There are some misconceptions about the forex market, but without a doubt, it is the biggest financial trade market in the world today. It has a daily trade volume of over six trillion dollars daily as per the survey of Triennial Central Bank in 2019. Forex is a currency trading market that carries a lot of attributes that may feel new to the stock market traders. It offers high liquidity and is considered a daily trade market that offers quick returns.
The traders in forex invest in currency pairs that are changing daily as per the countries’ geopolitical events. It is only one of the attributes of forex that traders consider while investing. The most amount of trades happen through financial institutions like commercial banks, hedge funds, central banks, and money managers. Global corporations use the forex market for hedging currency risks in their international trades, while only a small amount of individual traders use the market to speculate currencies and trade daily.
What moves the forex market?
Forex has a diverse player base, which compromises individuals, teams, and corporations. The most common types of entities that move the forex market include:
Commercial and investment banks
A major part of the forex trades takes place in the interbank market. The Interbank market is where the banks from around the world trade currency with each other with the help of their internet network. Banks also take clients and conduct trades on the market for them from the trading desks of their offices. When banks act as traders for investors, they earn profits from the bid-ask spread they receive from the profits.
The central banks have their own place in the forex market. Central banks are run by governments. The open market operations and IR policies of central banks are highly influential in changing the currency rates. The central bank has the power to fix the rates of its native currency in the forex market. It becomes the exchange rate regime that traders refer to trade in the open market. The central bank also takes actions to stabilize or increase the competitiveness of its currency in the market. Such actions are taken during the time of inflation to control the economic condition of a country.
Investment managers and hedge funds
A significant part of forex trading is managed by portfolio managers and hedge funds. Both combined together become the second-biggest group of players in forex after banks. The investment managers help investors in investing in major funds such as pension funds, endowments, and foundations. These managers carry their own investment strategies to make speculative forex trades. As an investment manager, one should have a good portfolio of handling clients, buying and selling currencies, and providing the right returns to their clients.