WHY TRADE THE SPOT FOREX MARKET?

WHY TRADE THE SPOT FOREX MARKET?
From all the financial instruments traded, forex is believed for a number of
reasons by many professional traders and analysts to be one of the bestsuited
markets to trade using technical analysis methods. First, it is wellsuited
because of its sheer size in trading volume; according to the Bank for
International Settlements, average daily turnover in traditional Foreign Exchange
markets amounted to $1.9 trillion in the cash exchange market and
another $1.2 trillion per day in the over-the-counter (OTC) Foreign Exchange
and interest-rate derivatives market as of April 2005. Second, the
rate of growth and market participants in forex trading has increased some
2000 percent over the past three decades, rising from barely $1 billion per
day in 1974 to an estimated $2 trillion per day by 2005. Third, since the market
does not have an official closing time, there is never a backlog or “pool”
of client orders parked overnight that may cause a severe reaction to news
stories hitting the market at the U.S. bank opening. This generally reduces
the chance for price gaps. Currencies tend to experience longer-lasting,
trending market conditions than do other markets.
These trends can last for months, or even years, as most central banks
do not switch interest rate policies every other day. This makes them ideal
markets for trend trading and even breakout systems traders. This might
explain why chart pattern analysis works so well in forex trading. With
such widespread groups playing the game around the world, crowd behavior
plays a large part in currency moves; and it is this crowd behavior that
is the foundation for the myriad of technical analysis tools and techniques.
Due in part to its size, forex is less volatile than other markets. Lower
volatility equals lower risk. For example, the Standard & Poor’s (S&P) 500
Index trading range is between 4 percent and 5 percent daily, whereas the
daily volatility range in the euro is around 1 percent. Trading veterans know
that markets are interdependent, with some markets more heavily influenced
by certain markets than others. We covered some of these relationships
looking at futures and certain stocks and how interest rates move
equity markets and currencies. We will learn in coming sections how to detect
hidden yet repeating patterns that occur between these related mar-
16 FOREX CONQUERED
kets. Forex is the ideal market for the experienced trader who has paid his
or her “trading tuition” in other markets. Forex is by far the largest market
in dollar volume. At times it can be less volatile; experiences longer, more
accentuated price trends; and does not have trading commissions as we discussed.
However, there are no free lunches. Traders must use all the trading
tools at their disposal; the better these fundamental and technical tools,
the greater their chance for trading success.
While intermarket and other relationships are often complex and difficult
to apply effectively, with a little high-tech help, traders and investors
can enjoy the benefits of using them without having to scrap their existing
trading methods.