In any kind of trading, there will be winners and losers. Somebody has to win and somebody will lose. With this in mind, let’s look at who are the players in this market so that you understand who you are up against. So who trades Forex? Forex is a huge market and there are all sorts of parties trading Forex knowingly and unknowingly.
Who Trades Forex?
Commercial Forex transactions and large amounts of speculative are allowed on a daily basis by the interbank market. Banks may trade on behalf of customers, but they mostly trade for their accounts run by proprietary traders. Some banks make billions of dollars daily from the Foreign currency market.
Corporations use the foreign currency from the foreign exchange market to fund their activities in foreign countries. These activities include paying for or selling goods and services from and into foreign countries. Part of the huge activity in the Forex market comes from companies exchanging currency to transact in other countries.
Governments/ Central Banks
The Central Bank of any country plays a vital role in the operations of the foreign currency market. A Central Bank can influence the value of their country’s currency. This is made possible by controlling money supply, inflation and sometimes interest rates to increase or decrease the value of the currency. Also, they can use foreign exchange reserves to stabilize the market.
Did you know that around 70% to 90% of all foreign exchange transactions are only speculative? This means that the individuals who bought or sold the currency do not plan on delivering the currency. Their sole intention was to speculate on the price movement of the currency. Small time retail speculators like you and I cannot afford such a show, only the big hedge funds. They have the muscle to control and speculate with billions of dollars every day.
If you are going to another country, you will need their money. At an airport or bank, you can exchange your currency for the local currency and just like that you have been in the Forex market!
Investment firms that manage large portfolio clients use the Foreign exchange market to enable transactions in foreign securities. For instance, an investment firm with an international equity portfolio in their hands will have to buy and sell several currency pairs to purchase foreign securities.
Retail Forex Traders
At finally, this is where we are! The retail Forex traders include people like you and me. We are small- time traders in terms of the number of dollars we put into the Forex market, but still very significant. Since the invention of Forex trading platforms, the retail Forex trade grows every day. Additionally, the trading platforms are available online and, therefore, accessible to everyone. Retail Forex traders access the currency exchange market indirectly through a bank or broker. Our ability to speculate is offered by either of the two types of brokers: brokers and dealers.
A broker is an agent for a trader. His or her work is to find the best price in the market and buy or sell on the behalf of the customer. For their services, a customer is charged a commission on the price obtained. On the other hand, dealers are the market makers as their work is to make the market for the trader. In addition, they act as counterparties to their transactions through quoting a price they are ready and willing to deal. The compensation for market makers is called the spread that refers to the difference between the buy and the selling price.