To start Forex trading, you have to realize what place a private investor occupies on Forex, or, in other words, the role of a trader in the global system of currency exchange. If you know the market participants and their impact, you will be able to understand how the currency rates change.
Forex trading involves a lot of participants:
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central banks;
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commercial banks;
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international funds;
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brokerage and dealing firms;
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private investors (traders).
Below we are going to consider their functions.
Central banks. The main task of the central banks is maintaining the monetary policy, in particular, preventing sharp movements of the rate of the national currency in order to avoid economic crises and support the trade balance.
Central banks of different countries can have either direct impact on Forex in the form of interventions, or indirect one by regulating the money supply and the interest rates.
Central banks can enter the market to influence the rate of the national currency or join other central banks to follow the common monetary policy.
Often central banks enter the market not to make profit but to check the stability of the national currency and correct its rate as it greatly influences the economic conditions in the country.
The following banks have the largest impact on the currency market: the central bank of the USA or the Federal Reserve System, the European Central Bank, the Bank of England, and the Bank of Japan.
Commercial banks. Large volume of operations with currencies are executed by commercial banks. Other Forex market participants hold accounts at commercial banks where they carry out exchange and deposit and credit operations. Besides executing their clients' requests, commercial banks trade on Forex with their own funds.
The following banks have a great impact on the foreign exchange market: Deutsche Bank, Barclays Bank, Union Bank of Switzerland, Citibank, Chase Manhattan Bank, Standard Chartered Bank, and others. The main distinctive feature of these banks is volume of their deals that can affect the currency rates.
International funds. The most powerful international funds are Investment Funds, Money Market Funds, and International Corporations. The international funds follow the policy of diversified management of investment portfolio. Such international funds can also include large international corporations that make foreign industrial investments.
Brokerage and dealing firms. The main task of this market participant is to connect a buyer and a seller of a currency and execute their deal. Being an intermediary, the brokerage or dealing firm charges commission for an executed deal.
Private investors, traders. Traders have recently come to Forex market. Due to the development of the information technologies, more and more private investors can participate in Forex trading. By carrying out successful speculative operations with currencies the traders can get significant profit.
