Forex - Who You're Up Against

There are over a hundred currencies in the world, all reacting constantly to national and international news and market forces. This built-in volatility makes the Forex market the most fluid in the financial world. It is also the largest, with trading taking place 24 hours a day, five days a week from Sunday afternoon through Friday afternoon. Even though only a few currencies - the American dollar, the Japanese yen and the euro - account for the bulk of the trading in the foreign exchange market, there are an average of more than five trillion trades per day.

Who is playing in this game? Is the Forex market a place for the individual investor to be?

Banks

Since their function is to handle money it is no surprise that banks are the biggest traders of foreign currencies. About half of all trades on the Forex market are executed among banks, a phenomenon known as "interbank trades." While many of these are performed as a service for customers with international business, a high percentage of transactions are speculative plays from the banks' own accounts, attempting to cash in on the short-term volatility of the Forex market.

Central Banks

While investment bankers are the most ubiquitous traders in the forex market, it is the central banks that carry the most clout. These national money watchdogs possess the power to intervene with a currency, jiggling the value of a nation's money to maximize that country's economy on the world stage. This can be done to juice exports or reign in galloping domestic inflation for instance. A Forex trader needs to be ever vigilant in assessing the actions of a central bank.

Hedge Funds

Hedge fund managers are the largest group of non-institutional investors in foreign currencies. Often they are trading currencies as part of an international portfolio for large accounts. But investment managers will also engage in speculative bets on the future values of another country's currency.

Corporations

Multinational companies buying raw materials and selling products are entwined in the Forex markets. With so many foreign transactions taking place, companies can find themselves exposed to unnecessary risks involved in currency fluctuations. To counter these dangerous positions managers will trade on the Forex exchange to hedge against such risk.

Although its popularity is on the rise, few forex market trades come from individual investors in comparison with banks and financial institutions. The fundamentals of trading foreign exchanges are much like trading equities - you just need to apply them to countries and not companies. 

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