Who Trades on the Foreign Exchange?

There are two main groups that trade currencies. A minority percentage of daily volume is from companies and governments that buy or sell products and services in a foreign country and must subsequently convert profits or protect costs made in foreign currencies into their own domestic currency in the course of doing business. This is primarily hedging activity. The majority percentage now consists of investors trading for profit, or speculation. Speculators range from large banks trading 10,000,000 currency units or more to the home-based operator trading 10,000 units or fewer.
Retail FOREX, as much as it has grown in the past 10 years, still represents a small percentage of the total daily volume but its numbers and significance are growing rapidly.

Today, importers and exporters, international portfolio managers, multinational corporations, high-frequency traders, speculators, day traders, long-term holders, and hedge funds all use the FOREX market to pay for goods and services, to transact in financial assets, to reduce the risk of currency movements by hedging their exposure in other markets or to simply attempt to profit by price movements.

A producer of widgets in the United Kingdom is intrinsically long the British Pound (GBP). If he signs a long-term sales contract with a company in the United States, he may wish to buy some quantity of the USD and sell an equal quantity of the GBP to hedge his margins from a fall in the GBP.

The speculator trades to make a profit by purchasing one currency and simultaneously selling another. The hedger trades to protect her margin on an international transaction (for example) from adverse currency fluctuations. The hedger has an intrinsic interest in one side of the market or the other. The speculator does not. Speculation is not a bad word. Speculators add liquidity to a market, making it easier for everyone to transact business. They also absorb risks that exist in the marketplace and help set efficient prices. This latter differs from the gambler, who creates risks in order to take them.

Speculators may trade at different price and time levels. Activity ranges from high frequency (HF) and ultra-high frequency (UHF) trades that may have a duration of just seconds to position trading, which may have a duration of weeks or months. Most speculators at the retail level are in between those two extremes.

Retail refers to the individual trader using one of the many online currency broker-dealers to work the FOREX markets. At one end are small part-timers playing mostly at a hobby with 10,000 mini lots. At the other end are large professional traders trading 250,000 bank lots.

Institutional refers to the big boys and girls trading for banks and hedge funds in lots of 10,000,000 or more. To a degree, they provide the liquidity so you and I can participate at the retail level.
By Michael Duane Archer
Michael Duane Archer has been an active futures and FOREX trader for more than 35 years. He has worked in various advisory capacities, notably as a commodity trading advisor, registered SEC investment advisor, and branch manager for Heinold of Hawaii. He currently trades FOREX and futures and is involved in several technical analysis research projects.

Copyrighted 2020. Content published with author's permission.

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