Brian R Hill#41

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What is market impact and why is it critical for large forex trades?

Market impact refers to how much a trade itself moves the market. For institutions, placing billion-dollar FX orders visibly shifts supply-demand, worsening entry prices. Impact has two components: temporary (price reverts after order finishes) and permanent (new equilibrium forms). Institutions minimize impact with execution algorithms, crossing networks, and internal netting. Example: a central bank diversifying reserves must split trades over weeks to avoid moving EUR/USD. Retail traders rarely create impact individually, but broker aggregation of client flows can still shift pricing. Recognizing market impact explains why “big money” moves cautiously and why volume surges often precede breakouts. For traders, it underscores the lesson: liquidity conditions are as important as directional calls.