There are many different participants in the foreign exchange market (forex), each with different motivations and goals for trading. There are two different access levels within forex trading. One is the interbank market, which features currencies being traded between securities dealers and the largest commercial banks. Because of the immense transactions and high volume levels, this market has the tightest spreads. The other level is the margin forex accounts, where you find the rest of the financial institutions, as well as individual investors and brokers.

This article is an overview of the various participants in the forex markets that you are likely to encounter.

Companies

Businesses are smaller players within the forex market, and they generally tend to make smaller trades. A lot of companies handle exports and imports of goods and services and therefore use their trades in the foreign exchange markets to hedge against exposure to currency rates and possibly harmful price movements. A forward contract is the normal tool that companies use for hedging exposure. Hedging refers to when companies cover an exposure to currency exposure with the use of an offsetting transaction.

Here's an example: An American company is interested in importing steel from China. The American company is undergoing a risk because the exchange rate can play havoc with the commitment to pay the company in Chinese Yuan. As the dollar's rate against the Yuan goes down, the cost in dollars rises. The American company can execute a forward contract to buy the Chinese Yuan before the exchange rate goes down in order to hedge against that currency risk. This keeps the American company from having additional expenses as a result of that currency change and any resulting price movements.

Companies tend to be smaller market participants and generally use the foreign exchange market to hedge against adverse price movements in their export and import transactions

Central banks

The central banks perform an important role within the markets, as it is their job to maintain economic stability. There are certain targets or requirements that they have for supporting the rates of local exchange, as well as maintaining a constant money supply, interest rates and inflation—ensuring that they stay under control. Some countries, like Japan, take a very proactive approach to managing the performance of their currency for foreign exchange, while other countries, like the U.S., take a much more indirect strategy when managing their currency.

The central banks sometimes intervene in the forex market, supporting their local currency, as well as keeping money supply, interest rates and inflation under control.

Market makers and brokers

The party with whom you are trading might be a market maker or broker. These two parties bring sellers and buyers together to join into a market trade at a set price. They not only fulfill the needs of the wholesale markets, but they also serve to provide prices for banks.

Market makers and brokers are essential elements in the forex market as they serve as price providers for other market participants.

Investment Management Companies

Fund managers, hedge funds and other types of investment firms (all of which execute trades for their clients, managing typically large accounts) trade in the forex markets for two primary reasons. First, they might need to sell or buy a high volume of foreign securities for their own clients’ portfolios. Second, they might speculate on market price or movement in interest rates, managing their clients’ portfolios to generate a profit or to limit risk in currency. Speculation is a term that is used to refer to a person who purchases one currency against his or her simultaneous sale of another.

Investment management companies, such as hedge funds, manage large accounts and trade on behalf of their clients.

Retail Traders

The segment that is made up of individual investors is growing quickly in the forex markets. Individual investors represent a significant segment of the market because they often serve as market makers, with their actions of taking and making prices, and removing and entering orders in the forex market. The individual investor’s primary objective is to speculate on the price direction in the market. Some investors maintain positions for months, or even years, while others change their positions out within a matter of minutes or even seconds.

There has been a large rise in retail traders in the forex markets due to growing interest and the markets’ accessibility.

Robots

No, this isn't the science-fiction part of the market. There are actual robots, known as Trading Bots, entering into the forex market. With this type of trade, algorithmic calculations govern when a trade takes place. The computer receives instructions about the execution, timing, quantity and price that have to be in place before an order can go through. The software application creates the automated robots that place orders without any need for human intervention.

Algorithmic trading is a popular strategy for pension funds, mutual funds, and investment banks. There are also retail investors who use trading bots, however. Some put rigid trading strategies in place that always perform the same actions when the right parameters are in place. Other traders program specific strategies, setting up an automated system for trades that keeps emotions out of the trading decision and keeps the human traders from having to sit at a computer all day long.

Trading bots have generated some controversy, as some people consider them to be a destabilizing force in markets, while others argue that the trading bots are easy to defeat in trades because the set of rules that they follow is generally very simple. A lot of trading bots are available for purchase on the Internet, many of them offering 100-percent returns on your money in just a few months. Unfortunately, the majority of these automatic systems simply don't work.

Robots, or “Trading Bots,” are computer software applications that place orders based on algorithmic calculations, without any need for human intervention

Bottom Line

The forex market is one of the most exciting opportunities for the individual investor. The fact that currency trades involve markets in two countries makes these markets relatively easily accessible. If you want to succeed in the forex market, just as with any other challenge, you have to apply patience, discipline and hard work. Put in the time to develop your own strategy for trading. Once you get the hang of how forex trades work (by practicing with a demo account), you'll be ready to start putting your own money into play.


Summary:

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Companies tend to be smaller market participants and generally use the foreign exchange market to hedge against adverse price movements in their export and import transactions.

 

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The central banks sometimes intervene in the forex market, supporting their local currency, as well as keeping money supply, interest rates and inflation under control.

 

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Market makers and brokers are essential elements in the forex market as they serve as price providers for other market participants.

 

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Investment management companies, such as hedge funds, manage large accounts and trade on behalf of their clients.

 

P

There has been a large rise in retail traders in the forex markets due to growing interest and the markets’ accessibility.

 

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Robots, or “Trading Bots,” are computer software applications that place orders based on algorithmic calculations, without any need for human intervention.

 

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