In this section, we are going to elaborate on the different participants in the foreign exchange market with a look at where we stand, as individual traders, in the larger scheme of things. An insight into the types of Forex participants and their influence on the market helps to better understand how currency rates change.
Market participants can be divided into 6 categories:
- Central Banks – their main objective is to stabilize the country’s economy, by monitoring variables such as inflation. This is achieved by regulating interest rates, intervening in the currency market (buying or selling), and regulating the reserve requirement ratio.
- Commercial and Investment Banks – these are the biggest players in the worldwide Forex markets. The narrow spreads within the interbank market allow transactions of huge amounts of currencies at very low costs. The top-tier interbank market accounts for about 55% of all Forex transactions worldwide.
- Multinational Companies – they participate in the Forex market primarily for hedging purposes. Hedging is essentially a type of activity that offsets the risk associated with currency movements.
- Institutional Traders – they make up about 30% of all Forex transactions worldwide and include insurance companies, pension funds, mutual funds, and hedge funds. Their objectives are trading for profit and hedging their global portfolios against currency risks.
- Retail Forex Brokers – they allow retail traders to access the Forex market by transmitting their orders to commercial banks or institutional platforms. These brokers get paid from the spread or by charging a commission on each transaction.
- Retail Traders – they actively trade currencies trying to profit from the fluctuation of one currency against another. This segment is the fastest-growing of the entire Forex market. One of the key elements that facilitated growth in this segment after the crash of 2008 was the ability to go long or short at any time.
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