Who Is Participating In Forex Market Trades?
Jun 30, 2010
The forex market is all about trading between countries, the currencies of these nations and the timing of investing in sure currencies. The FX market is trading between counties, usually completed with a dealer or a monetary company. Many people are concerned in forex trading, which is similar to stock market trading, but FX buying and selling is accomplished on a much larger total scale. Much of the buying and selling does take place between banks, governments, brokers and a small quantity of trades will take place in retail settings where the typical particular person concerned in trading is called a spectator. Monetary market and monetary conditions are making the forex market buying and selling go up and down daily. Hundreds of thousands are traded on a daily basis between most of the largest countries and this is going to incorporate some amount of trading in smaller international locations as well.
From the studies through the years, most trades in the foreign exchange market are accomplished between banks and this is referred to as interbank. Banks make up about 50 percent of the buying and selling in the forex market. So, if banks are broadly utilizing this method to generate income for stockholders and for their own bettering of enterprise, you already know the money have to be there for the smaller investor, the fund managers to use to increase the quantity of interest paid to accounts. Banks commerce money each day to extend the amount of money they hold. Overnight a bank will invest millions in forex markets, after which the next day make that money available to the general public in their savings, checking accounts and etc.
Business firms are also trading more typically in the foreign exchange markets. The commercial companies resembling Deutsche bank, UBS, Citigroup, and others reminiscent of HSBC, Braclays, Merrill Lynch, JP Morgan Chase, and nonetheless others corresponding to Goldman Sachs, ABN Amro, Morgan Stanley, and so forth are actively buying and selling within the foreign exchange markets to extend wealth of stock holders. Many smaller companies will not be concerned within the foreign exchange markets as extensively as some massive corporations are however the choices are stil there.
Central banks are the banks that maintain worldwide roles in the international markets. The supply of money, the availability of cash, and the interest rates are managed by central banks. Central banks play a big position within the forex trading, and are situated in Tokyo, New York and in London. These usually are not the one central locations for foreign currency trading but these are among the many very largest concerned on this market strategy. Typically banks, industrial investors and the central banks may have massive losses, and this in flip is handed on to investors. Other instances, the buyers and banks will have big gains.
http://www.themarketfinancial.com/who-is-participating-in-forex-market-trades/5560
Showing posts with label currency market. Show all posts
Showing posts with label currency market. Show all posts
Thursday 1 July 2010
Tuesday 16 June 2009
Currencies trading are very difficult.
Currencies trading are very difficult. They are more difficult than stocks and certainly more difficult than interest rates.
You need to learn by looking at price behaviour in the past, but trying to understand what currencies have done even recently is tough. There have been some big moves.
Take the US dollar versus euro rate, for example. It has ranged over the last few years from around 85 to 130. How is it possible that the currencies of the world's two largest economies can change in relative value by over 50%?
These types of currency moves are intriguing.
1. Purchasing price parity (PPP) is not much use
This theory suggests that currencies should tend towards the level where a collection of goods and services costs the same amount in different countries. PPP would suggest that if they are too expensive in one country, then that country's currency should fall.
The famous McDonald's Big Mac index is sometimes published in the Economist magazine, and it applies this analysis, to the price of the burgers in various countries.
The problem is that in reality PPP does not seem to have much impact on currency level. Perhaps it is for the same reason that people living in tiny but very expensive apartments in Tokyo do not migrate to Sydney or LA and buy a huge house. If they did, perhaps currencies would be easier to evaluate.
2. Market sentiment has the most impact
Since there are no reliable benchmarks, market sentiment is the huge factor that dominates events.
In 2005, the US dollar has been out of favour, despite an improving US economy and rising US dollar interest rates. The market is more worried about the US current account deficit. But is that econmies or fashion? There's the difficulty.
Conclusion
You need not avoid currency trading completely.
There are occasional opportunities such as the big market moves that you have seen in the major currencies during the last few years.
You should only be involved when you have a very firm grip on what's driving the market. That doesn't happen too often for any of us!
You need to learn by looking at price behaviour in the past, but trying to understand what currencies have done even recently is tough. There have been some big moves.
Take the US dollar versus euro rate, for example. It has ranged over the last few years from around 85 to 130. How is it possible that the currencies of the world's two largest economies can change in relative value by over 50%?
These types of currency moves are intriguing.
- The first thing to be aware of, is that you are looking at two economies. With stocks and interest rates, youj basically have only one economy to figure out.
- However, the second and bigger challenge is that currencies are largely driven by market sentiment, and the reason is that there is absolutely no successful benchmark for the pricing of a currency.
1. Purchasing price parity (PPP) is not much use
This theory suggests that currencies should tend towards the level where a collection of goods and services costs the same amount in different countries. PPP would suggest that if they are too expensive in one country, then that country's currency should fall.
The famous McDonald's Big Mac index is sometimes published in the Economist magazine, and it applies this analysis, to the price of the burgers in various countries.
The problem is that in reality PPP does not seem to have much impact on currency level. Perhaps it is for the same reason that people living in tiny but very expensive apartments in Tokyo do not migrate to Sydney or LA and buy a huge house. If they did, perhaps currencies would be easier to evaluate.
2. Market sentiment has the most impact
Since there are no reliable benchmarks, market sentiment is the huge factor that dominates events.
In 2005, the US dollar has been out of favour, despite an improving US economy and rising US dollar interest rates. The market is more worried about the US current account deficit. But is that econmies or fashion? There's the difficulty.
Conclusion
You need not avoid currency trading completely.
There are occasional opportunities such as the big market moves that you have seen in the major currencies during the last few years.
You should only be involved when you have a very firm grip on what's driving the market. That doesn't happen too often for any of us!
Saturday 14 February 2009
The Currency Market Information Edge
The Currency Market Information Edge
by Investopedia Staff, (Investopedia.com) (Contact Author Biography)
The global foreign exchange (forex) market had an average daily turnover of $3.2 trillion as of April 2007, an increase of 69% from the previous year, according to the 2007 Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity, conducted by the Bank for International Settlements. It is by far the largest financial market in the world, and its size and liquidity ensure that new information or news is disseminated within minutes. However, the forex market has some unique characteristics that distinguish it from other markets. These unique features may give some participants an "information edge" in some situations, resulting in new information being absorbed over a longer period. (For background reading, see the Forex Tutorial.)
Unique Characteristics of the Forex Market
Unlike stocks, which trade on a centralized exchange such as the New York Stock Exchange, currency trades are generally settled over the counter (OTC). The OTC nature of the global foreign exchange market means that rather than a single, centralized exchange (as is the case for stocks and commodities), currencies trade in a number of different geographical locations, most of which are linked to each other by state-of-the-art communications technology. OTC trading also means that at any point in time, there are likely to be a number of marginally different price quotations for a particular currency; a stock, on the other hand, only has one price quoted on an exchange at a particular instant. The global forex market is also the only financial market to be open virtually around the clock, except for weekends.
Another key distinguishing feature of the currency markets is the differing levels of price access enjoyed by market participants. This is unlike the stock and commodity markets, where all participants have access to a uniform price. (For more insight, read Basic Concepts Of The Forex Market.)
Market Participants
Currency markets have numerous participants in multiple time zones, ranging from very large banks and financial institutions at one end of the spectrum, to small retail brokers and individuals on the other. Central banks are among the largest and most influential participants in the forex market. However, on a daily basis, large commercial banks are the dominant players in the forex market, on account of their corporate customers and currency trading desks. Large corporations also account for a significant proportion of foreign exchange volume, especially companies that have substantial trade or capital flows. Investment managers and hedge funds are also major participants.
Differing Prices
Banks' currency trading desks trade in the interbank market, which is characterized by large deal size, huge volumes and tight bid/ask spreads. These currency trading desks take foreign exchange positions either to cover commercial demand (for example, if a large customer needs a currency such as the euro to pay for a sizable import), or for speculative purposes. Large commercial customers get prices from these banks that have a markup embedded in them; the markup or margin depends on the size of the customer and the size of the forex transaction.
Retail customers who need foreign currency have to contend with bid/ask spreads that are much wider than those in the interbank market. (For more insight, see The Foreign Exchange Interbank Market.)
Speculative Positions Vs. Commercial Transactions
In the global foreign exchange market, speculative positions outnumber commercial foreign exchange transactions, which arise due to trade or capital flows, by a huge margin, although the exact extent is difficult to quantify. This makes the forex market very sensitive to new information, since an unexpected development will cause speculators to reassess their original trades and cause them to adjust these trades to reflect the new information.
For example, if a company has to remit a payment to a foreign supplier, it has a finite window in which to do so. The company may try to time the purchase of the currency so as to obtain a favorable rate, or it may use a hedging strategy to cover its exchange risk; however, the transaction has to occur by a definite date, regardless of conditions in the foreign exchange market.
On the other hand, a trader with a speculative currency position seeks to maximize his or her trading profit or minimize loss at all times; as such, the trader can choose to retain the position or close it at any point. In the event of new information, the adjustment process for such speculative positions is likely to be almost instantaneous. The proliferation of instant communications technology has caused reaction times to shorten dramatically in all financial markets, not just in the forex market.
However, this "knee jerk" reaction is generally followed by a more gradual adjustment process as market participants digest the new information and analyze it in greater depth.
Information Edge
While there are numerous factors that affect exchange rates, from economic and political variables to supply/demand fundamentals and capital market conditions, the hierarchical structure of the forex market gives the biggest players a slight information edge over the smallest ones.
In some situations, therefore, exchange rates take a little longer to adjust to new information. For example, consider a case where the central bank of a major nation with a widely-traded currency decides to support it in the foreign exchange markets, a process known as "intervention." If this intervention is unexpected and covert, the major banks from which the central banks buy the currency have an information edge over other participants, because they know the identity and the intention of the buyer. Other participants, especially those with short positions in the currency, may be taken by surprise to see the currency suddenly strengthen. While they may or may not cover their short positions right away, the fact that the central bank is now intervening to support the currency may cause these participants to reassess the viability and implications of their short strategy. (For more on interventions, see Profiting From Interventions In Forex Markets.)
Example – Forex Market Reaction to News
All financial markets react strongly to unexpected news or developments, and the foreign exchange market is no exception. Consider a situation in which the U.S. economy is weakening, and there is widespread expectation that the Federal Reserve will reduce the benchmark federal funds rate by 25 basis points (0.25%) at its next meeting. Currency exchange rates will factor in this rate reduction in the period leading up to the expected policy announcement. However, if the Federal Reserve decides at its meeting to leave rates unchanged, the U.S. dollar will in all likelihood react dramatically to this unexpected development. If the Federal Reserve implies in its policy announcement that the U.S. economy's prospects are improving, the U.S. dollar may also strengthen against major currencies. (For a related strategy, see Using Interest Rate Parity To Trade Forex.)
Conclusion
While the massive size and liquidity of the foreign exchange market ensures that new information or news is generally absorbed within minutes, its unique features may result in new information being absorbed over a longer period in some situations.
In addition, the hierarchical structure of the forex market can give the biggest players a slight information edge.
by Investopedia Staff, (Contact Author Biography)
Investopedia.com believes that individuals can excel at managing their financial affairs. As such, we strive to provide free educational content and tools to empower individual investors, including thousands of original and objective articles and tutorials on a wide variety of financial topics.
http://www.investopedia.com/articles/forex/09/forex-information-currency-market.asp?partner=basics2
by Investopedia Staff, (Investopedia.com) (Contact Author Biography)
The global foreign exchange (forex) market had an average daily turnover of $3.2 trillion as of April 2007, an increase of 69% from the previous year, according to the 2007 Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity, conducted by the Bank for International Settlements. It is by far the largest financial market in the world, and its size and liquidity ensure that new information or news is disseminated within minutes. However, the forex market has some unique characteristics that distinguish it from other markets. These unique features may give some participants an "information edge" in some situations, resulting in new information being absorbed over a longer period. (For background reading, see the Forex Tutorial.)
Unique Characteristics of the Forex Market
Unlike stocks, which trade on a centralized exchange such as the New York Stock Exchange, currency trades are generally settled over the counter (OTC). The OTC nature of the global foreign exchange market means that rather than a single, centralized exchange (as is the case for stocks and commodities), currencies trade in a number of different geographical locations, most of which are linked to each other by state-of-the-art communications technology. OTC trading also means that at any point in time, there are likely to be a number of marginally different price quotations for a particular currency; a stock, on the other hand, only has one price quoted on an exchange at a particular instant. The global forex market is also the only financial market to be open virtually around the clock, except for weekends.
Another key distinguishing feature of the currency markets is the differing levels of price access enjoyed by market participants. This is unlike the stock and commodity markets, where all participants have access to a uniform price. (For more insight, read Basic Concepts Of The Forex Market.)
Market Participants
Currency markets have numerous participants in multiple time zones, ranging from very large banks and financial institutions at one end of the spectrum, to small retail brokers and individuals on the other. Central banks are among the largest and most influential participants in the forex market. However, on a daily basis, large commercial banks are the dominant players in the forex market, on account of their corporate customers and currency trading desks. Large corporations also account for a significant proportion of foreign exchange volume, especially companies that have substantial trade or capital flows. Investment managers and hedge funds are also major participants.
Differing Prices
Banks' currency trading desks trade in the interbank market, which is characterized by large deal size, huge volumes and tight bid/ask spreads. These currency trading desks take foreign exchange positions either to cover commercial demand (for example, if a large customer needs a currency such as the euro to pay for a sizable import), or for speculative purposes. Large commercial customers get prices from these banks that have a markup embedded in them; the markup or margin depends on the size of the customer and the size of the forex transaction.
Retail customers who need foreign currency have to contend with bid/ask spreads that are much wider than those in the interbank market. (For more insight, see The Foreign Exchange Interbank Market.)
Speculative Positions Vs. Commercial Transactions
In the global foreign exchange market, speculative positions outnumber commercial foreign exchange transactions, which arise due to trade or capital flows, by a huge margin, although the exact extent is difficult to quantify. This makes the forex market very sensitive to new information, since an unexpected development will cause speculators to reassess their original trades and cause them to adjust these trades to reflect the new information.
For example, if a company has to remit a payment to a foreign supplier, it has a finite window in which to do so. The company may try to time the purchase of the currency so as to obtain a favorable rate, or it may use a hedging strategy to cover its exchange risk; however, the transaction has to occur by a definite date, regardless of conditions in the foreign exchange market.
On the other hand, a trader with a speculative currency position seeks to maximize his or her trading profit or minimize loss at all times; as such, the trader can choose to retain the position or close it at any point. In the event of new information, the adjustment process for such speculative positions is likely to be almost instantaneous. The proliferation of instant communications technology has caused reaction times to shorten dramatically in all financial markets, not just in the forex market.
However, this "knee jerk" reaction is generally followed by a more gradual adjustment process as market participants digest the new information and analyze it in greater depth.
Information Edge
While there are numerous factors that affect exchange rates, from economic and political variables to supply/demand fundamentals and capital market conditions, the hierarchical structure of the forex market gives the biggest players a slight information edge over the smallest ones.
In some situations, therefore, exchange rates take a little longer to adjust to new information. For example, consider a case where the central bank of a major nation with a widely-traded currency decides to support it in the foreign exchange markets, a process known as "intervention." If this intervention is unexpected and covert, the major banks from which the central banks buy the currency have an information edge over other participants, because they know the identity and the intention of the buyer. Other participants, especially those with short positions in the currency, may be taken by surprise to see the currency suddenly strengthen. While they may or may not cover their short positions right away, the fact that the central bank is now intervening to support the currency may cause these participants to reassess the viability and implications of their short strategy. (For more on interventions, see Profiting From Interventions In Forex Markets.)
Example – Forex Market Reaction to News
All financial markets react strongly to unexpected news or developments, and the foreign exchange market is no exception. Consider a situation in which the U.S. economy is weakening, and there is widespread expectation that the Federal Reserve will reduce the benchmark federal funds rate by 25 basis points (0.25%) at its next meeting. Currency exchange rates will factor in this rate reduction in the period leading up to the expected policy announcement. However, if the Federal Reserve decides at its meeting to leave rates unchanged, the U.S. dollar will in all likelihood react dramatically to this unexpected development. If the Federal Reserve implies in its policy announcement that the U.S. economy's prospects are improving, the U.S. dollar may also strengthen against major currencies. (For a related strategy, see Using Interest Rate Parity To Trade Forex.)
Conclusion
While the massive size and liquidity of the foreign exchange market ensures that new information or news is generally absorbed within minutes, its unique features may result in new information being absorbed over a longer period in some situations.
In addition, the hierarchical structure of the forex market can give the biggest players a slight information edge.
by Investopedia Staff, (Contact Author Biography)
Investopedia.com believes that individuals can excel at managing their financial affairs. As such, we strive to provide free educational content and tools to empower individual investors, including thousands of original and objective articles and tutorials on a wide variety of financial topics.
http://www.investopedia.com/articles/forex/09/forex-information-currency-market.asp?partner=basics2
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