Jan 26: Three Main Characteristics of the Forex Market

by David Jenyns on January 26, 2007

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 marketís 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 countryís purchasing power is strong, another countryís 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 interbank, 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 betweens for large traders.

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