Key Factors in Foreign Exchange Trade
grudzień 6th, 2011Foreign exchange trade involves many things and to be able to understand how the forex market works, you need to know some of the key factors which are part of this market. In the following sections our target will be to provide complete information on this subject so that it becomes easy for you make the right decisions.
In forex there is no central market for all the foreign exchange trade that occurs in various parts of the world. Apart from that there are no regulatory bodies or regulations which may act on a inter country basis.
Key Factors
1. Over the Counter: Various forex markets have over the counter feature as one of their characteristics and due to that numerous interconnected markets get developed. These markets are the main place where currency instrument trade occurs. Due to this OTC feature there is also no uniform forex rate but normally the rates remain close enough to evade misuse by any arbitrageur.
2. Common Market Price: As London is a dominant player in the forex market, London Market Price has gradually become the quote price for different types of currencies. There are several other important players also in the market like Tokyo, Hong Kong and Singapore. The foreign exchange trading continues all days except weekends.
3. Foreign Exchange Rate Fluctuations: The fluctuations in foreign exchange rates are generally dependent on monetary flows of various types. In addition to it traders expect monetary flow to change in case there is GDP growth, interest rate changes, inflation, trade or budget deficit, fisher effect, parity in interest rates, M&A deals involving neighboring countries, surpluses of trade and similar other macroeconomic factors. It is also worth mentioning here that in case the rates fluctuate, the big banks are in safer position due to the fact that they can keep an eye on order flow their customers create.
4. Currency Trading: Forex involves trading in two currencies forming forex trading product. PPP/MMM or PPPMMM are the two commonly utilized forms of identifying any currency pair. These abbreviations, namely PPP or MMM are the three letter codes (ISO 4217) for their respective currencies. The first part is the base currency which is referred relative to the second part of the currency pair. Normally the US dollar is regarded as base currency with currency pair shown as USDJPY.
A simple example will help to explain it better, suppose we have a currency pair available as NZDUSD 6.1885. This would mean that 1 NZD is same as USD 6.1885. There are also some situations where USD is considered as counter currency. This occurs if the other currency is one of the following; AUD, EUR, GBP and NZD, so in such situations the code becomes GBPUSD or USDINR. If due to some fluctuations the PPP element is affected then the currency pairs such as PPPMMM or PPPRRR are also adversely influenced. It also results in development of what is known as currency correlation in currency pairs which have PPP.
Conclusion
To conclude we can say that there are several factors which work in forex trading and you must be aware of all of them to deal correctly and gain from your investment.