In this issue of the Celestial Trading Tools Educational Blog we are going to take a deeper look into exactly who trades the forex market, their motives and how this is useful to us as traders within this ever expanding market-place.
In the previous issue we discussed exactly what forex is, if you haven’t already read that post we suggest you take a look before reading this to give yourself a base understanding of exactly what the forex market is all about.
There are 4 main groups of traders we need to know about and understand in order to allow us to trade at the best of our ability these 4 groups are as follows
– Central Banks
– Speculators (Retail)
Let’s start with Banks and how and why they trade the forex market. The largest amount of currency is traded in the interbank market, this is where banks trade between each other through electronic networks. These banks essentially dictate the strength of specific currencies and cause the fluctuations in exchange rates that we see. A select group of these banks sometimes known as super banks include HSBC, Barclays, JP Morgan, Citi and Deutsche Bank. These are some of the largest banks in the world and trade huge volume every single day.
Banks will also sometimes speculate themselves to try to build their income also.
Central Banks such as Bank of England, European Central Bank and the Federal Reserve partake in the forex market also. These banks act on behalf of a nations’ government and their primary job is to fix the price of their native currency. They do this by adjusting interest rates to increase the valuation and competitiveness of their currency.
Central banks may also enter the forex market to temporarily destabilise or depreciate the currency’s value which will in turn make trade exports more competitive in the global market.
Corporations trade the forex markets to make their goods/services more profitable. For example, if Apple want to make a new iPhone they will source the products from China or Japan and so they may trade the forex markets to make this trade deal better in their favour so when they sell their iPhone they make a larger profit.
Alternatively, they may actually buy into the Japanese Yen to offset any reductions in profit due to more expensive parts for their products.
Whilst these big corporations don’t have as much impact on the markets as the big banks, they do still pump a substantial amount of money into various currencies, researching this and using COT reports can be quite useful when assessing market sentiment and future changes in direction.
Speculators are the final category of market participant. Although they make up the majority of the market participants, they differ in volume hugely. Whilst some have millions at their disposal and others only hundreds the sole purpose of a spectator trading is to make money.
They do not really care about interest rates, currency strength/weakness like the banks do apart from how it may affect their trade and make them money.
Some may also call these traders ‘retail’ traders too so don’t be confused if you see that term being used!
But there you have it, the main players in the forex market and why they participate, so now you have a greater understanding of exactly who trades forex and why! Keep your eyes peeled on the Celestial Trading Tools Educational Blog for future posts to enhance your forex knowledge!