Unique Characteristics of the Foreign Exchange Market

Tanya J. Montague

The foreign exchange market consists of trades made by the purchase of one currency by selling another. Although most foreign currency exchange is conducted between large institutions, the advent of online trading allows individuals to trade in this market too.

There are many factors that make the foreign currency market unique. Unlike the stock market where, when you buy stock you own a small piece of a company in exchange for your money, in the forex market you buy currency with other currency.  These Currency trades are often completed within a day or even a few minutes.

Liquidity

The liquidity of a commodity is the ease with which it can be converted to cash without impacting the value. Money is cash so that means it is usually very easy to trade.

Trading Volume

The average daily turnover worldwide is almost $4 trillion, according to a survey in December 2007 and increased 15% in 2008. The amount of money traded on the forex market daily is immense, much greater than the stock market. The most commonly traded currency is the USD.

A 24 Hour Market

All around the world currencies are traded 24 hours a day, five days a week. Whatever time of day or night you like to trade, except weekends, you will have the opportunity to do so.

A Global Market

The Forex market is all over the world and thus can be affected by international events. An unstable government or a change of a leader can create quick changes in the FX market. Currencies do not have an absolute value.  It is only measured in comparison with that of another currency.  This results in a unique situation – if one currency falls in value, another will rise, giving opportunity to profit as you can switch from the falling currency to the rising currency and still make money.

Be aware of factors affecting currency rates. That includes not only the standard domestic economic indicators, but trade imbalance figures, central bank policy changes and others.

Leverage

Leverage is where a small amount of something can be used to control a larger amount. Basically, the broker ‘lends’ investors ‘the rest’ of the money to make the purchase of currency.  This is referred to as trading on margin.

Margin differences between the stock and forex markets are enormous. Most stock brokers will leverage up to 2:1. In currency trading 100:1 is common and you may be able to leverage up to 200 times your account broker balance. Higher leverage gives you the chance of bigger profits and the risk of bigger losses.

All of this may seem a bit overwhelming when you are just starting out.  Take advantage of the demos offered by most brokers. Execute paper using the real currency figures until you are comfortable with the market.  

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