As the world's largest financial market, the forex market has a number of types of participants. They also vary considerably in their reasons for trading forex.

The following sections cover the primary types of players trading in the forex market.

Large Banks and Financial Institutions

The greatest percentage of participants in the forex market in terms of transaction volume tends to fall into this category, accounting for over sixty percent of all foreign exchange transactions.

Professional traders working at these major banks and financial institutions trade for their employer's account and also usually handle customer business and orders. Such players generally trade on credit lines that banks extend to one another in what is collectively known as the interbank forex market.

The interbank market consists of all the large banks that deal with each other and are largely responsible for the exchange rates which all other traders follow on their quote systems and trading platforms.

Also, the larger the credit network a particular bank has, the better will be its access to competitive foreign exchange rates. Having this larger network and access to the best rates enables traders at the bank to act as market makers, dealing on both sides of the bid offer spread for the bank's benefit.

Large Commercial Enterprises

Multi-national corporations that need access to the foreign exchange market in order to realize profits in their home country and to purchase raw materials abroad make up an important part of the foreign exchange market.

Importers and exporters also make use of the forex market, as well as companies which routinely operate internationally such as airlines and freight companies for example.

This type of participant generally trades currencies to protect or hedge against adverse movements in the foreign exchange market where they may have exposure.

An example of this might be a United States manufacturer which obtains key parts for their product in Japan. By trading in the forex market, with forwards and futures, the manufacturer can assure obtaining the Japanese Yen needed for the ongoing purchases at the best rates, hence hedging the risk.

Foreign Exchange Brokers

These participants generally act as intermediaries for other participants by obtaining the best possible prices for their clients in any given currency pair.

Interbank forex brokers usually profit by charging their clients a small commission on every trade. Retail forex brokers tend to either charge a commission on the number of lots traded or in the price spread by lowering the bid or raising the offer side of the market.

Governments and Central Banks

These institutions primarily participate in the foreign exchange market to intervene on behalf of their currency in the event of market instability or over or under valuation.

The central bank can intervene by buying its currency and selling foreign currency to give the currency support against other currencies. Conversely, the central bank can sell its own currency and buy foreign currencies to weaken it.

Traders and Speculators

Speculators can be anyone participating in the foreign exchange market with the intention of making a profit from directional price movements. These forex traders might include hedge funds, individual forex traders, small banks and other participants trading currencies for profit.

High net worth individuals have been able to speculate in the forex market trading in amounts of more than $1 million via banks or using currency futures for years.

Nevertheless, the relatively recent rise of retail forex trading via online forex brokers has enabled access to the forex market to speculators dealing in much smaller minimum transaction sizes or lots. Many brokers currently offer lot sizes that vary from $100,000 for standard lots, $10,000 for mini lots and down to only $1,000 for micro lots.

Risk Statement: Trading Foreign Exchange on margin carries a high level of risk and may not be suitable for all investors. The possibility exists that you could lose more than your initial deposit. The high degree of leverage can work against you as well as for you.