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Articles Directory >> Consider the FOREX Market
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FOREX is an acronym for Foreign Exchange. A further shortened form is FX. It is nothing but a relative value of a particular form of currency. A FOREX market is an international market place where the currencies of different countries are traded directly between two parties. Such a kind of trading is also called “off-exchange” or “over-the-counter (OTC)” trading. We mean that this kind of trading does not utilize the medium of a stock market for its trading. The existence of a FOREX market has made it possible for various companies and entities to engage themselves in international trade. It facilitates the ease of conversion of one currency to another against standard (but regularly changing) rates of exchange of currency. The international FOREX market has now completely switched over from the traditional exchange rate system to something known as the floating exchange rate system. Whereas the traditional exchange rate system depended on many factors of the country like its monetary policy, and the currency values remained fixed more or less, a floating exchange rate system allows currencies of various countries to fluctuate in their values in the foreign exchange market. So you should always make good and serious attempts to consider the FOREX Market.
The FOREX market has its distinct features viz.
Trading volumes are large in scope.
There is a high liquidity, which means that there is a minimum scope for loss of value.
Seamless and continuous trading: 24 hours a day, but only on weekdays. This is quite unlike other markets like the stock market where 24 hour business transactions are not possible.
Margin of profit (along with loss) is narrow. Lower the risks lower the gain!
Debt Capital or Leverage is used as a supplement for equity capital.
It allows a particular country to buy goods or services and pay in foreign currency.
It has very low transaction processing costs. Unlike a stock market which operates through an exchange and involves high transaction processing costs (broker-to-broker costs, dealer costs, counter costs etc.), the Foreign Exchange market has these costs significantly reduced or eliminated.
Transaction processing time is also significantly less compared to stock markets.
There is a facility called Interest Rate Rollover. By using this facility, the FOREX trader can earn overnight interests on the currencies held by him. But he is also liable to pay interest on the currencies that he has borrowed. But of course there will be, more often than not, a difference between these two interest rates. He can work out the difference between these two interest rates to his advantage.
A few central banks are actively involved in the foreign exchange business. This process is known as intervention. Central banks try to influence FOREX rates by actively buying and/or selling currencies in the market.
Timing: The all-important factor in the FOREX Market!
Consider the fact that the FOREX market is open 24 hours a day. This literally means that there is no time to sleep! What if the currency values suddenly drop while you were sleeping? Here comes the need to rethink your strategy. Look out and explore better times to trade. There certainly are better hours to trade in the foreign exchange market. They are called “FOREX Hours”. Though FOREX hours will vary for different types of traders, yet the best FOREX hours are certainly those that overlap market timings for two or more foreign markets. But then again, market size plays a significant role here. We will study that now. You should try to know that there are some risks in the stock market and so you need to make a very good research of the same.
Market Size: Another important factor!
A particular market may prove to be more rewarding to get involved in that a combination of two or more markets. If you come across such a market, it will be natural for you to dedicate the majority of your time to this market. The “overlapping market timings factor” will more or less get eliminated in this case.
These are the pre-requisite factors before you consider the FOREX Market.
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