The Forex Market And Its Three Distinctive Elements

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Distinctive elements are those elements that every new trader should know before they make their first trade. The first step to being a successful trader is knowing how the system of forex trading works. Before you open a Forex account, make yourself familiar with the foreign exchange market’s three distinctive aspects which are: geographical, functional, and participant.

Geographical Element

The Forex market is a huge and global market. It is spread all the way from North America to Europe, to the Far East, and back. The reasons for its growing popularity are numerous. It has access to all areas of the world. It is an easy and round the clock market with 24 hours a day accessibility. You can trade at any time of the day since there will be someone trading in some distant location around the world. The main foreign exchanges are in New York, Tokyo, Sydney, Singapore, Hong Kong, Bahrain, London and San Francisco. The geographical element of the foreign exchange market is useful for new traders to assess the size and volume of the Forex market. It has large and unmatched volume making it a powerful and profitable tool for investment.

Functional Element

The Forex market has the job to transfer purchasing power between countries. When trades are undertaken, partners convert their currency incomes into their domestic currency. If one country’s purchasing power is strong, the other country will have weak purchasing power. The Forex market helps to obtain and provide credit for international trade. The Forex is helpful in this regard because it assists in the movement of goods between countries and offers credit facilities too for financing.

Participant Element

The two main components which constitute the foreign exchange market are the Interbank, or the wholesale market and the client or the retail market. Further subdivision of these two categories results in five different types of participants.

The first type of participant is the bank and non-bank foreign exchange dealers. They buy at bid prices and sell at asking prices.

The second type of participants are individuals, commercial and investment firms including importers, exporters, tourists, and other portfolio investors. They use the market to help them invest.

The third group type includes the speculators and arbitragers. They are people who want to make money for themselves. They act in their own self-interest. Large banks are sometimes a part of this group.

Central Banks and treasuries are also another type of participants. Their motive is not to profit but to influence the market. They want the value of the domestic currency to benefit their interests.

The fifth and last type consists of Foreign exchange brokers. They facilitate trading but are not partners in the transaction. They usually charge a fee for the service rendered.