The forex market is replete with factors that influence forex pricing. When it comes to pricing, traders must understand how this moves in order to find their feet in the market. The foremost thing to understand is that a counterparty is involved in every transaction to be carried out.
Increasing your trading understanding the price is important because trading is done on margin. It can make your trading life continuous, and regardlessof which direction the currency is moving.
How Open Interest Influences Forex Pricing
In forex, open interest may be defined as a combination of all resting orders (limit orders). When it comes to setting orders, many traders opt for the current price below (buy limit) or above (sell limit). It is only after a set price level is reached that the order can be filled. There are typically two types of charges, i.e., limit order and market orders.
These further have subtypes. Limit orders are only executed when the price reaches a set level, whereas market orders can be executed only at the current market price.
In other words, it can be said that limit orders provide open interest, whereas market orders consume genuine interest. Traders must understand this distinction as it forms the backbone of forex pricing dynamics.
To know the pricing in the forex market, one must also understand the relationship between the ask price and the bid price. The ask price is never lower than the bid price. The two are unrelated in every other aspect. Due to this, the spread between them varies depending upon where the open interest lies.
Forex pricing can be impacted by delays between the market order entry and its execution, given that the market is fast moving. This may not be the result of unscrupulous brokers but may occur due to delays in communication.
When the forex pricing moves through various stages and reaches the retail level, they may be impacted by some entity's price shading or manipulations. This is why a few traders prefer an ECN to a traditional retail broker. There are both advantages and disadvantages of using an ECN. So, one must be aware of these factors before making a decision.