Trading forex
Over the last three decades the foreign exchange market
has become the world's largest financial market. With over
$1.8 trillion USD traded daily, it is more than three times
the aggregate amount of the US equity and treasury markets
combined.
Unlike other financial markets, the forex market has no
physical location and no central exchange. It operates
through a global network of banks, corporations and
individuals trading one currency for another.
The lack of a physical exchange enables the forex market
to operate on a 24-hour basis, spanning from one zone to
another in all the major financial centres.
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24-hour trading
One of the biggest advantages of trading forex is the
opportunity to trade 24 hours a day. Unlike other markets
which close and prevent you from taking advantage of market
moving news, with FX you can react instantly to world events
and increase your ability to make profits.
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Liquidity
The forex market is so liquid that there are always
buyers and sellers to trade with. It is the largest
financial market by far. With a daily volume of $1.8
trillion, it represents something in excess of three times
the size of the US equity and treasury markets combined.
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Leverage/margin
The degree of leverage in trading financial products has
been increasing over the years. Now the FX market has
reached the point at which a trader can virtually trade with
nothing down.
Traditionally, if an investor wanted to buy stocks and
shares, they had to provide the total amount of the funds
required for the position.
This has slowly evolved to the point where investors can
now put down a 10% “deposit” or margin and take a position
equivalent to ten times that size in some markets. Now
investors often only have to put down 2-3%, thus getting up
to 50 times leverage.
This gives players the chance to make bigger returns as
the positions they can hold in the market are much larger.
Conversely however, the risks are greater too.
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Profit potential in
falling markets
Since the market is always moving, there are always
trading opportunities, whether a currency is strengthening
or weakening in relation to another currency.
Thus a trader has the ability to sell short a currency
with the expectation that it will weaken versus another and
buy it back more cheaply later, making a profit should that
be the case.
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What drives the forex
market?
Currency prices are affected by a variety of economic and
political conditions, but probably the most important are
interest rates, inflation and political stability.
Sometimes governments actually participate in the forex
market to influence the value of their currencies, either by
flooding the market with their domestic currency in an
attempt to lower the price, or, conversely, buying in order
to raise the price.
This is known as Central Bank intervention. Any of these
factors, as well as large market orders, can cause high
volatility in currency prices. However, the size and volume
of the forex market makes it impossible for any one entity
to "drive" the market for any length of time.
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Who are the participants
in the forex markets?
The reason that the forex market is referred to as an
'Interbank' market is due to the fact that historically it
has been dominated by banks, including central banks,
commercial banks and investment banks.
However, the percentage of other market participants is
rapidly growing and now includes large multinational
corporations, global money managers, registered dealers,
international money brokers, futures and options traders and
private speculators.
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