As a beginning forex investor, it can seem as though making money in the forex market is easy. Unfortunately, this isn’t exactly true. Competition with central banks and governments makes it more challenging for a retail investor to profit in the forex market.
If you are wondering “how much do big banks trade in the forex market?” the answer may surprise you. The world’s major financial institutions account for roughly $2 trillion of the foreign exchange market’s $4 trillion per trading day daily turnover.
While it is clear that these banks have more money to put to work against you, it is feasible to get the better of the banks in the currency market – it just isn’t easy.
Big Bank’s Speculation
When attempting to control the supply of money, central banks frequently utilize the foreign exchange market. These banks drive down the price of their own currency toward predetermined rate targets, and utilizing their foreign reserves to steady the market.
Trading for a number of banks is purely speculative, with banks profiting by selling and buying the identical currencies, and realizing gains from the difference in price, referred to as the PIP spread. Usually a PIP (price interest point) is the fourth decimal point making it the smallest increment that the price of the currency can change.
Ask prices (what a bank will sell a currency for) and bid prices (what a bank will buy a currency for) are set by the bank, and may vary by as much as hundreds of PIPS.
Can You Beat The Big Banks?
The foreign exchange market is the largest, most liquid, decentralized market in the world, with trading taking place twenty-four hours a day, five and a half days a week. There are a considerable amount of large players that make trading in the FX market more difficult, due to the large amounts of available capital, and speed of transaction execution.
It may also be more difficult for the retail FX trader to profit versus the big banks due to the fact that the average retail investor often does not have access to the available capital required to obtain the best rates. Keep in mind that the major financial institutions are trading with trillions of dollars, and a single financial institution may be trading with billions of dollars. Not who you would want to compete directly with.
There is another avenue to investing in the foreign exchange market, and it involves the use of fundamental analysis of the currency market. If an investor can successfully forecast the price change in a currency based on economic and political events they can profit from forex investing.
In order to use this strategy for investing, you must have access to information that is not currently priced into the market, something that is notoriously difficult to do. You can lock in gains (and loses) by utilizing futures contracts to execute a trade even years into the future. These contracts allow you to speculate on long-term trends that could turn out to alter the value of a currency pair.