Currency trading is defined by a host of factors. These factors influence the directional movement of a currency pair. Because of this, it is imperative for a trader to be knowledgeable about them. The following characteristics define forex trade.
Forex trade is not a centralized system of trade. There are many geographic locations where trading takes place. This is not the case with stock and commodity trade. Forex trade is linked central points for purposes of co-regulation of information only. This is made possible with the improvement in information technology. OTC system of trading also means that you will always find different quotations of prices at any time for any currency. In stocks, you will only have one price to trade on at a single moment.
Except for weekends, forex trade goes on all day and all night. Different participants will enjoy different prices depending on where one has put his interests. In the stock markets all traders are exposed to only one price.
Forex trade occurs in different time zones and therefore you can naturally expect to find different types of traders. At one end of the continuum there are banks, hedge funds and other financial institutions while at the other end are smaller retailers, brokers and individuals.
Central banks are the most influential players in forex markets. Their influence has long-term ramifications. When it comes to short-term influence, commercial banks are the participants to watch. This is because they handle the accounts of individual players and handle currency exchange business.
Large corporations usually have large amounts of currency which they change into that of different countries especially if their business is of international nature. Such large amounts of capital flows make them be in a position to afford to risk substantial part of it as risk capital.
Other participants are investment managers such as insurance and social security funds.
The trading desks of banks handle currency as part of the larger interbank network which has the feature of making large transactions, higher volumes of trade and tightness in terms of the vales of spreads of bids. They take these demands in order to reconcile the commercial edge that they need to do business with the need to be speculative agents. Regular customers get the quotes of the prevailing rates from these banks on a regular basis. The banks attach a mark-up which depends on the size of the transaction being made with the customer and the significance of the transaction in forex terms.
The prices offered to retail customers have to differ from that of larger merchants on account of the volume of their deal and the size of their business. Their rates therefore differs from the one offered in the interbank.
Forex trade thrives on speculation. Since there are high volumes of currency exchange, it is hard to make a hard and fast rule to be followed all the time. Instead speculation supplemented with the use of indicators such as balances of trade of economically important countries as well as prices of important commodities. New information guides speculation such that a company with a need to make a payment in a foreign will keep abreast of new information so as to take advantage of the best rates. Poor speculation can result in painful losses.