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3. Advance Questions

What is it That Drives The Price?

There are ongoing debates in a trading community on what is the primary source of the price: EUR futures, interbank market, Forex market or a spot market? Which of these instruments is a leading one, and which ones are following?

Disputes become very fierce when it comes to the source: which data can be trusted, and which should be ignored.

Here is a simple example: trading volumes. Can one give a precise answer which volumes are more informative: futures or Forex, from exchange №1 or №2? Taking into account that the term “correctness” is not accurately defined in the Forex market, there is no answer to this question either.

Plausible answer. Every single source of the price has its own asset price determined by trading results inside the source. At the same time, the prices from all sources are synchronised by trades, also known as arbitrage.

Imagine walking down the street and seeing two exchangers – and the buying rate of the first one is higher than selling rate of the second one. Without hesitation, you’ll start carrying money over from one exchanger to another and benefit from the difference in the exchange rates. It will continue until the prices become equal in both exchangers due to the dramatically increased demand in the second exchanger and the excess supply in the first one.

This is how the sources of Forex prices are interconnected, but in a little more technological manner. However, it’s quite likely that there might be a great demand among population in the spot market itself, which would result in the prices moving up/down.

Conspiracy answer. Asset price is established in one market (stock exchange), and other prices just follow it. It’s interesting that Forex traders often believe that the Forex market itself is the driven market, but not the leading one. That’s probably how they try to justify their inability to make money particularly in the Forex market; if they’ve traded in CME (Chicago Mercantile Exchange), things would have been different.

Centralized stock markets – but not the Forex market (due to its decentralization) – are most often considered to be the leading markets.

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