What Is a Market, Really?
Before you place a trade, you need a clear mental model of what happens when a buyer meets a seller. This lesson builds that model from first principles.
Author
Somchai Wattana, CMT
Peer reviewer
David Chen, CFA
Most retail traders begin their journey without a clear definition of the thing they are trading in. They know the terminology — bid, ask, spread, liquidity — but they cannot articulate, in plain language, what a market is. This omission is not trivial.
The simplest possible definition
A market is a place where parties with opposing views on the future value of an asset exchange it, and the price that emerges is the temporary equilibrium between those views.
Why this matters for your trading
If price is the outcome of disagreement, then profitable trading requires you to be on the correct side of the disagreement more often than chance — and to size your position such that being wrong does not ruin you. This is the entire game.
Citations
- [1]Harris, L. (2003). Trading and Exchanges: Market Microstructure for Practitioners. Oxford University Press, 2003
- [2]Hasbrouck, J. (2007). Empirical Market Microstructure. Oxford University Press, 2007
- [3]Bank for International Settlements (2022). Triennial Central Bank Survey of Foreign Exchange. BIS, 2022. Source