Everyone stepping on the path of a forex trader should be aware of the key forces that influence the market as well as particular assets traded on it. To begin with, you should know the six key factors influencing the global currency market.

Banks

Banks are the backbone of the global financial system. They facilitate the transfer of currencies among different institutions and individuals, thus ensuring that money ends up where it is intended.

Banks also operate in tightly regulated environments, which ensures that they maintain accountability regarding the inflows and outflows of both local and foreign currencies in a given economy. Their share of the forex markets has been significantly reduced following the entry of forex dealers. Many forex platforms also largely depend on the forex quotes of banks.

Central banks play a critical role in creating a regulated environment for trading currencies. They keep track of the currency circulating in an economy and monitor bank activities for any irregular inflows and outflows.

In the forex market, central banks play a pivotal role in regulating the performance of local currencies against foreign currencies. For example, when the local currency is continuously underperforming against a major currency like the US dollar, the central bank may intervene by supplying the market with more dollars.

Conversely, when the local currency is seen as becoming overvalued, the central bank may buy the dollar to reduce its supply in the market. This is important not only for the sake of regulating the forex market but also for maintaining the balance of trade between a country’s imports and exports.

Day traders

Day traders are among the biggest handlers of currencies through the global forex markets. Day trading is about opening trading positions each day and closing them at the end of each day. A typical day trader may open tens or hundreds of positions each day. 

Among the key traders are large institutions keen on generating high returns from the currency price changes in the forex market. The impact of institutional participation in forex trading is particularly big, considering that, unlike individuals, they trade larger amounts of capital and significantly influence the supply and demand for a particular currency. The market supply and demand affect the value of forex pairs.

Legal restrictions in some jurisdictions limit the impact of private traders in the forex market. For example, in some instances,  private traders are restricted on the amount of foreign currency they can hold on behalf of other persons. In such jurisdictions, banks have a bigger influence on the volumes of foreign currencies in the economy.

Brokers

Brokers provide the medium through which traders place their orders to buy and sell different currencies. They provide quotes for different currency pairs, which guide their pricing,  demand, and supply. Brokers profit from forex trading through their spreads, which act as the transaction costs for forex trading.

Hedge funds and high-net-worth individuals

The two participants can change demand and supply in Forex. Both hedge funds and high net worth individuals have the financial strength to trade large volumes of currencies. In addition, these parties are more likely to venture into the market even when the conditions may look unfavorable.

The risk tolerance levels of these two groups are comparatively higher than those of most companies. Because of their willingness to take on risks, they help maintain liquidity even when other investors adopt a wait-and-see approach.

Scalpers

Scalpers trade by opening their positions for a few minutes, or even just some seconds, and closing those positions afterward. The ultimate goal of a scalper is to profit from small price movements replicated in several hundred or thousands of trades.  Scalping is a style, which includes very intensive, fast-paced trading.

Because of the magnitude of the number of trades they participate in daily, scalpers circulate billions of dollars worth of currencies in the forex market. However, some trading platforms do not allow scalping. This is potentially a limitation to the participation of traders in forex.

Business and companies involved in international trade

Large sums of foreign currencies are frequently demanded by companies and enterprises, whose lines of business involve the import and export of goods and services.  Usually, they have to get the currencies that will enable them to acquire the resources they need from across international borders.

Because of this, these entities have to convert their local currency into foreign currencies and vice versa. Such transactions cumulatively account for billions of dollars worth of foreign exchange daily.

Bottom line

The forex market is an essential factor in the global economy. Different participants play various roles in keeping the market afloat. The participants operate in different economic segments, but they play interdependent roles in the forex market. The key function of their roles is ensuring liquidity.

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