Primary Characteristics of Forex Trading
grudzień 6th, 2011Forex or Foreign Exchange market involves many different things. In the following sections we will closely look at some of the primary characteristics of forex market.
These Characteristics are:
1. Forex Market
2. OTC Nature
3. London Market Price
4. Forex Rate Fluctuations
5. Currency Trade
Forex Market
First of all we would like to tell that there is lack of any central market for most of the forex trade that occurs throughout the world. Additionally, forex market is also devoid of any inter-country regulations.
OTC Nature
There are several interconnected markets because of the OTC or over the counter characteristic of foreign exchange markets. These interconnected markets are the place for trading various currency instruments. It also means that the foreign exchange market has no single exchange rate. But generally the rates are more or less close to avoid exploitation by arbitrageurs.
London Market Price
London has been able to develop its dominance in the market and because of that quoted price for currencies is normally LMP or London Market Price. But apart from London there are other forex trading centers also such as Hong Kong, New York, Singapore and Tokyo. Forex trading continues all day and as soon Asian trading finishes, the trading starts in European region followed by North American region.
Forex Rate Fluctuations
There are constant fluctuations in forex rate and are primarily because of the different monetary flows and also due to expectations of a change in monetary flows occurring after:
1. Growth in GDP
2. Inflation
3. Changes in interest rate
4. International and domestic fisher effect
5. Interest rate parity
6. Deficits in budget
7. Deficits of trade
8. M&A deals spanning multiple nations
9. Trade surpluses
10. Occurrence of other similar macro-economic factors
In such forex rate fluctuations banks are in a better position as they are able to view the order flow of customers they have.
Currency Trade
There is trade of currencies against each other and a foreign exchange trading product is formed using 2 different currencies. The way a currency pair is recognized is XXX/YYY and in another form which is XXXYYY. The YYY and the XXX here refer to both currencies� international 3 letter ISO 4217 code. XXX is considered as base currency which gets quoted relative to other one recognized by YYY.
The normal convention in the forex market is to show foreign exchange rate against American dollar and keeping it base currency for all transactions, as for example, USDCAD or USDINR. To explain it better we will go through a small situation where the rate is quoted as GBPUSD 2.8951. This would be 1 GBP�s value in USD meaning that 1 GBP is equivalent to 2.8951 USD.
Only few occasions in which the US dollar becomes counter currency are GBP, AUD, EUR and NZD. If the forex trade involves these currencies then it will be expressed as GBPUSD or EURUSD and likewise.
In case any factor affects YYY then it will have its effect on YYYBBB as well as YYYKKK. Such a thing results in creation of currency correlation among all currency pairs involving YYY.
As per one survey done by Triennial, heavy trading occurs in following currency pairs:
1. EURUSD amounting to twenty eight percent.
2. USDJPY amounting to fourteen percent
3. GBPUSD amounting to nine percent