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Characteristics of Forex Trading
The FOREX market is a very interesting and individual market; it is certainly quite different from the more traditional stock market or commodity futures markets. It is distinguished by the following traits:
- Very high trading volumes Daily turnover of $4tn dwarfs other markets.
- Extremely high liquidityIt can be bought or sold very easily, very low storage costs, immediate execution, and transparent pricing etc.
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- Geographical dispersionFX can be traded from anywhere in the world with an Internet connection.
- Trading timesFX is traded 24 hours a day, 5 days a week, all year round. There is no dependence on seasonal factors, or future contract expiry.
What are the factors that can affect exchange rates? What should I look for when trading FOREX?
- Interest RatesTypically, an increase in a country's interest rate will increase the demand for the currency, and value of its currency because ownership of this currency will provide greater returns.
- Government Budget DeficitsA nation’s currency will usually weaken as a response to widening government budget deficits, and vice versa on narrowing deficits.
- Balance of TradeThe trade flow between countries illustrates the demand for goods and services, which in turn indicates demand for a country's currency to conduct trade. So an increasing balance of trade deficit will weaken the country's currency.
- InflationTypically a currency will lose value if there is a high level of inflation in the country or if inflation levels are perceived to be rising. This is because inflation makes things more expensive and so demand for that particular currency drops. However, a currency may sometimes strengthen when inflation rises because of expectations that the central bank will raise interest rates to combat rising inflation.
- Economic GrowthReports such as GDP, employment levels and retail sales detail the levels of a country's economic growth and health. Generally, the more healthy and robust a country's economy, the better its currency will perform, and the more demand for it there will be.
- Political FactorsInternal, regional and international political conditions and events can have a profound effect on currency markets. Situations such as Government upheaval, perceived fiscal behavior of the next/current ruling party, increasing tensions and risk of confrontation, either domestic or foreign, can greatly affect the strength of a nation's currency.
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