Some Basic Features of Forex

Forex, unlike the Stock Market, has no centralized exchange and all its transactions are conducted on the Interbank Market or OTC (over the counter) via phone or electronic networks.

Fundamentally, there are two main trading sources that comprise the daily Forex turnover. The Foreign trade represents only five percent and results from companies buying and selling their products in foreign countries as well as converting foreign sales into domestic currency. This group of traders includes Governments, companies (exporters and importers) and some investors who have foreign exchange exposure.

Their profits can be directly affected by the fluctuating movements between their local or domestic currency and the foreign currency of their overseas business or investment partners. The Speculation trade accounts for the other ninety-five percent and are transactions made for pure profit. This group, which includes banks, funds, corporations and individuals, creates artificial rate exposure in order to profit from the price variations or movements.

So as you can see and which may come as a surprise to you, most Forex trading is purely speculative, with only a small percentage of the market activity resulting from governments' and companies' fundamental currency conversion needs.

Forex is the world’s most traded market and is active 24 hours a day from Sunday 5pm EST to Friday 4pm EST. During each day, Forex trading commences in Sydney and then moves around the globe passing through Tokyo, London and New York.

During this time, investors have the unique opportunity of reacting immediately to currency fluctuations around the clock. The world's currency markets can be viewed as a huge melting pot because no other institution embraces the current world’s events at any given time more than Forex.

Several factors influence the supply and demand of any given currency and these fall into the following categories of economic factors, political conditions and market psychology.

Economic factors involve policy making and economic conditions. A government’s fiscal policy can directly influence its central bank’s level of interest rate which has a major bearing on the supply and cost of its money.

Economic conditions include but are not limited to Government budget deficits or surpluses; balance of trade levels and trends; inflation levels and trends; economic growth and health and the productivity of an economy. This fundamental data is released at specific times and dates during the month as defined by the Global Economic Calendar.Internal, regional, and international political conditions and events can have a profound effect on currency markets.
For instance, political upheaval and instability can have a negative impact on a nation's economy. Also, events in one country may spur positive or negative interest in a neighboring country affecting its currency.

Market psychology and trader perceptions influence the foreign exchange market in a variety of ways such as the following:

Unsettling international events can lead to ‘Risk Aversion’ causing investors to seek Safe haven investments. The ‘Buy the rumor, sell the fact’ truism can apply to many currency situations and reflects the impact of a particular action before it occurs. When the anticipated event arrives, the market then reacts in exactly the opposite direction.