How Financial Markets Work

Think about the last time you bought something where the price was not fixed. A second hand car. A piece of furniture from a private seller. A service where you negotiated the rate.

What happened in that negotiation? You had a price in your head. The seller had a price in their head. Somewhere in between, you agreed. The moment you agreed, that became the market price for that transaction.

Now imagine that same negotiation happening not between two people but between ten million people simultaneously, across every country in the world, every second of every trading day. Some are buying. Some are selling. Each has their own view of what something is worth. The price that emerges from all of that activity, the point where buyers and sellers continuously agree, is what we call the market price.

That is how financial markets work. Everything else is detail built on top of this.

You might wonder. If buyers and sellers agreed on a price just now, why is it different a second later?

Because the world keeps changing.

Every piece of new information that enters the market causes some participants to update their view. A stronger than expected jobs report from the US comes out and suddenly more people want to buy dollars because a strong economy suggests interest rates might stay higher for longer. An oil pipeline gets disrupted and traders who were happy selling oil a moment ago now want to buy it because supply just got tighter.

Imagine a fruit market where bananas are selling for $1 each. Suddenly news arrives that a disease has wiped out banana plantations across the region. Every buyer in the market knows bananas are about to become scarce. They start buying aggressively. Sellers, sensing demand, raise their prices. Within minutes bananas are $3 each.

Nothing physically changed in the market that day. What changed was information, and information changed expectations, and expectations changed behaviour, and behaviour changed the price.

This is exactly how financial markets work. They are not just reflecting what is happening in the world. They are reflecting what millions of people think is going to happen next.

When you open Navion Pro and look at any instrument, you will notice something immediately. There are two prices, not one.

Take EUR/USD as an example. You might see 1.0820 on one side and 1.0822 on the other. These two prices have names.

The gap between them, in this case 0.0002 or 2 pips, is called the spread. This is how your broker makes money on every transaction. You buy at the higher price and sell at the lower price, and that small difference is the broker's fee for connecting you to the market.

There is something that moves financial markets even more powerfully than facts and data. It is confidence.

Consider what happened in March 2020 when COVID-19 was declared a pandemic. Economies had not yet collapsed. Most businesses were still open. The actual economic damage had barely begun. But financial markets around the world crashed within days, some falling 30 to 40% in a matter of weeks.

Why? Because confidence collapsed. People did not know what was coming, and in the face of uncertainty, the natural human reaction is to sell, protect, and wait. That collective psychology, playing out across millions of trading accounts simultaneously, was enough to move markets by trillions of dollars before the real economic damage had even materialised.

The reverse is also true. Markets often rise in anticipation of good news before the good news actually arrives. A company stock might rise for months before it announces strong earnings, simply because enough investors believe the earnings will be strong. By the time the announcement comes, the move has already happened.

This is why experienced traders say markets are forward looking. They do not trade what is happening now. They trade what participants believe will happen next.

One of the most striking things about financial markets compared to almost any other business in the world is that they barely stop.

The global forex market opens on Monday morning in Sydney and does not close until Friday evening in New York. That is five consecutive days of continuous trading, 24 hours a day, across every time zone on the planet.

When traders in London are going home for the evening, traders in New York are hitting their stride. When New York closes, Asian markets take over. The baton is passed seamlessly, around the clock, around the world.

This has a practical implication for you as a trader. A position you leave open overnight can look very different in the morning. A news event in Japan at 2am your time can move a position you opened in the afternoon. The market does not pause while you sleep.