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Each perspective carries a different attitude, goal, investment horizon, and market impact.
They key difference among these market participants is their level of sophistication, where the elements of sophistication include:
- Money management techniques
- Profit objectives
- Level of computerization
- Quantitative abilities
- Research abilitiesLevel of discipline
Of course there are sophisticated and non-sophisticated banks, governments, corporations, investment funds, and traders. But among these segments it is the individual trader who has the least amount of external governance. Whereas governments, banks, corporations, and investment funds adhere to regulations and restrictions (to a certain extent), traders are only restricted by their level of capital.
In the absence of these external restrictions, traders fall into two groups: those who can impose internal restrictions – discipline - on their trading strategies and those who cannot: the fence-swingers, et al.
Those who can impose this discipline we will call the sophisticated investor. In the zero-sum game of forex trading, the sophisticated investor uses tools and strategies that emulate those of the highly sophisticated institutional participants to extract profits from the novice participant. It is only the sophisticated investor who has the ability to extract positive returns from the forex markets.
Forex trading has surged in recent years, as more individuals earn their living trading and the popularity of riskier investment vehicles like hedge funds has increased. The bottom line for these investors is superior returns, and in foreign exchange four major factors create a unique investment environment:
In no other market can you find a playing field that is so biased to the investor, at least on the surface. But to take advantage of these factors you have to be constantly aware of their downside.
In a liquid market there is a high degree of transparency, even when large transactions change hands. The sophisticated investor understands what this means: forex attracts huge players. As a trader grows in sophistication, they understand that these huge players have significant price impact, and watch for their market entry.