Whatever you are trading, whether it is stocks, futures, bonds, foreign
currency or anything else, there are certain conditions which must exist
for the market to be attractive to the trader and profitable for him. The
four characteristics of a good investment market are liquidity,
transparency, minimal trading costs and trending.
Liquidity
Trading in its simplest form comprises two elements, a sale and a
purchase, and the liquidity of a market is nothing more than the ease with
which a trader can both buy and sell. For a market to be truly liquid
however a trader must not merely be able to buy and sell with ease, but he
must also be able to do so in substantial volume without this having a
marked effect on the price of the items being traded.
If a market is not sufficiently liquid delays in buying and selling can
often result in considerable differences between the price when an order
is placed and when it is executed. Additionally, traders can often find
that it is difficult to sell items in a market with poor liquidity.
The foreign currency market is arguably the world's most liquid market
with an enormous trading volume which is second to none.
Transparency
When we talk about the transparency of a market we are referring to a
trader's access to accurate information throughout the trading process.
The greater the access to accurate information, the greater the
transparency.
Information is the key to successful trading in many of the world
markets and indeed there are numerous examples of individuals and
companies running into problems because they did not have access to
accurate information.
Fortunately, in addition to being the world's most liquid market, the
Forex market is also the world's most transparent market.
Minimal Trading Costs
In any market the market makers need to make a profit and that means
that there are inevitably costs to be met by the trader. The secret to a
successful market, as far as the trader is concerned, is for trading costs
to be as low as possible, as the higher the trading costs the lower his
profit, or the greater his loss.
The Forex market enjoys some of the lowest trading costs of any market
with no commission or similar trading costs and trading costs being
largely limited to the difference between the buying and selling price in
any currency trade. This difference, which is known as the 'spread' and
which is common to many markets, is also extremely tight in the case of
the foreign currency market, keeping trading costs to a minimum.
Trending
In most markets the biggest problem traders face is knowing when to buy
and when to sell and it is vitally important that traders have some way of
gauging the direction in which a market is moving.
In the case of the Forex market many traders employ a technique known
as technical analysis, which essentially studies the past performance of
the market and looks for trends which can then be used to predict its
future direction.
Such predictive tools are not unique to the Forex market and most
markets will display at least some form of trend. However, the Forex
market shows particularly strong trending characteristics and this makes
it much easier for traders to identify when to enter and exit trading
positions than is the case in most other markets.
