Who Trades Forex and Why

Retail traders usually picture the market as a crowd of people guessing direction. It is mostly not that. Most currency changes hands because somebody needs the other currency for a reason that has nothing to do with where the price goes next — and knowing that changes what you expect the price to do.

The interbank core

At the centre are a few dozen large banks quoting each other prices. There is no exchange and no central order book; there is a network of bilateral relationships, and a handful of electronic venues where those banks meet.

Two jobs dominate. Market making means quoting a two-sided price to clients and earning the spread. Managing the resulting inventory means offloading the position that quoting leaves behind. A bank that has just bought €200 million from a client is not expressing a view on the euro; it is looking for someone to sell it to.

That distinction matters. A large part of the flow you see is a position being passed along rather than an opinion being taken.

Corporates, hedgers and central banks

A manufacturer in Germany selling machines to a buyer in the United States gets paid in dollars and pays its staff in euros. Somebody has to convert, every month, whatever the rate is doing.

This is hedging flow, and its defining feature is that it is price-insensitive. The company is not trying to buy euros cheaply. It is trying to stop the rate mattering — to lock in a number now so that next quarter's margin is a known quantity rather than a bet on the currency market.

• Exporters and importers convert receipts and pay invoices on a schedule.
• Fund managers hedge the currency exposure that comes free with a foreign share or bond they actually wanted.
• Central banks hold reserves, and occasionally intervene deliberately to move or steady their own currency.

Central bank intervention is rare and worth recognising when it happens: it is the one participant that is explicitly trying to move the price, has effectively unlimited size, and announces its intentions in advance more often than not.

Funds and speculators

Hedge funds, macro funds and proprietary trading firms are the participants doing what a retail trader imagines everyone is doing: taking positions in order to profit from the move.

Even here, the picture is not a crowd of chartists. The recognisable styles are:

None of these is competing with you directly. A macro fund holding a three-month view and a high-frequency firm holding a position for four milliseconds are both in the market you are in, and neither is trying to take the other side of your fifteen-minute trade.

Where retail fits

Retail trading is a small fraction of total turnover — a few percent of a market that turns over trillions of dollars a day. That number is worth sitting with, because two common beliefs die on it.

• "The market is hunting my stop." Nothing in the interbank market can see your stop, and your size is not worth the effort. What is true is that stops cluster at obvious levels, and price moving through a cluster produces the acceleration that feels personal.
• "If I can read the order flow I can front-run the banks." The flow that moves the price is not visible to you, arrives through private channels, and is largely not directional in the first place.

There is one real sense in which your order is somebody's business: your broker may take the other side of it themselves rather than passing it on. That is a genuine structural fact, it is legal, and it is the subject of lesson 4 in this track.