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
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
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
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.
