Tuesday, September 18, 2007

Forex Markets & Its Trading Characteristics

There are a number of reasons why FOREX trading is such a great way of entering the capital markets. Among them we can find its easy accessibility thanks to the use of the internet, the fact that currency trading is all commission-free and also the low transaction costs involved.

There is one important characteristic about Forex that makes it what it is. This important characteristic is that there is not a single unified foreign exchange market in the world. Instead of this, due to the over-the-counter nature of currency markets, there exists a number of interconnected marketplaces, where many different currency instruments are traded. What this implies is that there is not a single dollar rate in the world, but different rates, depending on what bank or market maker you are asking a quotation to. In practice these rates are often very close as you can easily find on the web.

As a piece of general knowledge you must learn that the main forex trading centers are placed in New York, London, and Tokyo, but this doesnt mean they are the only ones; there are other banks throughout the world that also participate. For example, as the Asian trading session ends, the European trading centers open, then the US session, and then the Asian centers open again. This kind of continuos market has the advantage that traders can react to news immediately, instead of waiting for the markets to open.

There are many factors that can influence the exchange rate of a particular currency. These rate fluctuations are usually caused by changes in inflation, GDP growth, interest rates, budget and trade deficits or surpluses, and other macroeconomic conditions f the country emitting the particular currency. Also major news that are released publicly can affect the prices of currencies; so many people have access to the same news at the same time that they can shake a currency price really hard.

According to a specialized study, the most heavily traded products on the spot market are: EUR/USD - 28 %, USD/JPY - 18 %, GBP/USD - 14 % and the US currency was involved in 89% of transactions, followed by the euro (37%), the yen (20%) and sterling (17%).

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