Who Trades the Forex Market
When it comes to who trades in the Forex market, the answer would be mostly limited to well-capitalised financial corporations and institutions. While such big players still rule the Forex market regarding transaction volume, the recent growth in online Forex trading has made the forex market accessible to practically anyone with an internet connection, a computer and some cash funds.
There are numerous players in the Forex market:
Banks
The largest currency volume forex market is traded on the interbank market. Here, through electronic networks banks of all sizes trade with each other. Big banks account for a large percentage of total traded currency. Banks aid forex market transactions for clients and administer speculative transactions from their trading desks. When banks enact as merchants to clients, the bid-ask spread serves as the bank’s profit. Speculative forex market transactions are executed to take advantage of currency variation.
Large Companies
It should not be forgotten, though, in all the transactions on the forex market made by the banks, it is eventually the international companies that depend on forex market trading. Whenever a service or commodity is sold in another country than it was produced, a forex business is imperative. Companies’ trade forex market to hedge the risk conjoined with foreign currency translation. Big companies such as software and computer companies from America or car manufacturers are also important players in the forex market. (Hedging contrary to currency risks can give your offshore investments a security level.)
Government and central banks
Also of enormous importance for developments in the forex market are the national governments and their central banks. Despite these are formally independent, political influence cannot entirely be escaped. Interest rate decisions profoundly influence the forex market prices. Higher interest rates largely trigger a great demand for the corresponding currency. Also, central banks are also active as sellers and buyers, for instance when the exchange rate is to be actively influenced or currency reserves are to be invested.
Any action employed by a central bank in the forex market helps to increase or stabilise the willingness of that nation’s economy. Governments, as well as central banks, can make currency interventions to depreciate or revalue their currencies. For instance, in times of great deflationary tendencies, a central bank can weaken its currency by creating extra supply, which is then used to purchase foreign currency. This efficiently reduces the domestic currency and makes exports more competitive on the global market.
Speculators (US)
The third large group on the forex market is the speculators, which can ultimately be counted as private traders (retail forex speculators). These days, the rise of online forex trading has unlocked the private forex market for almost anyone with a computer, internet connection and the desire to risk their money in forex trading. The trading volume of private traders is quite low compared to banks and other financial institutions but, the forex trade is growing fast in popularity. Private trader’s forex market operations are based on a combination of fundamentals (interest rate parity, monetary policy expectations, inflation rates, etc.) and technical factors (resistance, price patterns, support, technical indicators).
As a private trader, also known as the Retail trader, you are part of an excellent context in which each player pursues his own goal. The result is the exchange rates.
The Bottom Line
Certainly, Forex market participants trade currencies for actual different reasons. Financial institutions, speculative trading- executed by banks, hedge funds and individual investors – is profit – oriented. Central banks are driving forex markets energetically through monetary policy, the exchange rate regime, currency interventions and, in unusual cases. Companies trade currencies for global transactions and to hedge risks.
Investors can now benefit from knowing who is trading currencies and why they are doing so.