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4 Forex Trading Characteristics You Must Know
Forex is an abbreviation for the foreign exchange
and refers to the trading of foreign currencies. The foreign
exchange market is the largest and most liquid market in the
world. Its trades total $2 trillion every day. The forex market
has many characteristics and can be difficult to interpret.
However, there are four main characteristics that you should
be familiar with if you are thinking of becoming a forex trader.
The first of the four characteristics of forex trading are
geographical ones. The foreign exchange market is global. It
spans around the entire word and is hugely popular because
it is open 24 hours a day in every country. Although the foreign
exchange market is worldwide, it does not have a physical,
centralized location for activity. However, the major exchanges
are located in New York, San Francisco, Hong Kong, London,
Tokyo, Singapore, Sydney and Bahrain. Because the forex does
not have specific operation site, foreign exchange trades are
considered over the counter. Trading takes place through the
use of computer terminals, telephones and broker desks.
The next important characteristic to be aware of are the markets
main functions. The forex markets major function is to transfer
purchasing power. Trades are made by allowing participants
to convert their currency revenues into their domestic currency.
The forex also helps keep the exchange rate from fluctuating
to severely. The market also functions to aid in the movement
of goods between countries by providing credit for financing.
Another distinguishing characteristic that you should be aware
of before making a trade on the foreign exchange market is
its participants. The forex is divided into to main categories,
the interbank, or wholesale market and the client, or retail
market. Within those two sections there are five different
types’ of participants.
The first set or participants are the bank
and non-bank foreign exchange dealers. These participants buy at bid prices and
sell at asking prices, aiding in market efficiency. The second
type of participant is individuals and investment and commercial
firms. They use the forex to help them invest while reducing
risk. They often use the forex as a hedging tool. The third
group consists of speculators and arbitragers who seek solely
to profit from the forex. They attempt to make money for themselves
while assuming the least amount of risks.
Central
banks and treasuries make up the next set of participants.
They use it to change the value of their own currency using
their reserves. They attempt to influence the market rather
than make profits. The last group is made up of foreign exchange
brokers. These are the people who facilitate trading for others
and usually charge fees or commission for their services.
The forth characteristic of the forex is that there
is little or no inside information. Fluctuations in the exchange rate
are cause by actual money flows or an expectation of a change
in the flow of money. This expectation of change can be a result
of changes in the gross domestic product, budget and trade
deficits or surpluses, inflation, the interest rate, and other
economic conditions. Since major news about these conditions
are generally made through announcements that everyone has
access to at the same time, there is little or no insider information
that can be provided.
These are the top four characteristic that every trader should
know before they become participants in the forex. If you are
unaware of these basic characteristics it will be difficult
to be a successful trader in the foreign exchange market. Knowing
the system before jumping in will help to insure you will get
the most out of your trades.
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