forex Content Writer | Market Analyst