The foreign exchange market (forex market or fx market) is the world's largest market and consists largely of the forex spot market (spot foreign exchange market) and the currency futures market. Today however the majority of smaller traders tend to confine themselves to trading spot forex.
There are four elements which must be present in any good financial market, whether you are trading in the stock, bond, futures, currency market or any other market. These four elements are liquidity, transparency, low trading costs and market trends.
There are always two sides to a trade, a purchase and a sale, and in its simplest form liquidity refers to the ease with which traders can buy and sell. To be truly liquid traders must also be able to trade in substantial volume without this having any marked effect on prices.
If a market lacks liquidity then traders will often encounter delays in meeting orders to buy, frequently leading to a significant variation between the price when an order is placed and when it is executed. In addition, it may be hard to sell in a market that is not sufficiently liquid.
Fortunately the currency exchange market (especially when trading in major world currencies such as the USD and GBP) is extremely liquid and a huge number of trades are conducted each day on the Forex money market with a trading volume that far exceeds that of other markets.
A market is said to possess transparency when traders can access accurate information at all stages of the trading process.
Information is the key to many things in life and the world's various markets are no exception. There are many examples, especially in the world stock markets, of companies and individuals which have run into difficulty because the parties to a trade did not have access to accurate information.
The foreign currency exchange market is without doubt the world's most transparent market and this is especially true when it comes to pricing.
Low Trading Costs
Markets carry trading costs which inevitably lower a trader's profits or increase his losses. However, when a market can keep its trading costs low it becomes attractive to traders and encourages both an increased number of trades and an greater trading volume.
The absence of commission and other usual trading costs, together with the tight spread of prices, in currency trading mean that trading costs in the Forex market are kept very low.
In many markets it can be difficult to know just when to enter the market and when to exit it (when to 'buy' and when to 'sell'). As a result, it is important to have some way of assessing the present state of a market and to predict its future direction.
In the foreign currency exchange market this is achieved by employing various forms of technical analysis which examine the past performance of the market and identify trends which can then be used to predict its future.
Most markets display trends of one form or another, but in some markets these are far more clearly defined than in others, making it far easier for traders to enter and exit the market. The foreign currency market displays a particularly strong trending characteristic.