The main participants on the Forex market are individual investors, national and commercial banks, financial institutions, insurance funds, and companies.
Profit from speculation on fluctuations in currency pairs and protection against fluctuations in currency pairs affecting trade in goods and services are the key reasons for their involvement in the Forex markets.
The world wide web proved to be a major engine for marketing, as it provides not only traders, but also individual investors, access to the most up-to-date news about the Forex market, technology and instruments.
Forex is decentralized and is governed by its own rules, meaning it is an international Over-The-Counter (OTC) market. Unlike joint stock and futures markets, there is no clearing organization or central exchange. As a result, exchange fees and clearing fees are eliminated, thus reducing the cost of transactions.
Participants on the OTC Forex market can be divided into two groups and deal directly with one another: the interbank market and the retail market, both having different interests and needs. These
Interbank Market:
Central banks, commercial banks and financial institutions have currency transactions occurring among themselves – this is referred to as the Interbank market.
Central Banks
The European Central Bank, the Federal Reserve Bank of the United States, the Bank of England, the Swiss National Bank, and the Bank of Japan are central banks in the Forex market and participate in the market for several reasons:
– To decrease undesirable fluctuations in exchange rates.
– To increase or reduce the value of their own currency or to help another central bank to do the same.
– To restructure their reserves from one currency to another.
Commercial banks
Deutsche Bank, Barclays, etc. are referred to as commercial banks and they provide, thanks to daily float, liquidity in the currency market. Some transactions are equity transactions of the banks for the purpose of speculation, while others are transfers of foreign currency based on customer needs.
Non-Banking Corporations
Non-Banking corporations are financial institutions, such as brokerages, investment funds and pension funds. The companies involved in foreign trade activities trade on the Forex market to regulate cash flows as they are exposed to currency risk. Therefore, they need to protect themselves from undesired movement in the Forex market by hedging their positions. For example, Japanese firms are major exporters to the U.S. and paid in U.S. dollars. Naturally, they have to sell dollars against yen and are therefore exposed to any adverse impact associated with the decline in the dollar against the yen. International companies also need to derive profits from other currencies. For example, a company whose head office is in London and has offices in Europe and America could reverse its profit from EUR and USD to its main currency, namely the British pound, when creating their balance sheet. Thus, they will have to buy GBP and sell EUR and USD. Some companies have their own internal dealer offices and therefore operate as quasi-banks in the market and take the currency risk involved in trading and speculation.
Brokers
Brokers are intermediaries between market makers offering the most agreeable price trying to even orders for buying with those for sale. Only when the other side makes an appropriate proposal will the broker reveal the name of the party making the quotation and will get a commission from the transaction. The introduction of electronic brokering in recent years and the introduction of the single European currency (Euro) greatly reduced the role of the ordinary broker, whereas in the past, brokers were very useful for smaller market makers, which are otherwise unable to obtain competitive market rates.
The Retail Market
Retail markets are transactions of small speculators and investors and are usually carried out through Forex brokers acting as intermediaries between the retail market and the Interbank market. Insurance (hedge) funds, brokers, and investors are the main participants in the retail market.
Investors
Investors are independent traders who trade on the Forex market with their personal resources in order to profit from speculation on the development of future exchange rates. They trade mostly through platforms offering immediate realization, tight spreads and margin trading by high leverage.
Hedge funds
Global hedge funds are private investment funds that speculate on the different classes of assets using leverage (leverage). They use commercial opportunities in the Forex market, relying on macroeconomic analysis that reveals challenges within a country and its currency to plan and implement transactions. Due to aggressive strategies and the high trading volumes, hedge funds are chiefly responsible for the dynamics of the currency market.
- What is Forex?
The Forex market is a global decentralized market for the trading of currencies.
- When is the Forex Market Open for Trading?
Forex trading is available 24 hours a day, 5 days a week, unlike other financial markets. Investors can respond to currency fluctuations caused by economic, social and political events at the time they occur.
Each session begins in Sydney, Australia, and moves around the globe as the business day begins in each financial center – first in Tokyo, then London, followed by New York, etc.
- Currency Pair:
The pair expresses the ratio of one currency to another, or, to put it another way, how many units of the quoted currency (the second in the pair USD / EUR) are needed to purchase one unit of the base currency (the first in the pair USD / EUR)
- Which are the Most Commonly Traded Currencies in the Forex Market?
U.S. dollar, Euro, British pound, Japanese yen, Swiss franc, Canadian dollar, and Australian dollar.
- What is Leverage?
Leverage is a derivative of the word, “lever.” In physics, the use of leverage allows you to “increase” power to lift more weight than you can lift with your bare hands. The longer the lever, the more weight you can lift. In the financial world, leverage has the same function – it allows you to increase your financial power by using different financial instruments or borrowed capital, such as margin.
- Who are the Participants in the FX Market?
Historically, it has been dominated by banks, including central banks, commercial banks, and investment banks. In recent years, the percentage of other market participants has rapidly increased, and now includes futures and options traders, large multinational corporations, registered dealers, brokers, and private speculators.
- What is a Margin?
Margin trading enables you to open a position by depositing a small percentage of the transaction amount in your account. When buying on margin you are able to maximize your profits by using leverage. The margin is the leverage ratio expressed as a percentage.
- How do I Manage Risk?
Within the Forex market, the most common tool used to control risk is the limit and stop loss order. Due to the liquidity of the Forex market, the limit and stop orders are easily executed.
- What are Stop and Limit Orders?
You can set a stop loss order for 10% below a certain price as a measure against the exercise of “call security” (margin call), and when the price reaches the amount you set, the order closes. The stop loss orders are designed to limit your loss. Limit orders, on the other hand, protect you from temporarily low prices (if the bottom is in seconds or minutes). Limit orders are very handy for volatile stock.
- Lots and Pips:
A lot is a standardized amount of units of a particular instrument adopted by the exchange or trade regulator. On the Forex market, one lot is equal to 100,000 from the trading currency pair. The nominal value is considered in the base currency (the first in the pair). For Example: 1 lot EUR/USD has a value of 100,000 EUR.
The pip is a unit of measurement to the smallest change in the price that a certain currency pair can make. The pip is the change in the fourth digit after the decimal point. The Japanese yen is the exception – due to large amount of nominal exchange the pip is the change in the second digit after the decimal point.
- What is a Market order?
A market order is the order a trader creates to buy or sell an investment at the best available current price. Market orders are free from restrictions on the buy/sell price and time frame and are the default option.
- What is the Difference Between Market and Limit Orders?
Market orders are performed immediately at the current market price. Limit orders are orders enforceable (in the future) when the market price reaches a prearranged value.
- What are long andshort positions?
A long position is when a trader buys a currency at one price and aims to sell it at a higher price. A short position is one in which the trader sells a currency in anticipation that its price will fall on the next purchase.
- Spreads:
The spread is the difference between the buy price and sell price. The spread is the main source of income for brokers and the smaller it is, the less you pay for transaction costs. When developing a strategy, it is important to take into account the size of the spread of the tool that you will trade.
- What are “Bid” and “Ask”?
Bid is the price at which buyers are willing to buy a currency from the sellers. Ask is the price which the sellers are offering to sell a currency to the buyers.
- What is a Fundamental Analysis?
Fundamental analysis uses economic indicators, along with political and business news, to identify the possibility of buying and selling.
- What is a technical analysis?
Technical analysis relies on historical information in the form of charts to identify patterns, which are subsequently used to predict future price movements.
- What is a Rollover?
The rollover is the fee that is charged when you leave a position open for 24 hours. How long you keep a position open depends on your desire. Keep in mind that swap numbers can be positive or negative and the amount you pay or receive for the open position is dependent on the currency pair you are trading with.