Successful trading in the foreign exchange market is knowledge of the psychology and motives of its participants to a large extent. To understand this, you need to find out who is involved in trading on the Forex market and what functions they perform. This knowledge will give you a basis on which you will be able to build an understanding of market processes that move the price chart and make money on trading. In the future, it will help to make more accurate forecasts based on fundamental analysis.
The main participants of the foreign exchange market
Forex is an international market for foreign exchange transactions, with a daily turnover of about $5 trillion. It does not have a central exchange, like on stock or futures market. The regulator, in this case, is the market itself, through the interaction with its participants.
The main market participants are:
- Central banks of various countries;
- Commercial banks;
- Other financial institutions;
- Individuals (brokers and traders).
Their task is to regulate the money turnover both within the country and abroad. The ECB (European Central Bank), the Fed (Federal Reserve System), Bank of England and the Central Bank of Japan are considered to be one of the most powerful central banks in the world – they play an important role in the foreign exchange market and can significantly influence the price movement. This is done by regulating interest rates. Also, central banks use the funds of their country to influence the rate of national currency.
Even though central banks are full participants in the Forex market, they do not use it to make money. Changing quotes is a necessity to maintain the stability and growth of a country’s economy. However, foreign exchange intervention is still not so rare – it is a complex process in which several central and commercial banks can be involved at once.
Due to the large volume of banking operations, commercial banks provide the highest liquidity to the Forex market. This volume, which amounts to tens of billions a day, can be divided into two parts.
The first part is transactions for bank customers, for example, currency exchange; the second part is trading with own funds. That is, commercial banks, in contrast to central banks, are traders, only very large ones. The largest of them are Deutsche Bank, Standard Chartered Bank, Union Bank of Switzerland.
These are institutions whose activities are related to currency exchange, mediation or speculation. These include investment, pension and hedge funds. In addition, quotes are influenced mainly by companies involved in the import and export of various products. They provide the demand for currency and conduct exchange operations through commercial banks.
Corporations are also associated with the import of their products, so they often have to buy and sell foreign currency. The exchange rate is not always favourable to them, therefore, to reduce the costs of the exchange, they use the Forex market to their advantage. The turnover of global corporations amounts to billions of dollars, and therefore the impact on quotations can be quite significant.
Previously, they included only travel companies and individuals who made money transfers to other countries (pensions, salaries, etc.). Also, the purchase/sale of foreign currency can be included here. Individual traders came to Forex with the advent of margin trading. Thanks to the use of leverage, investment and trading in the foreign exchange market have become available to almost everyone. Brokerage companies, for instance JustForex broker, other important market participants, play a significant role here. They act as intermediaries between the trader and the market by executing trading orders.