The Forex Market: Not Just a Speculative Market

Filed under: Learn Forex Trading |

 

Screen shot 2013-05-23 at 10.37.35Although traders on the forex market speculate on market prices and make trades based upon where they think price will go (based on fundamentals or technical analysis), there is also another element of the forex market, which you should be aware of (if you are not already). This element is obvious when you think about it – but many speculative traders do not. Let me explain…

 

The forex market, of course, is short for the ‘foreign exchange’ market, and it is simply the buying of one currency with another. Thus, if a big UK corporation suddenly needs one million euros to conduct some business, then they will buy these euros with their British pounds. This would be a decision solely based upon business, and might have nothing to do with any speculation in the market. However, a large enough transaction would move the market regardless, and this could account for some of the spikes and odd movements that sometimes occur in the forex markets.

 

Let’s say that you sell the USD/JPY pair based upon an analysis of the technical data, and all signs point to the fact that the Japanese yen will drop further. However, your stop loss is suddenly taken out with a market spike, and you feel frustrated and confused because you just didn’t see it coming. This could be one occasion where a market transaction was made, not on the strength or weakness of the Japanese yen, but due to a big American corporation needing to buy some Japanese yen to conduct some business there. Unlike the stock market (where when a company is fundamentally weak and this is reflected in a technical chart, nobody will be buying the stock), in the forex market, even if the fundamentals are weak and the chart reflects this, there will still be companies conducting business in the currency’s country of origin. This is something that all forex traders should remember.

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