Forex Market Participants: Who Trades Forex?

When it comes down to who trades forex, the answer used to be largely confined to well-capitalized financial institutions and corporations. While such large players still dominate the forex market in terms of overall forex transaction volumes, the recent rise of online retail forex trading has made the forex market accessible to just about anyone with a computer, an Internet connection and some funds to put at risk.

The sections below examine in greater detail several types of people or institutions who trade forex and how they do so.

Professional Forex Market-Makers

Many large banks with a foreign exchange department will hire professional forex traders to act as market-makers to their customers and other professional interbank counterparties. They will typically make markets (two-way prices consisting of a bid and an offer price) in one or more currency pairs for their customer dealing desk and for counterparties who the bank has extended credit lines to.

Strategic Bank Traders

In addition, some of the more senior traders or managers may be relieved of market-making duties and instead take a more strategic and longer-term approach to trading in order to generate extra profits from the bank's forex activities.

Bank Forex Customers

An important type of customer that trades forex through the dealing desk of a major forex bank consists of large corporation looking to hedge against exchange rate risk. Other bank forex dealing desk customers might include financial institutions like hedge funds or wealthy individuals looking to speculate on foreign exchange rate movements or shift investment funds between countries.

Currency Futures Traders

Smaller currency speculators traditionally traded currency futures using the major futures exchanges such as the Chicago Mercantile Exchange before online forex trading became available. Futures traders might stand and deal directly on the exchange floor to keep in touch with the ebb and flow of the market, or they might sit in an off-floor office monitoring market movements.

Either way, their futures transactions cross the floor of the exchange they are traded on. This generally assures them of competitive pricing, even on smaller trading amounts than most banks will quote their dealing desk customers.

Retail Forex Speculators

These days, the rise of online forex trading has opened up the retail forex market to just about anyone with an online computer and the desire to place their funds at risk trading forex.

Some such retail traders may just use a forex trading robot to trade their personal account for them. Others might use forex trading signal subscription services or signal generating programs to give them trade ideas. Still others enjoy the fact that they can now develop their own automated trade plan with the aid of an online forex trading platform capable of supporting automated trading.

Opening an Online Forex Account

These days, thanks to the Internet, online forex brokers are able to offer small retail accounts and automated trading platforms for executing small trades where an account can be opened with as little as $25. These micro-accounts can be leveraged up to 200:1, although with greater potential rewards, naturally also comes greater potential risks.

In addition, many of the online forex brokers offer minimum position or lot sizes where the minimum fluctuation of one pip is equivalent to 10 U.S. cents, versus a regular forex lot size where the minimum pip value is $10. Standard and V.I.P. accounts typically have successively higher initial deposit requirements, and they often have higher lot sizes and minimum pip values.