Updated: Jan 17
When you want to become a consistently profitable Forex trader you have to know who you are up against. There are different Forex market participants, each of these participants have their own reasons for entering the Forex market and trading the way they do. We, as retail traders, don’t have the ability to push the markets. However, big players, such as banks, do. You want to be able to identify the potential positions these big players are taking and try to join them. We, as retail traders are liquidity providers, nothing more, nothing less. However, this does not mean we can’t make any profits. In this article you will read more about the other Forex market participants and get to know more about how they operate. Knowing this information you can use it to your advantage in order to improve your trading edge.
What is the Forex market?
The Forex market is a decentralized market. This means there is no general exchange, like there is for stocks. Just because there is no general exchange doesn’t mean that there is no market. In fact, the Forex market is the most traded market of all the markets out there. Daily, more than 5 trillion dollars get exchanged in the Forex market. This is an enormous amount. Each day a lot of different Forex market participants exchange currency to generate profits, or fill their needs.
When people talk about the Forex market, they talk about currencies that get traded. There are a lot of different currencies you can trade. The more a currency is traded, the cheaper it is to trade it. This is something to keep in mind when deciding which currencies you want to trade. Costs are a real part of trading and are often overlooked.
Who are trading the Forex market?
There are a lot of different groups trading the Forex market. Every group has other motives to do so. Below you will find the list of the most important and well-known Forex market participants:
These are the most well-known Forex market participants. Not all of those are as important, but it’s good to know who you are playing with.
Central banks hold a lot of currency. They hold their origin currency, as well as currencies of countries they often work with. The central bank is responsible for the inflation and other things that are related to the economy and economic growth. The most powerful tools a central bank can use is changing the interest rates and printing money. These two things have a massive impact on the value of a currency. The goal of holding and trading currency is economic growth and economic health. Central banks, together with the big international banks, are amongst the most important Forex market participants. If you want to gain a profitable trading edge it’s very important to know how they operate and why they operate. You will read more about this later in this article.
International banks are banks just below central banks. They deal with central banks and big international corporations. The goal of these banks is to provide pricing for different currencies. This makes sure big transaction can happen at the right price. They clear trades in major currencies, but also in currencies of emerging countries. Because they exchange massive amounts of currency they have to operate a certain way. Together with the central banks, this is a very important Forex market participant.
International companies are important Forex market participants. When they want to import a product in to a country that uses a different currency, a trade has to take place. This is not about a few million, but about hundreds of millions, even billions. This makes them an important player in the Forex market. Every day a lot of products are being exchanged globally. Most countries have their own currency. Every time an international transaction takes place currency is being traded.
Fund managers are people that manage funds. They usually do that by having a diversified portfolio filled with different assets. Fund managers have two reasons to participate in the Forex market:
Buy foreign stock
When an American fund manager wants to buy stocks in Tokyo a transaction of currency takes places. This is one of the ways a fund manager participates in the Forex market. Another way a fund manager participates is by hedging against the currency exposure he has in his portfolio. This can be done in various different ways. Let’s say you have a portfolio filled with US stocks. This means you are exposed to the value of the US dollar. If you are 100% long on US stocks you are also long on the dollar. In order to hedge against this risk you can short the US dollar. This is a very basic idea of hedging and there goes a lot more into it, but this is the general idea. Fund managers are well-known Forex market participants.
Retail traders are traders like us, who participate to generate profits by speculating on future pricing of a currency. Retail traders are a fast growing Forex market participants. Retail traders trade through brokers, so brokers also play an important role. We retail traders don’t have the ability to push the markets, because our trading size is simply too small. However, we do provide liquidity for bigger players. We can also easily get in and out of the markets whenever we want to, giving us an edge over bigger players who can’t do this that easily. The only way a retail trader has a chance of winning at trading is by developing a profitable trading edge that has been proven and tested.
As you can see all the Forex market participants have a different motive to trade the Forex market. It’s important to note that this is just a basic explanation, there is way more to it.
The difference between retail traders and other Forex market participants
When you are going to trade you need liquidity, this means if you want to buy, someone needs to sell to you at that same price. Fortunately for us, we trade small size, at least, not as big as the banks do. This means it’s easier for us to get our orders filled. This is quite a big advantage.
If big banks want to trade a few billion dollars for another currency at a certain price, there has to be enough liquidity at that price. Because the order is so big, this is not always the case. This is a problem big traders have and small, retail traders, don’t have. Especially in “thin” markets, so markets that are not traded very often, this can happen.
In order for such a big order to get filled at the same price, bigger players often scale in. This means they build their position around the same price. When they do this, they get a good fill at the level they want. If they wouldn’t do this, they would push the market up and get a worse fill price. Only knowing this can give you a massive edge. This information should be part of every trading edge.
Let’s give you an example.
A big market participant wants to exchange 1 billion euro for dollars. He wants to do this at a price of 1.20. If there are only enough sell orders to fill half that position, half of the position gets filled. The other half of his position will get filled at a higher price, because that’s where more sellers will be. This means his average fill price goes up, causing him losses. In order to combat this problem he scales in.
The scaling is also called accumulation. For whatever reason that big player wants to buy at a certain level. He quietly accumulates his order until it’s all in the market. He does this very carefully. It’s all planned out and based on statistics and other factors, not based on feeling and trendlines like retail traders use. They usually have an algoritm that does this.
We as retail traders can take advantage of this information by learning to identify these accumulation phases. The basis of our strategy at CDFX Trading is exactly this, identifying what the bigger player is doing, identifying accumulation phases and joining the bigger player when the odds are in our favor, that’s our trading edge. This sounds hard, but with the right amount of coaching and practise this is something you can learn too.
If you want to learn how to trade this way, you might want to check out our 1-on-1 coaching program where we teach you how to identify these accumulation phases and how to trade them profitably. We teach you a proven and mechanical trading edge.
As you can see there is quite a big difference between retail traders and bigger traders, such as banks. By taking what we know about how these banks need to trade we can get an advantage.
There are a lot of different players in the Forex market. The Forex market participants we spoke about in this article are the most well-known and the most important ones. As a trader you have to be prepared and know who you are playing with. You need to know the motives of each player and you need to know how they play. If you do this correctly you can develop a profitable trading edge and become a consistently profitable Forex trader.
If you have any questions about this article, feel free to contact us.
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