What is Forex Trading?-Forex Market Participants and Forex Trading Hour

Last Updated on Tuesday, 27 March 2012 07:56 Written by FxTT Content Department Tuesday, 20 September 2011 05:26

Forex market is a gigantic lucrative market which does not only contain of investors, traders, institutional traders like in equity markets but also has additional participants for entirely different reasons than those on the equity market. Therefore, it is important to identify and understand the functions and motivations of the main players of the forex market.

Forex Market Participants:

Governments and Central Banks

Some of the most influential participants involved with currency exchange are the central banks and governments. Central banks are often involved in manipulating reserve volumes in order to meet certain economic goals. Central banks also affect the forex market when they adjust interest rates to control inflation. By doing this, they can affect currency valuation. There are also instances when central banks intervene, either directly or verbally, in the forex market when they want to realign exchange rates. With extremely deep pockets, they yield significant influence on the currency markets.

Banks and Other Financial Institutions

In addition to central banks and governments, some of the largest participants involved with forex transactions are banks. Large banks transact with each other using the interbank market (with the help of Electronic Brokering System i.e. EBS) and determine the currency price that individual traders see on their trading platforms.

Banks act as brokers as they are willing to buy/sell a currency at the bid/ask price. Banks make money by exchanging currency at a premium to the price they paid to obtain it. Since the forex market is a decentralized market, it is common to see different banks with slightly different exchange rates for the same currency.

Figure 1. Forex market participants

Large Commercial Companies

Companies take part in the foreign exchange market for the purpose of doing business i.e. companies that do business abroad have to exchange their home currency with foreign currency. Thus this action makes them indirectly involved in the forex market. Although the volume these companies trade is much smaller than those in the interbank market, these types of market players typically deal with commercial banks for their transactions.

These multinational companies have to deal with the risk from fluctuating exchange rates. In order to minimize the risk, they often use the concept of hedging. Using hedging they can achieve zero risk environment to do business.

Speculators/Retail Traders

Speculators attempt to make money by taking advantage of fluctuation in exchange-rates. If the internet, electronic trading and retail brokers were not invented then it would have been very difficult for speculators to enter in forex markets. Speculators can have a big sway on the currency markets, particularly big ones.

Forex market is a 24-hour market

In addition to the number of participant factor, another factor that makes forex becomes the largest financial market is forex trading hour. As a decentralized market, forex has another luxury as it opens 24 hours a day and five days a week as exhibited on the table below. Forex market opens on Monday (Sydney open) and closes on Friday (New York close).

Session Overlap

We can see that in between each session, there is a period of time where two sessions are open at the same time. From 3:00-4:00 am EDT, the Tokyo session and London session overlap, and from 8:00-12:00 am EDT, the London session and the New York session overlap.

Naturally, these are the busiest times during the trading day because there is more volume when two markets are open at the same time. This makes sense because during those times, all the market participants are trading.

The best time to trade forex is when two sessions are overlapping. These are also the times where major news events are released.