A Forex trader is defined as a person who is educated, trained, and/or licensed to regularly conduct business in the foreign exchange market. In order to be the best in the business Forex traders have to know certain characteristics or aspects of the industry. One such aspect is the proper identification and manipulation of market participants. This article will provide a primer on market participants in preparation for further and/or more in depth readings regarding the same.
The Best Forex Traders Should Know the Definition of Market Participant
The general definition of a participant is a person or entity that takes part in an endeavor. Simply put these natural and juridical persons make up the Foreign exchange industry, in that every Forex trader in one way crosses paths with the same. The predominant school of thought identifies or differentiates these participants by level of access or clout.
Best Forex Traders Should Know the First Level
The first level is the interbank level that includes the biggest and most powerful commercial banks and securities network or dealers. The main difference between the first level and the other levels is the fact that large commercial banks and established securities dealers deal in various currency pairs in huge volumes.
This means that the percentage in points (pip) for these transactions are very thin, almost razor sharp. Simply put the lower the percentage in points the lower the profit and losses for each trade or lot. However, since the first level of participants deal with huge lots then it is possible to lower the pips. How huge are the lots, well think about this, the first level is only make up at most 10% of the participants in the Forex market however they are responsible for more than 50% of all the trades that occur.
Best Forex Traders Should Know the Second Level
The second level is comprised of smaller banks, large multinational players, pension funds, insurers, hedge funds, etc. These participants, although not as big and not as powerful as the first level, still exercise significant pressure over the Forex market, mainly due to their position as a swing vote when the position of the first level is not consolidated.
Best Forex Traders Should Know Other Participants
One thing to remember, the difference between the first level, second level and other participants is more on the quality and quantity of Forex they trade in, rather than the type of organization they are incorporated as. Examples of other participants are:
- Non bank foreign exchange corporation
- Investment and Management Firms
- Smaller Central Banks
- Commercial Corporations
- Privately owned trading firms
The best Forex traders do not only know how to identify the participants but more importantly know how to deal with the same. This is because bigger firms are more concerned with volume rather than pips while smaller firms require higher pips to stay afloat. Think of it this way, the first level are wholesalers, the second level are huge retail establishments and the other levels are mom and pop shops or smaller retail establishments.