Why should a trader know how Forex trading works?
How does the Forex currency market work from the inside? For a better understanding the principles of this financial exchange, you need to realize who the participants in Forex trading are. This question is especially interesting for novice traders who want to find out the structure of foreign exchange trading in order to conduct more efficient and profitable activities. Today we will tell you about such a concept as Forex trading participants, consider their detailed typology and introduce you to the types of trading processes.
Understanding how Forex functions will help you to competently approach the choice of the optimal trading strategy. Awareness of the trading participants (or, they are often also called bidders) will assist to form a holistic vision of the general problematics, various trends and market conditions leading to a particular outcome of a Forex transaction. Such awareness is also useful in that you develop your analytical skills, and this is already one of the components of successful Forex trading.
A Forex bidder is a party willing to purchase assets at the price offered by the seller. This can include both legal entities and individuals, so the composition of the participants can be extremely variable. They serve as an indicator of the dynamics of demand for a particular trading product in Forex. Thus, an increase in the demand for trading any currency pair prompts sellers to increase the price accordingly. The rise in prices affects market sentiment and demand.
In this process, we observe a certain cyclical nature due to changes in the Forex exchange. Typically, the seller will give preference to the bidder who can pay the highest price for the product offered. It should be noted that Forex trading can be multi-stage or can be a part of the auction trading. One way or another, trading participants are a significant driving force of the market, because it is they who set the trends that affect the general state of the Forex currency exchange.
Companies and private investors as bidders in Forex trading
Speaking about the legal status of bidders in Forex trading, it is necessary to give a clear classification of the participants themselves, depending on their legal status. As mentioned above, both companies and individuals, for example, private investors, can trade in Forex. The percentage of both those and others is constantly fluctuating, since both banks and ordinary citizens become buyers of currency. So let’s move on to the direct division of bidders into categories. These are:
- central banks;
- commercial banks;
- foreign trade companies;
- currency exchanges (for example, Forex);
- brokerage firms;
- individuals as a separate group of Forex bidders.
Thus, as we can see, the concept of legal entities can be attributed to most categories. For example, central banks can be involved in Forex trading in order to avoid financial crises and to maintain a reasonable balance between imports and exports. Their activity is mainly of a foreign economic nature, therefore, they are undoubtedly a major player in the foreign exchange market. How does their activity differ from the participation of commercial banks in Forex trading?
The interest of commercial banks as trading participants, or bidders, is to ensure high liquidity of their own funds. The turnover of commercial capital can reach almost 70% of all Forex transactions per day. Since this is a fairly high indicator, it follows that international banking organizations can influence the quotes change in Forex. In addition, many transactions are made between banks, and this significantly affects the state of the market in general.
Foreign trade companies are often another bidder in Forex trading. Their activities are aimed at attracting free foreign exchange balances and placing deposits for a short period of time. Such companies can act as importers and exporters of currencies, however, in the absence of direct access to the market, they trade in Forex through commercial banks, which, in turn, also contributes to the formation of one or another trend in Forex trading.
Currency exchanges, in particular Forex, are the scene of action of all bidders in the aggregate. This should include brokerage firms, which, as a rule, are antagonistic to traders, and this kind of opposition generates various changes and movements in the market. Broker services, such as leverage, are also based on charging traders and are a percentage of the completed transaction. Here we have summarized all legal entities as potential bidders in Forex.
And, finally, a separate group of bidders in Forex trading can be called people who are not representatives of any organization. These are ordinary citizens, individuals interested in conducting profitable transactions in Forex for the purpose of personal enrichment. An interesting historical fact for our readers is that private investors got the right to make deposits and conduct foreign exchange transactions in Forex already 35 years ago.
What are the types of trades in general?
In our review, we focus primarily on the Forex market, however, for a deeper understanding of this topic, we want to draw your attention to the types of trading in general, and not only in the context of the Forex exchange. This knowledge will help you find your bearings in the world of trade more freely, especially if one day you wish to engage in investment or business activities in other markets, aside from Forex.
Even the most common type of bidding, an auction can have several varieties, depending on a number of parameters. Trading in Forex is also to a certain extent built on the basis of the auction principle. So, having considered the types of auctions, you will be able to delve into the structure of any current market in more detail, therefore this information is relevant and universal for each bidder in Forex trading. How is trading classified by type? Let’s consider the main ones:
- dynamic bids;
- setting bids for a specific period of time;
- setting unique bids;
- “live” traditional auction.
With dynamic bids, Forex traders can set their own bid. If we are not talking about currency trading in Forex, but, for example, about operations with securities or any other trading products, then even the absence of a trading participant will not be an obstacle to automatically raising rates to a specific amount. When these indicators are reached, the bidding will end on the part of this bidder, if they have set the upper limit of the bid in advance.
Auction trades, where bids can be placed over a period of time, have the great advantage that bidders do not need to track the dynamics of bids in real time. The implementation of such an algorithm within the Forex platform is partly possible thanks to the principles of automated trading using expert advisors, as you probably already know from our previous reviews. They are designed to help a trader and perform plenty of useful functions during the Forex trading process.
Unique bids are the basis of auctions, in which the winner can be the bidder who offers the most unexpected bid. As an example, let us give the following situation: users 1, 2, 3, 4, and 5 express a desire to place bids on a certain product or trading product, and their bids are the same ones. Let’s say the first two bidders announced a price of $ 100, the third and fourth bid $ 60, and bidder number 5 offered a bid of $ 70. It is them who will become the winner because of the uniqueness and uniqueness of his bet.
And the last type of bidding is the live auction. The essence of such bargaining comes down to the sale of the lot by increasing the price of it. It is worth noting that competitiveness is widely used here as a trait of human nature, as well as speed of reaction, because the desire to take possession of the goods often prevails over common sense and the real value of the goods. It will be useful to know that the auction is not always based only on a rise in price, there is a separate type of auction that takes its decline as a basis (Dutch auction, or, in other words, reduction).
Practical application of knowledge about Forex bidders
A thorough understanding of terms such as bidders and types of trades is obviously useful information for anyone who wants to take their first steps in the trading world, especially if you have ambitions to become a Forex trader. Having learned to distinguish one category of trading participants from another, you will be able to make decisions about the advisability of a transaction in a more balanced and rational way. The awareness of who with you in the transaction chain is can influence your next steps.
If you are an individual and are planning to engage in private investment in Forex, the ability to distinguish between a central bank and a commercial one will also help you make the right choice in terms of a trading strategy, as you will understand the goals of a particular Forex bidder. Or, if you start to carry out transactions through a brokerage company, you will understand the broker’s motivation, the amount of his commission or the amount of leverage offered to you. As a result, a clear understanding of the situation and the type of bidder you are dealing with will lead you to the right conclusions.
Consciousness of the decision made, logical elaboration and backtesting of a trading strategy in Forex will keep you away from impulsive and overly emotional actions, which will save your deposit and increase it if you conduct your Forex trading in a pragmatic and experienced style. Bidders, even if they represent legal entities, are still people who are also at risk of making wrong decisions.
If you strive to conclude profitable deals in Forex, you should remember about the general imperfection of market processes and allow the possibility of mistakes, and on your part, be able to show indulgence towards yourself. At the same time, a sober approach, cold calculation of potential profits and losses will become your daily companions of your Forex trading, and belonging to the category of traders – individuals – will only be a factor motivating for further professional growth.