Advertisement

Advertisement

Who is Forex trading?

Advertisement

Who is Forex trading
The ease of access to the Forex market has increased its popularity to unprecedented levels among individual traders. However, retail trades account for only a very small percentage of the total market value of $ 5.1 trillion a day. It is therefore necessary for the novice trader to recognize other categories of senior participants in the Forex market. This article reviews some of the different categories of Forex traders and their roles.

As in any other financial market, the Forex market consists of two main categories: individual traders (retail traders) and institutional traders. There are subcategories for these main categories, which are listed in the following lines:

Who is Forex trading?
Who is Forex trading

Retail Forex Traders
This category includes traders who use their own capital to trade in the Forex market. A retail trader employs his own money in trading through an account he opens with a broker. Individual retail traders account for 7.5% of the total market volume. Paradoxically, the currency market may not have enjoyed such a reputation without the presence of such traders. Depending on the timeframe a trader chooses to work on, he can be classified into a daily trader, a swing trader, or an investor. Retail traders can also be classified as full-time and part-time traders.

Institutional Forex Traders
Institutional trading involves the use of a company's capital to trade in the currency market. This type of trading accounts for up to 92.5% of the total trading volume in the Forex market. However, it should be noted that profit may not always be the main objective of the participation of these types of traders in the market. Institutional trading companies have a huge impact on the levels of volatility and liquidity in the currency market. Below are the different types of institutional traders in the Forex market.

Multinational companies
Companies engaged in the cross-border exchange of goods and services need to exchange foreign exchange to ensure smooth export and import movement. Moreover, these companies use the Forex market to reduce the risk of exchange rate fluctuations through hedge transactions. Large companies execute contracts worth billions of dollars on a regular basis to meet their business needs and reduce financial risks.

Hedge Funds
Hedge funds are mainly classified as short-term speculators in currency markets. Hedge funds are known for their fast and flexible access to and exit from deals. It relies mainly on important news such as non-farm employment reports, changes in unemployment, inflation, retail sales and GDP growth.

Insurance companies and pension funds
These companies target profits that are slightly above the banks' rate of return on savings. Insurance and hedge funds prefer to trade long-term trends in currency markets. However, they take strict precautionary measures in dealing with their clients' assets because they are classified as public funds and therefore subject to government accountability and control.

Commercial banks
Trading offices are one of the main divisions of most major commercial banks. These departments carry out trading in the Forex market on behalf of high net worth customers and also on their own account. There is a link between different banks through major trading platforms such as the Electronic Brokerage Service (EBS) or the Reuters platform. The interbank market is the backbone of the spot currency markets, allowing large companies, banks, hedge funds and other non-bank financial institutions to exchange currencies safely and easily.

Central banks
Central banks are independent bodies that carry out the task of formulating monetary policy in the country they represent. Despite the independence of the central bank, it remains accountable to elected governments in his country. In general, the government is responsible for defining the overall framework and responsibilities of the central bank. Trading decisions taken by central banks do not, or are not, aimed at making profits or not. For example, the central bank may intervene in the Forex market if the country's currency is subject to violent fluctuations, usually preceded by several failed attempts at verbal intervention. These interventions are aimed at achieving results that are in the interest of the country concerned, but are often affected by the rest of the market participants. Central banks in developed economies, at least theoretically, have an unlimited ability to sell and buy. The central bank may also affect exchange rates by raising or lowering benchmark interest rates.

Thus, the objectives of participants in the Forex market are very different. They may target risk hedging, profit making, economic growth support, or any other objective. Perhaps this is one of the main points that distinguish the Forex market from the stock markets, where the goal of all participants from the sale and purchase of shares to make a profit only.

No comments:

Powered by Blogger.