This week we will look into the players of the Forex Market. We will try to understand who they are, how they shape it and why may they be considered a driving forces behind the currency exchange market!
As you would possibly have guessed, Forex was initially a very exclusive marketplace. Managed and controlled by large banks and financial institutions. However, the market has opened up to a far wider audience in the last 25 years! Each participant enters the market with their own agendas and varying interests.
Major Commercial Banks – The Interbank Market
Let us start with the biggest and most important participants of the market – commercial and investment banks, often referred to as the Interbank Market - a decentralised and largely unregulated network of international banks operating across the globe (however, banks themselves are very highly regulated entities). Interbank Market participants are considered market makers. To be considered market makers, they take on various responsibilities. They decide on the buy and sell prices to other participants (earning profit through the spread in the process). By actively participating in the market themselves, they also provide us with enormous liquidity and volume that we see daily.
I am sure that we all heard of them and maybe even use some of them for our day to day personal or business banking! The Interbank Market include some of the biggest names out there, such as Deutsche Bank, UBS, Barclays, Citi, RBS, JPMorgan, HSBC, Credit Suisse, Goldman Sachs or Morgan Stanley and many more.
Governments and Central Banks
Governments and Central Banks are the next participants of the Forex market we are going to discuss.
Central Banks main functions (usually under the authority of the government) are to:
- manage and issue the state currency
- facilitate monetary policies
- enable the economic growth
- adjust interest rates
- control inflation
- regulate financial institutions
- maintain international currency reserves (accumulated through an international trade)
Government and Central Banks take part in the Forex Market to enable the growth of their economy. They have the power to re-adjust the exchange rates if they feel it will help boost their economy or put it back on track with their monetary and international policies.
Here are some Major Central Banks that you, as a trader should be aware of: Federal Reserve Bank (USD), European Central Bank (EUR), Bank of England (GBP) Bank of Japan (JPY), the Swiss National Bank (CHF). Their activities on the Forex Market may affect your trading positions so it is very important to keep an eye out for high impact news, speeches or new legislations.
Businesses & Commercial Corporations
Business and Corporations are the next participants on our list. These commercial companies (of any size) use Forex Market as a way to conduct & protect their business rather than to seek profits from trading.
They simply use Forex to facilitate their business needs, including:
- currency exchange when conducting international business (import or export of goods and services)
- reduction of risk arising from the exchange rate fluctuations (also referred to as hedging against adverse price movements)
- mergers and acquisitions between large international companies
However, many non-commercial businesses & corporations also use Forex to speculate and to make profits. Their trading decisions (mostly due to the size of their positions) may result in some sudden and unexpected price movements that may affect your trades in the short term, however, this group is not considered a market maker. They enter their positions using buy and sell prices as quoted by the Major Banks.
Speculators are the last group we are going to cover in today's lesson! To put it very simply, they speculate on future price movements to make money.
To do so, they analyse the markets and execute their strategies. Speculators are willing to risk their capital to profit from the price changes. Speculators vary from individual retail traders to large fund managers dealing with multi million accounts! Let’s look at both groups individually:
Fund Managers & Hedge Funds
This group invest aggressively on behalf of their clients. They manage funds from various sources, such as high-net-worth individuals, insurance companies, governments, pension funds and other private investors. As such, there is no limit to the combined capital they can manage. They are responsible for managing the risks, growing the portfolio and delivering profits for their investors.
Thanks to the competitive offering of online brokers such as EagleFX, retail traders can benefit from the opportunities offered by the Forex Market as well! The benefits include:
- high leverage
- adjustable lot sizes (micro-, mini- & standard-lot)
- low deposits to open an account
- wide range of tradable instruments
- easy access to desktop and mobile trading platforms
- 24/7 support
- accessible education and market analysis
Retail or Individual Traders invest their capital and execute trades on their personal accounts to make a profit. There are a lot of tools available for retail traders to make their trading life easier such as free market analysis (https://t.me/tradingtoptenofficial ), trading software (https://t.me/elitetradingserviceschannel ) or trading signals. If you are interested in any of these, make sure to always do your research, talk to the customer support that is available and start on a DEMO account as you learn the process or strategy!
We all know that retail traders would not be able to trade Forex if it wasn’t for the brokers!
Forex Brokers can sometimes be even considered market makers for the retail trader. They provide their clients with competitive buy and sell prices, generated from brokers own data via sophisticated pricing engines that they have developed. They do not use Reuters Dealing or ICAP EBS which are the main trading platforms used by other major players.
Join us next week as we are going to discuss Forex Brokers in greater detail and what to look for when choosing one for yourself!