The forex market is a complex structure with different entities buying and selling currencies for various purposes. “Forex trader” refers to an individual who participates in the currency market by opening a trading account with a broker to participate in the currency market.

Technological progress has made many changes to the currency market. Brokers were only able to offer more competitive rates in the last few years making trading accessible to virtually everyone with internet access.

Nowadays, smartphones are everywhere, and retail trading has taken advantage of this opportunity. Smartphones brought investors even closer to the market, making it possible to open or close a trade from virtually anywhere with mobile coverage.

Technology has made the market more competitive too. Robots or trading algorithms dominate price action, with human investors following this price action closely.

All this makes trading financial markets in the 21st-century a complicated process. In order to succeed, the starting point for every investor should be to understand who participants of the Forex market are.

Currency Market Participants

Not everyone trades speculatively. Most of them are in it for the profit, but not everyone.

Before discussing the currency market, one needs to understand who the market participants are, or, who the buyers and sellers are.

  1. Central banks. Central banks set the monetary policy in a country or region (e.g. Eurozone). By raising or cutting the interest rate, they influence the value of a currency. They sometimes implement other policies that need to be executed. They have a trading department in charge of execution and sometimes they intervene directly in the currency market.
  2. Commercial banks. Commercial banks buy and sell currencies on behalf of their clients. For instance, if a company from Japan buys a company from the United States, a commercial bank or a consortium of banks sell JPY (Japanese Yen) and buy USD (U.S. Dollar). The bigger the amount, the more significant the effect on the USD/JPY pair and overall Forex market flows.
  3. Hedge funds & institutional players. They typically buy and sell currencies based on macroeconomic differences. These entities have a long investing horizon and usually invest in a currency. They have plenty of resources and capital; billions of dollars move through them and their respective financial vehicles.
  4. High-Frequency Trading (HFT) companies. The HFT industry is made up of supercomputers buying and selling thousands of trades per second. The industry is responsible for the vast daily volume and for wild market swings that can happen in an instant.

Forex brokers, liquidity providers, and investors can influence prices too. Investors make up no more than six or seven percent of the daily volume of overall currency market transactions. In other words, investors strive to align with overall changes in the monetary policy set by central banks and to profit from big trends. To do that, they use an arsenal of technical and fundamental analysis tools to predict future prices.

Because it offers a way to diversify investments and resources, trading currency markets appeals to all investor types:

  • Scalpers look for short and very short-term trades, usually closing them during the trading day.
  • Swing investors keep trades open from a couple of hours to a couple of weeks or more.
  • Serious investors, on the other hand, check the bigger picture before opening or closing a trade.

In all cases, everyone has their own reason for trading; speculation, hobby, or simply to be part of something exciting.

Take-aways: 

  • Central banks play a critical role.
  • Not everyone uses speculation.
  • Investors use technical and fundamental analyses to predict the future direction of a currency or currency pair.
  • Scalpers, swing investors, and serious investors dominate retail trading.