Forex Trading Limits
Forex is a vast market with daily volume that surpasses the stock, futures, options and bond markets combined with $3 trillion of currency traded each day, as of 2011. The forex market and forex brokers are subject to certain regulations, but additional controls to maintain the market's successful handling of such large trading volumes each day needs to be in place.
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Forex Trading
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Forex is a global over-the-counter market for trading currencies. It is a decentralized financial market, also known as FX or the currency market. As of 2011, approximately 5 percent of forex trades are made by companies buying and selling products in foreign countries. Speculators trading for profit make up the remaining 95 percent of forex transactions.
Daily Trading Limit
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The market keeps in check with the use of daily trading limits. A daily trading limit enforces the maximum allowed gain or loss that can happen in any one trading session. For the forex market and other markets such as options or commodities, a degree of stability is maintained in the face of high market volatility and trades that involve large volumes of shares. Daily trading limits also prevent efforts to manipulate the markets. Additionally, the forex, futures, options and commodities markets use a high degree of leverage and daily trading limits help prevent huge losses.
A daily trading limit also provides information regarding the strength or weakness of the market. If the trading limit has been reached during a day of trading, this is termed an "up limit day" and shows evidence of a strong market. Conversely, a weak market will have what is called a "down limit day," where the level of trading experiences the maximum price drop allowed before trading stops.
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Currency Trading Limits
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Forex market makers do huge volumes of trades each day and because of this have the power to create extreme effects on the market. A market maker is a large forex broker that holds currency in inventory and quotes both a buy and sell price to create a market. Daily trading limits are enforced upon market makers by regulatory agencies that govern them, depending on which country they are located in. Forex market makers in the U.S. are regulated by the Commodity Futures Trading Commission.
Trading limits vary based on the type of asset being traded, whether futures, options or currency. In the forex market, trading limits also exist for currency pairs. For example, China has a daily trading limit of 0.5 percent for the Chinese renminbi against the U.S. dollar.
Reaching the Limit
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When the daily trading limit is triggered, market activity will be temporarily suspended on any instruments or currencies that have reached the upper or lower daily limit, and the particular currency, commodity or contract is considered "limit up" or "down limit" depending on the activity direction. Permitting that prices move back into an allowable range, trading may resume. In some scenarios, the market for these instruments may remain closed for the rest of the day, termed a "locked market." Additionally, a daily trading limit will not prevent large market price changes over the course of several days, in which trading a specific currency, derivative or contract may be impossible.
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References
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