Major Players in Forex and Styles of Trading
This lesson will cover the following
- Who participate in the Forex market
- What time frame can investors use in order to trade
Who are the main players in the Forex market?
After we have learned the basic terms in Forex trading, now the time has come to talk about who participate in the Forex market. We could categorize major players in the market in six groups:
Commercial and investment banks
First, commercial and investment banks are the foundation of Forex market, as all other players must deal with them in order to participate in the market. The mechanics of order processing in currency exchange, in which banks play the main role, will be explained in the next article. Apart from that, commercial and investment banks are the founders of foreign currency exchange, which began as an added service to deposits and loans, expanding banks’ range of provided services.
Second, central banks are also major participants, but they are separated from commercial and investment banks, because of the different goal they are after when exchanging foreign currencies. Their main purpose is to provide adequate trading conditions in their home countries, controlling the availability and money supply. They also intervene in the Forex market at times of economic and financial imbalances, when fluctuations of the national currency need to be dampened.
The third group encompasses high-net-worth individuals, who usually participate on the Forex market through the intermediation of commercial and investment banks. A high-net-worth individual is a person with high net worth. In the American private banking business, such person is defined as having investable assets of more than $1 million, which excludes his primary residence.
Another group consists of hedge funds, which are a relatively new player on the currency exchange markets. They comprise high net-worth individuals that work in a partnership and have very large pools of investments, in most cases totaling well above hundreds of millions of dollars.
Businesses of any size
The fifth group consists of businesses and corporations of any size, from small exporters/importers to multi-million enterprises. They are mainly driven by the needs of their business operations, during which often payments for goods and services in foreign currencies arise and require an exchange. Such players are called “commercial traders” and they use the financial markets to hedge their operations by offsetting exchange rate risks.
And the last group of participants consists of individuals. These are mainly people who need to exchange some of their home currency for another, most often when they are visiting a foreign country and need to pay for goods and services in the local currency. Individuals are also private traders, commonly known as “freelancers”, who are using different online trading platforms in order to profit from price fluctuations, but are trading with small amounts of currencies.
Now that we have mentioned the main participants in Forex, it would be useful, if we focus our attention on different Forex trading styles.
Before starting your experience as a trader, you should know the specifics of behavior of different types of traders and decide which style of trading you wish to implement. Generally, several different trading styles can be distinguished: day trading, scalping, swing trading and position trading.
If a trader, acting as a speculator, prefers to enter (buy and sell) a series of trades in the currency market within the same trading day and close all of his/her positions before the market closes, then he is referred to as a day trader. In dependence on the strategy a trader uses, he/she may submit from several to hundreds of orders per day. Day traders can be institutional or private.
Institutional day traders work at financial institutions and have a number of advantages over private traders, such as access to more resources, tools, equipment, large amounts of capital and leverage, large availability of fresh fund inflows to trade continuously on the markets, dedicated and direct access to data centers and exchanges.
On the other hand, private traders work as a freelancers, or in a partnership with a few other traders. Private traders generally trade with their own capital, but they may also trade with other peoples funds. Legislation may pose restrictions regarding the amount of other peoples money a private trader can manage. In the United States, for example, day traders may not advertise as advisors or financial managers. Although not required, almost all private day traders use direct access brokers, as they offer the fastest order entry to the exchanges, as well as superior software trading platforms.
Day trading is a short-term trading style, because it implements analysis of charts with a time frame of 15 minutes, 30 minutes or 1 hour. A day trader usually spend 3-5 hours per day of trading and strive to achieve a quick turnover rate. These traders tend to rely more on technical analysis, taking advantage of small price movements, and trade highly liquid currency pairs in order to profit. A day trader is usually very flexible, as he/she can adapt himself/herself to whatever condition the market is in at any given moment.
Scalping is a style, which includes very intensive, quick trading. A trader is referred to as a scalper, when he/she allows his/her positions to last only for a matter of seconds to a full minute, but rarely longer than that. If a trader leaves a position open for more than 1 minute or two, then such a style is no longer considered as scalping, but rather as day trading.
The sole purpose of a scalper is to register small profits, while exposing his/her trading account to a very limited risk, because of the ultra-short period of time. There would not be any point in scalping for many traders, if they were not offered to trade with highly leveraged trading accounts. Only ability to manage a huge amount of funds of, actually, virtual money, provides these traders with the opportunity to profit from a price move of a mere 2-3 pips. In doing so, scalpers tend to examine charts with a time frame of 1 minute to 15 minutes.
Swing trading is a style of technical trading which focuses on the prices short-term momentum and attempts to capitalize on movements which continue typically from one to four days. Thus, swing trading is based on a time span longer than day trading, but also shorter than the buy-and-hold strategy, which includes holding positions open for months, and even years.
This style of trading provides a greater chance of success for beginner traders, because it does not restrain the traders horizon to a couple of hours, like day trading does, and also because a swing trader does not necessarily invest a lot of his/her time attempting to identify the appropriate price for making an entry or an exit.
A swing trader usually enters into an average of 3 to 6 trades within one week and strives to make a large amount of pips in profit, 100 to 300 pips.
These traders utilize the longest time frame of trading in comparison with the other three groups. In this case traders may enter into trades, lasting for several weeks to several months. The main purpose here is to register a large amount of pips per trade, from 300 to 1000 pips. These traders usually prefer to use fundamental analysis (or examining macroeconomic, political or other indicators), when making their decisions.