ForexForex Strategies

Capital flows and the forex market

Capital flows and the forex market

 

At the beginning of a trading career, one would be tempted to think that there is a single market in which all goods and securities are traded. Such a market, where every buyer can meet with any seller, has been called ‘Perfect Market’.

Unfortunately for traders, the perfect market does not exist. Instead, it has been replaced by multiple markets in which buyers and sellers trade at prices different from each other.

We have divided these markets into two categories: Markets that trade the same commodity or security but have different prices (Intermarket) and demands that deal in fundamentally different products altogether (Contramarkets). In this article we will discuss the Intermarket.

 

This category is further divided into three subcategories:

  1. Markets that trade the same product but at different prices (Eg. Stock Index futures and Stock Options)
  2. Markets that trade the same financial instruments but in different forms (Eg. Futures contracts and forward contracts)
  3. Markets that trade the same commodity/security for different expiry dates (Eg options market vs spot forex market)

 

All these markets are discussed below in detail.

Intermarket trade

The first type of market is called Intermarket. In this type of market, the same commodity or security is traded at different prices by different participants. This trade aims to profit from the price difference between the two markets.

The advantage of this type of trade is that it offers a high degree of liquidity as there are always buyers and sellers available at any given time. This allows traders to enter and exit the market quickly without affecting the price. Furthermore, since all buyers and sellers are trading at the same price, no one has an advantage.

The disadvantage of this type of market is that it can be challenging to predict which market will profit from the price difference. In addition, since the prices are constantly changing, it can be challenging to keep track of the market and make a profit.

Stock index futures and stock options markets.

In this trade, the same security (a stock index) is traded at different prices by different participants. This trade aims to profit from the price difference between the two markets.

The advantage of this type of trade is that it offers a high degree of liquidity as there are always buyers and sellers available at any given time. This allows traders to enter and exit the market quickly without affecting the price. Furthermore, since all buyers and sellers are trading at the same price, no one has an advantage.

The disadvantage of this type of market is that it can be challenging to predict which market will move to profit from the price difference. In addition, since the prices are constantly changing, it can be challenging to keep track of the market and make a profit.

Futures contracts and forward contracts.

In this trade, the same financial instrument (a stock index future) is traded at different prices by different participants. This trade aims to profit from the price difference between the two markets.

The advantage of this type of trade is that it offers a high degree of liquidity as there are always buyers and sellers available at any given time. This allows traders to enter and exit the market quickly without affecting the price. Furthermore, since all buyers and sellers are trading at the same price, no one has an advantage.

The disadvantage of this type of market is that it can be challenging to predict which market will move to profit from the price difference. In addition, since the prices are constantly changing, it can be challenging to keep track of the market and make a profit.

Options market vs spot forex market

In this trade, two fundamentally different products (options & forex) are traded by other participants to varying prices for various reasons. This trade aims to take advantage of liquidity differences between these two markets or arbitrage.

The advantage of this type of trade is that it offers a high degree of liquidity as there are always buyers and sellers available at any given time. This allows traders to enter and exit the market quickly without affecting the price. Furthermore, since all buyers and sellers are trading at the same price, no one has an advantage.

The disadvantage of this type of market is that it can be challenging to predict which market will move to profit from the price difference. In addition, since the prices are constantly changing, it can be challenging to keep track of the market and make a profit.

 

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