Foreign exchange market is, in fact, a set of conversion transactions on purchase and sale of foreign currency on specific conditions with value date which are performed between participants of foreign exchange market. Concerning conversion transactions in English the steady term Foreign Exchange Operations, in abbreviated form FOREX, or FX is accepted.
It should be noted that FOREX is not the market in the usual sense. It has no uniform center. Trade in the FOREX market is made by means of telephone communication and via terminals of computer network. It is clear to those who already faced mechanisms of functioning of FOREX exchange market that it considerably differs from the models described in classical textbooks on macroeconomic which claim that they demand and supply of currencies define an equilibrium rate. In reality FOREX exchange market as, however, and all financial markets, never is in balance, its state can be defined as permanent search of the escaping balance. For quite some time now, namely since 1971 this search considerably became more active. This circumstance is connected with refusal of the Bretton Woods system of fixed rates and transition to free floating of currencies from each other. Inflow on the FOREX market of professional players and as a result strengthening of exchange rate fluctuation became result of withdrawal of the state from adjustment policy of currency rates.
The fact that FOREX exchange market is subject to considerable fluctuations, causes ambiguous reaction in people. For professional traders it is a potential source of income whereas for financial managers of corporations or investment funds it is rather an a source of risk and uncertainty of rather future income.
To promote further, it is necessary to understand what moves the FOREX market. Among the major factors influencing exchange rates of currencies It should be noted the following:
balance of mutual payments
- state of the economy
- the forecasts made on the basis of schedules of the technical analysis
- political and psychological factors
The main factor which defines a present situation in the FOREX market can be considered capital flow between the states. Besides such factors as inflation or level of the main discount rate, are also capable to influence currency value significantly. At the same time it is necessary to remember that the state always stands behind a currency back. The state performs the influence in two ways. The first of them is control, the second so-called currency interventions. Currency control keeps citizens from daredevil acts which can negatively affect on. Intervention is a purchase sale of large volumes of currency to raise or, on the contrary, to reduce its cost in the FOREX market.
All above-mentioned conditions are capable to cause sudden and sometimes drama turns of the market if in them something unexpectedly and significantly changes. It is the main explanation of the fact that sometimes only expectation of economic changes can affect more market changes, than events. Activity of managers of the big and coordinated financial funds also has significant effect on the movement of the FOREX market. In spite of the fact that each of them has an opportunity to arrive at own discretion, all of them are at least rather knowledgeable about features of the traffic schedule of each of principal currencies in the FOREX market. When the traffic schedule of currency reaches a certain key point, the market behavior of FOREX becomes technically predicted and respectively reaction of managers of large financial funds becomes predictable and how often happens, identical or similar. The sudden and powerful jump in prices results. At the same time essential volumes of the capitals are enclosed in the same positions.
The FOREX market is attractive also to investors. In recent years professional investors considerably increased the level of the participation in FOREX exchange market. The number of private investors also constantly increases. To sum up the result, in brief we will characterize those numerous features of the FOREX market which induce professional investors to take part in it:
The FOREX market operates with huge money supply. At the same time in goods quality money acts. The cost of one transaction repeatedly exceeds similar indicators in any other market. This feature of the FOREX market is most attractive to investors as it gives free rain in instant opening or closing of any position. In addition, high liquidity has powerful attractive force for any investor as it provides him freedom to open and close a position of any volume.