Forex Basics - Essential Elements of a Robust Trading Market

The foreign exchange market, often referred to as forex market is by far the world largest market. It consists of two major parts: the forex spot (or money) market (spot forex) and the currency futures market. Nowadays, most retail (small, private) traders participate largely in trading spot forex.

There are at least four essential elements which we would like to be present in any solid financial market, be it the stock, bond, futures, currency, or any other market, for that matter. These four elements include: transparency, liquidity, low trading costs, and lasting market trends.

Transparency

A market is said to be transparent when traders have access to accurate information at all stages of the trading process. Information is the key to making rational decisions and is particularly important in business. The world financial markets being venus where business is conducted are no exception here. One can quote many examples, especially in the stock market, of companies or individuals that have run into problems because they were deprived access to accurate information.

The foreign currency exchange market is one of the world most transparent markets, perhaps more than any stock market, which is especially true when it comes to pricing.

Liquidity

Just as there are two sides to any coin, there are also always two sides to any trade: a purchase and a sale, and it is the ease with which traders can buy and sell that is referred to as liquidity. In any truly liquid market, traders should be able to trade in substantial volumes without affecting prices in a significant way. On the other hand, in a market that lacks liquidity, traders are likely to encounter delays in getting their orders filled, which often leads to marked differences between the price at the time the order is placed and when it is executed.

One really good thing about the currency exchange market is that it is extremely liquid. A huge number of trades are executed each day on the Forex money market with trading volumes that exceed those of other financial markets, even combined. The liquidity in question is particularly good when trading occurs in major world currencies such as the USD and GBP.

Low Trading Costs

Trading in any market involves trading costs that are charges imposed by exchanges and brokers facilitating the trading process. Such costs inevitably lower traders' profits. They can also increase his losses. However, when the market trading costs are kept low, the market like that becomes attractive to traders and encourages more trades, which, in turn, leads to greater trading volumes and thus greater liquidity.

The absence of broker commissions and other usual trading costs in currency trading, together with the tight spread of prices, which continues to improve, means that trading costs in the forex market tend to be rather low.

Lasting Market Trends

In any market, it is usually difficult to know just when to enter it and then when to exit it. Because of that, it is good to have some reliable ways of assessing the state of a market as this can be helpful in predicting its direction in future.

In the forex market, as well as in many other financial markets, this is achieved by utilizing various elements of technical analysis that examine the market past performance and identify its trends, which can then be used to predict its future.

Most markets display trends of one kind or another, but in some markets these trends are more clearly defined than in others, making it thus easier for traders to enter and exit the market. The foreign currency market displays particularly strong and lasting trends.