Forex Trading - How Exactly Does the Forex Market Work?

By Nathan Pennington

The forex market is like an onion. It has many layers. These layers are hidden by the layers above it. Let's peel the onion and see what we find.

The top layer is the retail trader. That's you and me. We're the surface. When you look at the forex market, we are what you see. One might assume that we're the ones who drive the market. We're not. Let's peel down a little further . . .

Next you have all the "real" currency transactions. These are the travelers that go back and forth from country to country. They need money exchanged. That's real currency trading. ;-)

The other (even larger) currency trading happens between companies. Companies are constantly selling and buying between countries for various reasons. Currency needs to be converted in these cases as well.

Peeling down further.

Here are the huge traders. These are hedge funds, pension funds, very high net worth individuals (Warren Buffet). These guys are almost completely hidden. They lurk. Slowly they buy or sell, never all at once. But the onion has yet another layer. These individuals are still not the real deal. Even they do not have control of the market.

Here we have reached the core. These are real. These mark the market do what they want. They actually control it . . . who are they?

The central banks. They control money flow, interest rates, and some things hidden from the public's eye. They are the ones who make the currency market do as they want it to do.

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Nathan Pennington is a forex trader and the author of Winning Forex Trading -THE Definitive Guide

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