Forex trading is about buying and selling currencies.
Those who participate in forex trading do so for a variety of purposes:
⦁ As a financial investment: many people invest in currencies to take advantage of fluctuations in their quotes. For example, a person can buy EURUSD when it is quoted at 1.20 and then sell it when it is quoted at 1.40, getting a return.
⦁ Exchange of goods, exports and imports of goods and services. If a Spanish company sells services to the United States, it will probably receive a payment in dollars. If this company requires local inputs, it will sell the dollars in exchange for euros. In other words, dollars were sold and euros were bought.
⦁ Financial exchange: When a Spanish investment company buys shares in a US company, if the shares are denominated in dollars and the company uses euros, it will be selling euros and buying dollars.
⦁ To minimize risks: a US company that regularly imports goods from Spain can buy futures from the EURUSD pair to avoid the currency risk involved in currency pair fluctuation and thus ensure the ability to pay for its imports in the future.
⦁ Monetary intervention: the central banks of the countries maintain large foreign exchange reserves and also intervene in the money markets by buying and selling foreign currencies.
Considering the above, we can see that the main participants of the forex market are:
⦁ Central Banks
⦁ Individual Investors
⦁ Institutional Investors
⦁ Companies linked to foreign trade
Daily, forex trading has a daily turnover of over 5 trillion dollars.
The interbank market is the largest volume of money traded. The main players in this market are Citi, Deutche Bank, Barclays and UBS.
After the banks, follow the commercial companies that participate because of commercial exchanges.
The central banks also move large numbers, intervening in the markets by making monetary policy.
Individual private traders are responsible for 70% to 80% of forex market transactions. These exchanges are carried out in order to take advantage of the volatility of the prices and thus obtain a financial return. Retail forex trading has been growing year by year thanks to the development of information technologies and the growth of brokers who specialize in individual investors.
Through a retail broker, private investors can access forex trading and get a return on their investment. Small investors often use leverage to obtain a higher return, however, the risk of capital loss increases considerably as leverage increases.
Some of the best known brokers are FXCM, Saxo Bank, GFT, IG, Gaitame and Oanda.
Forex Trading Strategies:
We can group traders into the following groups:
1. Novice speculators: seduced by advertising and the expectation of big profits in the short term, they use too much leverage. While many make profits in the short term, most make losses in the long term. In general, they are novices and see their trades more as a bet than as an investment. Their accounts are usually small, between $100 and $1000. There are a lot of speculators of this type.
2. Great traders: take forex trading as a serious investment and have large accounts. The typical big trader has invested a lot of time and money in education and has extensive forex trading experience. He knows a lot about forex trading and has high demands on the service offered by brokers.
3. Strategy programmers: after analyzing the market for patterns of behavior, they take advantage of its capabilities and develop automated strategies that trade automatically seeking to take advantage of the patterns to make a profit. These strategies are usually based on just one currency pair and often use oversold or overbought indicators or trade at specified times. Buy and sell orders are frequent: several times a day or several times a week. While they do not look for a large amount of profit pips in each trade, their high frequency makes the volatility of this strategy high.
4. Copiers: They know their limitations in terms of the time they can devote to forex trading or their knowledge of the market, but they still see forex trading as a serious investment form, so they seek to obtain a return by taking advantage of the possibility of copying the trades of other more experienced investors. This class of investors has had a great growth in recent times. On average, traders who copy other investors get a better return than trading on their own.