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.
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.
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.
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.