What is Forex Capital Market?

Learn About For-ex Capital Market

For-ex capital market, sometimes abbreviated as F-X, stands for the foreign exchange market. Money has been around us since ancient times but the for-ex capital market started to exist in 1973 when currencies of major industrialized countries became floating. Since then, the exchange rates are mainly controlled by the supply and demand. Average daily currency trading volume in 2007 exceeded 3.2 trillion US dollars making for-ex capital market the biggest market in the world.

Major difference between for-ex and other financial markets is that each currency trade consists of simultaneous purchase and sale activities, which is why the market is called “foreign exchange market”.

The for-ex capital market has an internal structure, whose tiers differ by the level of access determined by the amount of money traded.

· The biggest component is the inter-bank market with a 43% share. The inter-bank market mainly consists of big investment banking firms. The big companies provide a big flow of transaction for the significant amount and therefore enjoy a relatively small spread between bids and ask price. As we go down the hierarchy the spread has a tendency to increase as the volume traded decreases. Commercial traders and multinational companies are responsible for a big part of the for-ex capital market. They use currency transactions mainly to pay for commodities, goods and services.

· Central banks control prices, money supply and interest rates and can sometimes intervene in the for-ex capital market by selling or buying currencies when the exchange rates are too high or too low which generally has a short-term effect.

· The next level is an investment management firm, which mainly trade on behalf of the clients.

· Finally, retail for-ex broker is at the bottom level of the market with the smallest market share.

The biggest moves on the market are tied to the information and news releases and often happen in the morning of the particular session. One of the best market characteristics is liquidity of the for-ex capital market. Liquidity can be understood as trading volume and it varies from session to session and within the trading session.

Currencies and other financial markets are highly correlated and among them, the most influential markets are: gold, oil, stocks and bonds. For example, gold is highly anti-correlated to the US dollars, oil price is often considered indicative of the inflation and growth expectations, and so on. The bottom line is that other financial markets influence currencies and if trader wants to be successful it is imperative to look at the big picture.

Before starting to operate in the for-ex capital market every participant has to have a trading plan. A trading plan is an organized approach to execute trading strategy, that has been developed based on the market analysis and outlook. An important part of the market analysis framework can be a trading system, which not only helps traders to make decisions and increase their profit but also allows them to lower the psychological pressure. The way that it works is that system generates trading signals, which can be easily understood and used to make decisions by the trader.

But many traders, especially well respected ones, use self-developed systems. That way they have different, unique approach to trading and if it shows to be profitable one, all trader has to do is to repeat it continuously.

Latest hit are automated for-ex systems that give for-ex capital market new dimension. Software applications can do trading 24 hours a day and can be run from any computer, which gives great flexibility and possibility to ordinary people to get involved in this lucrative industry. It is only necessary to learn basics of for-ex capital market trading to be able to guide robots in wanted direction.