Forex for Dummies!

OK, at the previous part of lesson we learned few things about the Forex market and the two major currencies: the US dollar and the Euro. In this lesson we will learn about the Central Banks & Commercial and Investment Banks and it’s participation in the Forex Market.

1. Central Banks

Central Banks (CBs), like the Federal Reserve Bank of the United States, are for all intents and purposes non-profit entities. Therefore they do not speculate in the currency markets. In other words, they are not in the market to make a profit. Their main purpose in the market is to create stable economic conditions through bouts of liquidity from their cash reserves. Therefore, they may intervene directly, or via foreign central banks in an attempt to adjust perceived imbalances. More importantly from a speculators point of view, they are just one of the many sources of blind liquidity that comprise the enormous dollar volume traded daily in the FX market.

 - CBs are not in the market for profit
 - They provide opportunities for speculators to profit by way of large bouts of liquidity

2. Commercial and Investment Banks

Commercial and Investment banks such as: Unified Bank of Switzerland (UBS), Citibank, JP Morgan, Royal Bank of Scotland (RBS), HSBC, Barclays, Goldman Sachs and Bank of America just to name a few are regarded as the main players. These banks are in the market via proprietary trading desks worldwide on behalf of themselves and their clients. In fact, the majority of these banks profit is derived from FOREX trading. The market has proven to be very profitable for banks providing them with less exposure to risk than loans and other banking activity.

These bank’s dealers exploit every advantage in this market using technical, fundamental and order flow data. Before computing power evolved to the level it has reached today, it required a large team of people to consolidate all the data into concise trading decisions. Today however, many of the advanced strategies employed by them can be done with nothing more than a modern desktop PC and a spreadsheet. This fact allows the individual trader to keep cost low while maintaining an effective posture in the market.

Here end’s the introduction to the Forex market. The next two (and last) lessons are going to teach about trading (The Fundamental and the Technical Analysis), see you there!
Next part of lesson: Fundamental Analysis.

Enjoy!
Yaacov Peretz.