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Three Main Characteristics of the Forex Market
While there are many characteristics of the Forex market, there are three that help new traders learn exactly what the foreign exchange market is all about. These characteristics are those that every new trader should know long before they make their first trade. The Forex system is one that is made to encompass the entire globe. It can be difficult to interpret and even more difficult to trade successfully within. Knowing how the system works is the first step to being a successful trader however. So, before you even think about opening a Forex account, be sure that you are familiar with the foreign exchange market’s geographical, functional, and participant characteristics.
Geographical Characteristics of Forex Market
The Forex is a huge market that encompasses the entire globe. This is a market that spans from the United States to Europe, to China, and back. There is no area it cannot touch. This is one thing that makes the market so popular. There is simply something for everyone with the Forex market. It is easily accessed due to it being open all day in every country. Its 24 hour access makes it even more attractive for investors. No matter what time of day you want to trade, there will be someone trading in some distant location around the world. Although there is trading in the Forex in every corner of the globe, the major exchanges are Singapore, Hong Kong, Tokyo, Bahrain, London, New York, San Francisco, and Sydney. The geographical characteristics of the foreign exchange market can help new traders realize the size and volume of the Forex. It is simply unmatched in volume and size. This makes the Forex a powerful tool for investors everywhere.
Functional Characteristics of Forex Market
The entire Forex market functions to transfer purchasing power. This is done between countries. When trades are made, they are allowing partners to convert currency revenues into their domestic currency. When one country’s purchasing power is strong, another country’s may be weaker. It also functions to obtain and provide credit for international trade and to avoid an exchange rate catastrophe. When it comes to international trade, the Forex is helpful because it can help the movement of goods between countries and offer credit for financing.
Participant Characteristics of Forex Exchange Market
There are two main parts to the foreign exchange market. The first part is the inter bank, which is often called the wholesale market. The second part is the client, which is often called the retail market. Throughout these two categories, there are approximately five different types of participants. The bank and non-bank foreign exchange dealers are those that buy at bid prices and sell at asking prices. This helps the efficiency of the market as a whole. An interesting thing to note is that by trading currencies, banks often make up to 20% of their profits.
Individuals and commercial and investment firms make up the second type of participants. This group consists of importers, exporters, tourists, and other portfolio investors. They use the market basically to help them invest. These are often those participants that use the Forex to hedge, which is a way to reduce their risk.
Speculators and arbitragers are the third group type that seeks to profit from the foreign exchange market. These people are those that are out to make money for themselves. They are acting in their own self interest. They seek profitable rate changes in order to help them profit and try to profit with the least possible risk involved. Large banks are sometimes a part of this group.
Central banks and treasuries are also involved in the Forex. They use it to change the value of their own currency, or to at least attempt to do so. This is something that they do with reserves. Their motive is not to profit but to influence the market. They want the value of their domestic currency to benefit their interests.
Lastly, foreign exchange brokers are the last of the five groups involved in the participant characteristic of the Forex. These participants are those who facilitate trading but are not partners in the transaction. They typically charge a fee for their service, which is most often on a commission scale. They are often seen as go between's for large traders.
What Drives Traders to Forex Markets
With the Forex market being the biggest financial market on the globe, it is no wonder millions of people are drawn to it. When it comes to investing, currency trading it where it’s at right now. It is one of the fastest growing investment forms to date. It is important to note however that although the Forex is called a “market” by name, it is not a traditional “market”. All trading is done over the telephone or via computers. There is no central location for the trading in any country. It is actually a cash inter-bank or inter-dealer system formed in 1971. This was the time when floating exchange rates came about. The Forex is huge today, with over 3.5 trillion levels exchanged each day. It is clearly one of the most popular forms of trading worldwide.
Availability of Forex Market
One of the best features of the Forex market is that it never closes. This is a system that takes place all day long, every day of the year. There are people in every country that are waiting to trade. You could wake up at 2 in the morning, no matter where you are, and expect to find trading occurring in full force. The availability of the market is something that is very appealing to some people. When dealing with foreign currency, there is no other way. The market must remain open for 24 hours because of the time differences and such. Traders capitalize on the wide range of trading time and appreciate that aspect of the Forex. With other markets that close daily, there is sometimes a sense of anxiety about what may or may not happen overnight. This is not an issue with the Forex market.
Excitement of Trading the Forex Market
Along with its never ending trading, the Forex is attractive to many traders because of the excitement it can bring. Trading is something that can be very exciting and the Forex offers never ending excitement for those willing to partake. The Forex market is so large, with $1.5 to $3.5 trillion dollars per day, that it allows nearly perfect liquidity. The size alone makes this market a joy ride for traders. If you are looking for endless excitement, you will be glad to know that you can certainly find it in the Forex market. Unlike the other markets, the Forex is great because you can enjoy that excitement all day long. You won’t have to deal with the anxieties that occur with other markets after closing time. You can know that no matter what, the Forex will be open and you will be able to deal with business as needed. This adds a fun element to trading with the Forex, which can be removed by stress in other markets.
Forex Trading is not For Everyone
In previous times, the market was only for the rich. One had to typically place at least a $1million cash deposit down with the bank to even begin trading. This made it difficult for anyone but rich people to trade. Today however, the Forex is open to smaller scaled traders as well. Most of the traders are actually doing so from home. Lower margin requirements are very attractive to the smaller traders. They allow them to participate with the larger traders on the same scale, but at a more equal position. With the Internet thriving year after year, home based traders can get in with the larger traders via their computer, which was not always the case. Before, only large traders could even access the Forex at any level. Today, the Forex is for everyone.
As you can see, the Forex market is one that offers excitement, availability, and opportunity. These three reasons are what draw millions of people to the Forex each day. It is something that once you try it, you will not want to stop. The opportunities are endless, which is why the Forex is a popular topic in business schools today. If you are interested in learning this market, check with your local college to see if there are any classes offered about the topic. You will need to be aware of the rules and regulations before you begin trading. Once you have the information you need, jump on in and start trading right away!