Fair Value:
In investing, fair value refers to an asset’s sale price agreed upon by a willing buyer and seller, assuming both parties are knowledgeable and enter the transaction freely.
One of the importance of financial markets is price discovery. The markets will always give out a fair value price, a price where buyers are willing to buy and sellers are willing to sell depending on the supply and demand.
Suppose there is a missed level on trade in the market i.e. the supply didn’t match the demand at one particular point. The market will seek to fill in any gaps or missed price levels on trade.
Market retracements simply goes to fill in the levels in price not efficiently traded for fair value.
For stock markets:
Traders usually buy or sell at a fair value price. For DSE, the stock prices have a specific change in value either by 5/10/100. For example, a share trading at 200 TSH, may rise or fall by 5 TSH i.e., fall to 195 or rise to 205. There is never a 201 price. The price of share you find in the market is always a fair value price brought about by supply and demand conditions of the market. No manipulation, and order books are available to any trader to see.
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In FX market:
Price moves by a difference in pip. This is the smallest change in price movement. Every price is a fair value price, there is no specific increments as for the stock markets.
Traders can enter orders at any price, therefore every price should be a fair value price. Every level that is traded in the market should be filled by buyers and sellers.
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A simple example:
Explained below
Thus, retracements in the market simply means a willingness on the part of the market makers to reprice to levels not efficiently traded for fair value.
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