The Complete Guide To Forex Market Structure

The foreign exchange market is the largest financial market in the world.

Understanding the market structure of foreign exchange is crucial for foreign exchange traders who want to understand Forex trading strategies or Forex brokers who need to grasp market trends and adapt to policy adjustments.

Understanding Market Structure in Forex

To truly understand the structure of the foreign exchange market and start forex trading, it is necessary to understand not only the main components of the foreign exchange market, but also a certain understanding of how they are related and what kind of impact they will cause.

First of all, we need to understand the main players in the foreign exchange market, which mainly includes banks, hedge funds and retail traders.

Banks mainly earn profits through fund storage, interest returns, and exchange between different currencies, and have a great influence on the foreign exchange market through the formulation of monetary policies.          

hedge funds, they are often entrusted by individuals to hedge fund managers to conduct a large amount of capital transactions, and this also has a huge impact on changing the direction of the market.

While retail traders make up the largest part of foreign exchange market transactions, they often rely on the leverage provided by brokers to trade.

What is Market Structure In Forex?

After gaining some basic knowledge about the Forex market, the next question is what exactly is Market Structure in Forex?

Market structure in Forex, from a broader perspective, pertains to the arrangement of transactions involving various participants and platforms in the foreign exchange market. This includes numerous currency traders, and is characterized by a well-defined hierarchy and decentralization.

Hierachy

There are two levels of foreign exchange trading: the interbank market and the over-the-counter (OTC) market.

 According to the roles played by different individuals in the market, some scholars believe that the foreign exchange market is hierarchical, and arrange them into a pyramid in sequence.

At the top of the pyramid are the central banks of different countries, which mainly include transactions between banks. At the same time, their foreign exchange policies have the most important influence on the foreign exchange market.

The second layer is the transaction between commercial banks and the central bank. They can always feel the market changes in advance to make better responses.

 From the third level, there is the level of over-the-counter trading, which is mainly composed of companies and hedge funds, and usually conducts detailed analysis of market trends in order to obtain greater benefits.

The bottom layer is scattered traders, but they are also real currency users. They are the largest subject of foreign exchange transactions, but they are at the bottom because they have less influence on the trend than other levels, but they are also one of the groups that cannot be ignored.

Decentralization

Decentralization is reflected in the fact that everyone can get a different offer at any single moment and at any place. 

Even the final transaction price of the same currency may be different, and this depends on the individual choice of the trader. This means greater freedom for traders and better trading opportunities

How To Read Market Structure In Forex?

From a microscopic point of view, Market Structure in Forex refers to the different types of market conditions that traders can encounter when trading currencies. These market structures can include trends, ranges, breakouts, and reversals, among others.

We usually observe the corresponding market structure through charts, and identify key levels of support and resistance and swing high–swing low formations , which can help them determine market structures.

When we analyze the market structure, the icon generally may appear in 3 states, trending upwards, trending downwards or moving sideways. How can this be used for analysis? We can analyze from two aspects, trending and ranging.

When using trending for analysis, we have two options, the expectation remains the same or there is a reversal. When the price of the market is moving in the same direction, in an uptrend, we tend to look for a series of higher highs and higher lows, and trading time is generally to observe when the higher lows occur, and then in the Buy before breaking out of the previous high. 

In a downtrend, do the opposite, look for a series of lower highs and lower lows, watch when the lower highs occur, and selling the pullback of the previous lower low. It is not a good time to trade when we expect a reversal.

When analyzing using ranging, we can identify the upper and lower limits above and below that level, and buy at the lower limit and sell at the upper limit. However, any trend in forex trading may change, and you still need to be careful.

Types of Market Structure

Market structures are usually divided into 3 categories: Bullish Market Structure, Bearish Market Structure and Sideways Market Structure.

Bullish Market Structure

The Bullish Market tends to represent an upward trend and consists of a series of higher highs and lower lows.When people think that the demand for a certain currency will increase, the price will rise as a whole, thus sending out an upward signal Continuously stimulate investor confidence, increase trading volume, and promote continued growth, thus forming bullish bullishness. Factors affecting the Bullish Market mainly include trading volume, trading prospects, and whether the trading trend is strong or not.

Bearish Market Structure

The Bearish Markets often represents a downward trend and consists of a series of lower lows and lower highs.When people lose confidence in trading, selling pressure dominates the market. The overall price will fall.When in this kind of market, the price has a lower breakthrough, people are less willing to sell, and when the price has a slight upward momentum, traders are eager to sell to make a profit.At this stage, the trading volume tends to increase, because traders generally choose to buy at this time in order to reduce the overall loss when it increases.

Sideways market structure

Sideways market structure often represents a gentle trend, also known as a sideways phenomenon, and consists of a series of by equal highs and equal lows, it will fluctuate up and down in a certain area, and it often has the following characteristics. Price volatility is low and trading volume is low. When the price breaks out of this range, the price will usher in a large volatility.