Foreign Exchange Market


Piggy has noted that there has been an increasing interest for day trading. An ordinary person with a computer connected to the internet can now try to compete with professional traders in different banks across the world. Most of the day trading involves the global foreign exchange market. This is basically an international network that is open 24 hours a day and involves the trading of global currencies. In a typical foreign exchange transaction, a party purchases some quantity of one currency by paying with some quantity of another currency. It is a dynamic market that includes all aspects of buying, selling and exchanging currencies at current or determined prices. In terms of volume of trading, it is by far the largest market in the world with a daily turnover of over USD5.0 trillion. The main participants in this market are the larger international banks. The market largely works through financial institutions and operates on several levels. The foreign exchange market is unique because of the following characteristics;

  • Its huge trading volume representing the largest asset class in the world leading to high liquidity;
  • Its geographical dispersion;
  • Its continuous operation: 24 hours a day except weekends (trading from 22:00 GMT on Sunday (Sydney) until 22:00 GMT Friday (New York))
  • The variety of factors that affect exchange rates;
  • The low margins of relative profit compared with other markets of fixed income; and
  • The use of leverage to enhance profit and loss margins and with respect to account size.

via GIPHY

Pricing in currency markets, just like in any other market is influenced by the forces of supply and demand – which is in turn driven by the following factors listed hereunder;

Political Factors

A key point is that all forms of internal, regional, international political conditions and events can have a profound effect on currency markets. Political upheaval/instability can have a negative impact on a nation’s economy. For example, developments such as BREXIT/The Trump effect had a direct impact on the underlying currencies;

Economics Factors

Economic policies influence the supply and demand of money. The market usually reacts negatively to widening government budget deficits and positively to narrowing budget deficits. Reports such as GDP, Inflation figures, employment levels and retail/car sales reflect the levels of a country’s economic growth, thus influencing the value of its currency.

Market Psychology

The perception of market participants can influence prices. For example, unsettling international events can lead to some form of “herd behaviour”, whereby investors move their assets to a perceived “safe haven”. As a result, there will be a greater demand, thus a higher price, for currencies perceived as stronger over their relatively weaker counterparts.

In conclusion, the above-mentioned factors form the basis of the two market analysis methods in forex trading; fundamental and technical analysis. Fundamental Analysis is the study of the economic and geopolitical forces that determine exchange rates. On the other hand, technical analysis is the framework in which forex traders study price movements. This involves developing trading rules by using various indicators, theories and charting tools.

The Infograph below shows the differences between the Forex and Stock Market;

Lean more about the Forex Market by downloading a copy of the Investor 101 Handbook below;

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