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The trading industry


Trade and Money

Trade is with us since the early stages of the homo sapiens. Hunters about 25 thousand years ago traded their extra hunted pieces for new arrows or clothes. Anything they had no time to make for themselves because they spent their time hunting.

Therefore, their first concepts that people should have developed could be about what a fair deal was, and, also, about how to measure and count their properties and objects.

The oldest Sumerian records were about transactions between customers and merchants.

Money started being employed in Mesopotamia as early as 5,000 B.C. as a mean to value exchange, in the form of coils and rings made of silver.


Currency trading is nothing but a refinement of the concept when several types of currencies are available in an interlinked and global civilisation. Forex Trading is a means to find the current fair value of a national currency in relation to others.

Markets in Forex

Forex or FX are short forms for The Foreign Exchange Market, a global market for currency exchanges. Forex allows Central Banks, Governments, and commercial entities, including trading companies and institutional funds to speculate on the movements of the price of currency pairs using the global inter-bank market. FX is a decentralised market. Trades are done on the spot, and the traded deal is delivered within two working days.

The Forex market was established back in 1971, following the abolishment of fix-currency quotes by the National Central Banks. Since then, the rates were determined by supply and demand.

The Forex market is the most liquid market on the planet, with over 5.3 trillion dollars exchanged every day. A volume higher than the total size of the US government debt is traded every week. It operates 24 hours a day from Sunday 10:00 pm (GMT) to Friday 10:00 10 pm (GMT).

Forex retail trading volume is roughly 5.5% of the whole currency market, while Deutsche Bank is the top volume contributor with about 21% market share.

As for the currencies exchanged, there are over 170 different currencies that are traded in the FX market, being the top traded

1.- US Dollar (USD) is part of almost 90% of all operations
2.- The Euro (EUR) is the second most traded currency (33%)
3.- The Japanese Yen (JPY) – 23%)
4.- The Pound Sterling (GBP -11.8%)
5.- The Australian Dollar (AUD – 8.6%)
6.- The Swiss Franc (CHF- 5.2%)
7.- The Canadian Dollar(CAD – 4.6%)
8.- Mexican Peso (MXN – 2.5%)
9.- Chinese Renminbi (CNY – 2.2%)
10.- New Zealand Dollar (NZD – 1.4%)

Time Zones

As already said, the Forex markets operate round the clock from Sunday till Friday, but liquidity shifts its focus depending on the open session.

The dollar is mostly involved in all sessions, while the EUR and GBP start increasing their volume once the European session opens and then again following the beginning of the US session. That also signals an increase in the volume of the Pacific currencies, and especially the Yen (JPY).

The trading day starts in Sidney, continuing with Tokyo when it’s their time to go online, then Frankfurt and London, and it completes its full circle when the New York session begins and ends.

News Releases

Each country and economic zone releases economic information during the business hours of their time-zone, usually during the morning. It’s important for the trader to keep track of these events since they are usually market movers and shakers. Below an example taken from tradingeconomics.com.

Main Market Participants

Central Banks

National Central Banks are major participants. They control the money supply and interest rated of their country or economic zone to try to control inflation and sometimes the price of their currency.

Central banks act, also as support for the liquidity of commercial banks. A simple rumour of a Central Bank rate or money supply flow intervention create price spikes and long trends.

Institutional Firms

They typically handle large accounts on behalf of their customers and of themselves. They may use currency exchange not only for speculation but also for hedging their foreign investment portfolio. For instance, they may run a stock found made of large US S&P500 companies. To protect it from the USD variations against their local currency they may have sold the USD currency to match the USD value of their portfolio.

Retail Brokers

The growing interest by ordinary citizens to speculate on the movement of the price of currencies has created an opportunity for the retail broker industry to act as an intermediate dealer between the retail trader and the forex market. That is so because retail investors didn’t have direct access to the Forex Market.

Retail Brokers are controlled and regulated by the financial authorities of the country they register as a business company. In the US it is done by the Commodity Futures Trading Commission and National Futures Association.  In the UK Forex brokers operate under the Financial Conduct Authority (FCA), operating independently of the UK Government.

Retail Traders

As we saw, the forex world there are several layers of traders, which can be classified into two main categories:

-inter-bank traders
– Retail traders

Both groups are basically looking for opportunities to profit, and use roughly the same type of tools, but inter-bank traders have the financial strength to move the markets, while retailers only can rely on their ability to follow the flow of the money. Therefore, inter-bank dealers can shake the market in search of stop orders before heading in the opposite direction. This stream is full of sharks trying to profit from the small fish.

Type of Traders

Traders can be classified by their time frame and profit goals.

Scalpers: Very short-term time frames, typically 1 minute. Quick in and out of a trade for a few points or pips.

Day traders: They trade during their session and close their positions before leving the market watch. They use larger time frames, from 5 minutes to 4 hours and, consequently larger profit targets.

Swing traders: They open positions lasting from one day to one or two weeks. They try to profit from short momentum price movements.

Position Traders: Long-term positional investors.

Trading Platforms

The majority of retail traders use MetaTrader 4 (MT4) and recently its new brother MetaTrader 5 (MT5). MT4 is still prevalent as it is supplied free of charge by FX brokers when opening an account. Institutional investors use BARX, Orex or Oanda Pro.
In terms of software functionality, both platform types are relatively similar. It is typical for new functions and features appearing on institutional platforms to show later on retail apps. The main differences are related to the unique needs of institutional players about volume, multibank connectivity, best execution engines, central limit order book and market depth.

Advanced Solutions

For advanced traders, there are a handful of institutional-grade platforms. The main being NinjaTrader, TradeStation, Multicharts and SmartQuant. All these trading solutions include powerful high-level programming environments (EasyLaguage, C#, OpenQuant) combined with powerful tools such as market scanners to identify trading opportunities meeting specific technical criteria, Depth of market and a collection of apps to backtest and assess the quality of an automated trading system.

The next article will describe the different asset classes that are currently available in the Forex industry nowadays.



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