Here Are The Five Modes Of Forex Trading

Forex Trading
(photo source: udemy)

People from all around the world are into investing currencies and such. While other people think it’s nonsense and that it doesn’t do any good with your money, there are still a huge number of people who thinks that it is practical and worthy of their money. A lot of people wants to know more about forex trading and if you are one of them, you definitely landed on the right page.

If you want to know more about the modes of forex trading, see the list below:

  1. Banks

As per Investopedia, The greatest volume of currency is traded in the interbank market. This is where banks of all sizes trade currency with each other and through electronic networks. Big banks account for a large percentage of total currency volume trades. Banks facilitate forex transactions for clients and conduct speculative trades from their own trading desks. When banks act as dealers for clients, the bid-ask spread represents the bank’s profit. Speculative currency trades are executed to profit on currency fluctuations.

  1. Central Banks

Another one from the sources of Investopedia is Central Banks. According to them, Central banks are extremely important players in the forex market. Open market operations and interest rate policies of central banks influence currency rates to a very large extent.

Central banks are responsible for forex fixing. This is the exchange rate regime by which a currency will trade in the open market. Floating, fixed and pegged are the types of exchange rate regimes.

  1. Corporations

Corporations play a big role when it comes to the topic of Forex Trading. According to Investopedia, firms engaged in importing and exporting conduct forex transactions to pay for goods and services. Consider the example of a German solar panel producer that imports American components and sells the final goods in China. After the final sale is made, the Chinese yuan must be converted back to euros. The German firm must exchange euros for dollars to purchase the American components.

Companies trade forex to hedge the risk associated with foreign currency translations. The same German firm might purchase American dollars in the spot market, or enter into a currency swap agreement to obtain dollars in advance of purchasing components from the American company in order to reduce foreign currency exposure risk.

  1. Investment Managers and Hedge Funds

After banks, portfolio managers, pooled funds and hedge funds make up the second-biggest collection of players in the forex market. Investment managers trade currencies for large accounts such as pension funds and endowments. An investment manager with an international portfolio will have to purchase and sell currencies to trade foreign securities. Investment managers may also make speculative forex trades. Hedge funds execute speculative currency trades as well. All of these came from Investopedia as well.

  1. Individual Investors

Investopedia said that the volume of trades made by retail investors is extremely low compared to that of banks and other financial institutions. But the forex trade is growing rapidly in popularity. Retail investors base currency trades on a combination of fundamentals (interest rate parity, inflation rates, monetary policy expectations, etc.) and technical factors (support, resistance, technical indicators, price patterns).

Author Bio: Mark Aldrin Hipolito is a day-time writer for FP Markets, one of the most successful and established forex providers in the world. He writes to help people get interested in the world of trade markets.

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