Welcome to lecture four, why prices move? prices move actually because of order flow. It's not because of a technical pattern, not a candlestick formation. And it's not even because of fundamentals. It is simply the case of there being an imbalance in liquidity causing order flow in one direction or another, which causes prices to move. One of the most common myths in trading is that traders are actually trading with a broker when most are not.

Actually, it is estimated that as many as 98% of all amateur traders actually are trading with a dealer as opposed to a broker. Another misconception is that since brokers know where they Trade stops are they say they move price to stop the trader out. This is simply not the case. These guys make their money through the spread and also through the commission they charge as they pass their trade on to the market, while dealers on the other hand, tend to take the other side of your trade. So, here's a trade ticket for the euro dollar currency pair. In forex prices are quoted like an auction, where the dealer announces their price they're willing to buy if you want to sell and this is called the bid and also the price they're willing to sell if you want to buy and this is called the offer.

Remember that the dealers trading strategy relies on profiting from the price difference between the bid and the offer. And this is called the spread. So what the dealers do is they set their prices to maximize their profits, while still attracting traders who are willing to trade with them. Some dealers may also charge a lower spread and charge a commission. So in this example, the dealer is willing to buy at 186 5.1 and sell at 186 9.1. Remember, this is the opposite side of your trade.

And we covered this in the lecture on zero sum. His profit in this instance would be four pips. And a pip means percentage in points. So therefore, for pets is actually four hundredths of a cent. For x is a fiercely competitive market between dealers, which is actually great for us as traders, as we get much better prices. One point to note is that when we look at the chart on a trading platform, It actually displays the dealer's bid, which is our selling price, and it excludes the offer price.

The forex market is renowned for its liquidity and also for its volatility. liquidity is the most important characteristic of a well functioning market. And quite literally is the enabler of trading. volatility is perhaps the most important element determine risk and rewards. Always bear in mind that the identifying characteristic of volatility is unpredictable price changes. Your price chart only draws the bid price and completely ignores the ask.

So you should always check the spread during a volatile period. So, if we were able to take a look at the quoted prices, and look at the liquidity available, we may see something like this chart on the right in our dealers order book. Remember that in trading, profit is made by either buying low and selling high or selling high and buying low. These are the only ways to make profit. And so the best two prices would be the lowest offer price and the highest bid price. So on this chart, you can see that there's about 14 million of liquidity at 1.86 5.1, which is our sell price.

And the gap between the bid and the offer is four pips, which is you know, is the spread. If we take a look at the previous chart, and actually now look at the chart in the middle, we see that there is now liquidity at 186 6.1. So this would now become the best bid price. And so our price chart would move upwards. Most trading platforms would represent this by green candle. Alternatively, if the liquidity was then consumed down to 1086 4.1, then price would fall, as this would now be the best price.

And our charts would display a red candle. And this is order flow in action reacting to changes in liquidity. If you also take a look at the chart in the middle, you'll also notice that the gap between the bid and the offer price has actually tightened and the spread is now three. And this would signal to a professional trader, that volatility is reducing, since the spread is tightening, but during highly volatile periods, liquidity actually dries up. And this is where dealers pull their bid and ask quotes from the market spreads widen significantly. And consequently, you're more likely to experience a loss during a highly volatile times than actually make a profit.

As you can see, volatility is linked to liquid And vice versa. When dealers and brokers remove their limit orders from the market spreads widen, prices jump around, and the market is more volatile. Likewise, when markets are more volatile, dealers respond by actually withdrawing their limit orders from the market to reduce their own risk. Unless liquidity dries up even more. They each cause the other liquidity and volatility are both cause and effect. These things are precisely what we profit from.

And so volatility is important to our trading. A good time to see this is during the non farm payrolls announcement that takes place on the first Friday of every month. The results are so unpredictable that liquidity is removed the market causing violence spikes around the time of the announcement. And it's actually wise to steer clear of the market until it's all over a recent catastrophic event was back in January 2015, when the Swiss National Bank decided to abandon its four year old FX peg against the euro. As you can see from this chart, price fell nearly 4000 pips in a matter of minutes. And many traders were wiped out.

And many brokers got into serious trouble. And there was actually one broker in the UK called our party that actually went out of business. And therefore that caused the traders who held account with them, actually at risk of losing their own money. This is another reason why it pays to be with a true broker who passes your order to the real market, rather than a dealer who simply just takes the other side of your trade. So what does that mean for my trading? Well, being clear on the inner workings of the currency market will give you a much better understanding precisely of what's happening when you observe price action and charts during the day.

More importantly, when you see prices move or you get stopped out, I hope that you will no longer feel prone to the paranoia or misconception that often distracts amateur traders. This is an important lecture, and I hope that I've given you a much clearer understanding of the market and how prices actually move. In the next lecture, we will look at probability and the law of small and the law of large numbers. And what does this mean for you as a professional trader