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What is market microstructure theory in forex?

Market microstructure theory studies how trading mechanisms—order flow, liquidity, spreads, and information asymmetry—affect price formation. In forex, microstructure explains why prices don’t just reflect fundamentals but also dealer behavior, order clustering, and execution technology. Institutions use microstructure research to refine strategies, predicting short-term price dynamics. Retail traders can apply insights by recognizing spread behavior, session effects, and liquidity traps. Benefits: deeper understanding of price mechanics. Risks: complexity and data access. Microstructure theory teaches traders that forex is not a single “market” but a constantly shifting network of orders shaping price minute by minute.