When the Foreign Exchange market opened to the retail traders and main street investors in the middle of 1980's it was not as popular as it is today. For the Forex market were just for the sophisticated investors and institutional traders and hedge fund managers that uses hedging strategies for their clients that has international foreign currency exposures.
Now you can actually find approximately around 21 broker-dealers and banks that offer forex dealing services more on a speculative form of investment attracting more retail investors who would like to take advantage of the FX price fluctuations to make some money at the risk of loss to their initial capital investment. Leverage and spreads vary depending on the currency with which they would like to trade. The intricacies of the forex market can be misunderstood by others who during some point in time may have lost a lot of money trading it.
But it is understanding where the heartbeat of the Foreign exchange market is primarily heavy in trading volumes. And this is where the American and Asian trading sessions meets with the European Trading sessions. It happens to be one of the highlights of the Foreign exchange market, as it traded within the three major markets in different time zones. This became the standard bearer on investments and trading capabilities where the commodities and stocks followed suit by setting global trading channels such as Globex to start with and worked itself up to what is now called the electronic age of global trading.
Although, there is no official exchange for the Forex market or a trading pit like the commodities market in Chicago Board of Trade or the Chicago Mercantile exchange; the FX market is heavily traded in the European sessions in London. Where about 200 dealers are willing and able to make markets in any free floating currency in the world. Which makes it the heart and soul of the foreign currency trading. It comprises a good 35% of Trading volume in a single days trade.
It also has the biggest liquidity pool, bids and offers narrow considerably during these sessions as competitive prices are being contributed through out the electronic trading systems and in line with the Reuters interbank dealing system.
Since these dealers has the strength to make market move, more often when the European market opens the price actions are often stretch to their extreme highs and lows. This makes the weak shorts and long positions to be eliminated called as " shaking out the rookies ". For others it is often called the " London fake-out " where the initial market movements may not be the real market sentiments as mentioned earlier. After eliminating the other speculative investors out of the market; then within the next few hours the real market directions will be obvious to the traders as it leads to the American trading sessions.
Just be extra careful specially during these thin trading markets towards and after the holidays.
As the market prices can swing dramatically and unexpectedly specially right after New Year where position adjustments are made that may eventually make the US dollar move with such volatility that it may drop and other European currencies may exactly do the opposite. These are very common in liquidity adjustments and the interbank dealers may have a dramatic push and pull strategies in place that may make retail and sophisticated investors drawback most postions on the start of the trading week.
Have a great New Year this coming 2010 !
Good Luck and Happy Trading !
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