If you’re an absolute rookie to forex trading you might be asking yourself how can forex be so widespread and who does trade forex at the end of the day in order for claims to state that there is a massive volume exceeding $4 Trillion traded every day. Well first of all we should explain that besides retail forex traders like the traders that engage in forex trading for free or for real money at trading-point.com there is another four our five categories that trade forex on a day to day basis.
The first category that trade forex without them even realizing is consumers when they are in foreign locations away from their home jurisdiction and they engage in shopping for goods or services. As a traveler when you are abroad you have to exchange your currency to the currency of the country you are visiting in order to be able to pay for accommodation, transportation, shopping and other goods or services you are using or purchasing for the location of your visit. Even when purchasing any of the above mentioned goods or services with a credit card which was issued in your local jurisdiction you should realize that the price for which you are charge for at the visiting country will be charged to your card at the equivalent rate of the time of the transaction. By using your credit card to pay you can be saving slightly as you will not be called to pay the commission fee charged by banks or a currency centre but nevertheless you are still subject to the rate of the current day to determine what you will be charged on your next bank statement which will be sent to your home address. The volume of transactions as described above may be small in volume but if you consider the overall volume of people that engage in shopping for goods and services when travelling abroad you will soon realize that total sum of these transactions is very, very high.
The second category that uses forex trading is businesses as importing goods or conducting any sort of business practice including paying for outsourced services abroad or anything similar will need foreign currency to be concluded. Very similar to what has been described above businesses perform forex trading when conducting usual practices of purchasing products or services with the volume of transactions being the main key difference to consumers. Businesses buy and sell both services and products as part of their normal conduct of performing their practice on a day to day basis which in many cases might not be limited to the boundaries of their region either due to costs or either due to limitations of offering in products of that nature in their particular region. What this means is that when a business decided to import a product or purchase outsourced labor from overseas it will be called to pay in foreign exchange. It is only reasonable to understand that these trades need significant volumes of foreign exchange and either might be traded on a day to day basis or either can be traded in large orders when exchange rates are in favor of the purchaser based on circumstances and market conditions.
On a day to day basis businesses need to convert currencies when they perform trading outside the boundaries of their legal jurisdiction; in order to best understand this you should understand that when a business imports or exports products to or from its home country it will have to process or receive a payment in foreign currency; it is only realistic that large business entities convert significant amounts of money back and forth in order to perform their transactions. What this means is that companies with respected figures in cash flow and revenue might select to trade currencies on a day to day basis based on their prediction of transaction volume in order to have sufficient liquidity of cash flow available at any given time to buy and sell goods. The timing of when a business converts a bulk volume of currency to have on hand can have a large affect on their balance sheet, which is why many businesses use hedging strategies to ensure they do not sustain losses over time due to currency market volatility.
Investors and Speculators
The third segment that adds up to the group of traders that practice forex trading is investors and speculators which trade on international markets either through a direct forex broker or through and online forex platform. These traders require liquidity in cash flow in order to perform trading in foreign markets; to best understand this we can set a simple example of a trader that originates from Australia where the home currency is the Australian Dollar (AUD) and is buying or selling stocks, bonds or commodities on the Nasdaq were transactions are performed in United States Dollars (USD), this particular trader will require sufficient liquidity in USD in order to perform his transactions; exchanging his home currency on a day when stocks of Google are low and are a good choice to buy might be such an efficient decision not because the actual stock might not be promising but because his home currency is just to costly to exchange to USD in order to perform the purchase; what this means is that speculators and traders in many cases maintain balances which they trade to foreign currencies based on currency market prices in order to benefit from promising exchange prices which can prove efficient when a trading opportunity may arise.
Types of Traders
Although it is unrealistic to say that there is only two categories as each forex trader is an individual entity as each trader has different knowledge, a different perspective of micro and macro economics and each trader wishes to achieve a different level of profit with a different ratio of risk involved. In a general outline you can say that there is two categories of forex traders which use different tactics and an overall different style of trading. The 2 broad categories of traders consist of technical traders and fundamental traders. The first category is more mathematical or more statistical to be more precise and often has a bigger appetite for risk as this category of forex traders has a tendency to use tactics of constant opening and closing positions and even more sometimes prefer using forex robots for their traders. They tend to use charting tools and quantative trading models and theories to come to a conclusion where they wish to set their stop loss and how they will construct their trading outline for the day.
The second broad category of traders is a more human or more mild category of traders in terms of tactics and risk appetite as fundamental traders prefer using traditional signals to consider what their trading policy for the day, week or year will be. Fundamental traders dig through the news and enhance themselves with the ability to extract signals from chained reactions of financial or political turbulence which push the forex market to go both up and down. Fundamental traders prefer clearly tracking interest rates, GDP changes, employment statistics, military conflicts, political changes and instabilities or even natural disasters which affect fx rates. Summing up we would recommend that you do not attempt to categorize yourself in to 1 particular category as each individual has different abilities. Your forex trading pattern is something that will roll out as it goes based on your learning curve.