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Lesson 3
Central Banks And Governments
Policies that are implemented by governments and central banks can play a major role inthe FX market.
Central banks can play an important part in controlling the country'smoney supply to insure financial stability.
Banks
A large part of FX turnover is from banks. Large banks can literally trade billions ofdollars daily. This can take the form of a service to their customers or they themselvesspeculate on the FX market.
Hedge Funds
As known the FX market can be extremely liquid which is why it can be desirable totrade. Hedge Funds have increasingly allocated portions of their portfolios to speculate onthe FX market. Another advantage Hedge Funds can utilize is a much higher degree ofleverage than would typically be found in the equity markets.
Corporate Businesses
The FX market mainstay is that of international trade. Many companies have to import orexports goods to different countries all around the world. Payment for these goods andservices may be made and received in different currencies. Many billions of dollars areexchanged daily to facilitate trade. The timing of those transactions can dramaticallyaffect a company's balance sheet.
The Man In The Street
The man in the street also plays a part in toady's FX world. Every time he goes on holidayoverseas he normally need to purchase that country's currency and again change it backinto his own currency once he returns. Unwittingly, he is in fact trading currencies. Hemay also purchase goods and services while overseas and his credit card company has toconvert those sales back into his base currency in order to charge him.
Speculators And Investors
We shall differentiate speculator from investors here with the definition that an investorhas a much longer time horizon in which he expects his investment to yield a profit.Regardless of the difference both speculators and investors will approach the FX market.
What Next
Well now we have a basic understanding of how the FX market works and who the mainplayers are, what next? You are now going to have to decide the best way to trade themarket. The two most common approaches are that of fundamental analysis and technicalanalysis.Fundamental analysis concentrates on the forces of supply and demand for a givensecurity. This approach examines all the factors that determine the price of a security andthe real value of that security. This is referred to as the intrinsic value. If the intrinsicvalue is below the market price then there is an opportunity to buy and if the market isabove the intrinsic price then there is an opportunity to sell.Technical analysis is the study of market action, mainly through the use of charts andindicators to forecast the future price of a security. There are three main points that atechnical analyst applies:A. Market action discounts everything. Regardless of what the fundamentals are saying,the price you see is the price you get.B. The price of a given security moves in trends.C. The historical trend of a security will tend to repeat.Of all of the above things the most important of them is point A. The tools of thetechnical analyst are indicators, patterns and systems. These tools are applied to charts.Moving averages, support and resistance lines, envelopes, Bollinger bands andmomentum are all examples of indicators.There are many ways to skin a cat as the saying goes but fundamental and technicalanalysis are the two most popular ways of trading FX.
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