How Banks, Hedge Funds, and Corporations Move Currencies 
How Banks, Hedge Funds, and Corporations Move Currencies
by InformedTrades
Video Lecture 6 of 61
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Date Added: May 7, 2017

Lecture Description

Practice trading with a free demo trading account: bit.ly/IT-forex-demo3

View full lesson: www.informedtrades.com/21041-forex-market-participants.html

Behind central banks in terms of size and ability to move the foreign exchange market are the banks which we learned about in our previous lessons which make up the Interbank market. It is important to understand here that in addition to executing trades on behalf of their clients, the bank's traders often times try to earn additional profits by taking speculative positions in the market as well.

While most of the other players we are going to discuss in this lesson do not have the size and clout to move the market in their favor, many of these bank traders are an exception to this rule and can leverage their huge buying power and inside knowledge of client order flow to move the market in their favor. This is why you hear about quick market jumps in the foreign exchange market being attributed to the clearing out the stops in the market or protecting an option level, things which we will learn more about in later lessons.

The next level of participants is the large hedge funds who trade in the foreign exchange market for speculative purposes to try and generate alpha, or a return for their investors that is over and above the average market return. Most forex hedge funds are trend following, meaning they tend to build into longer term positions over time to try and profit from a longer term uptrend or downtrend in the market. These funds are one of the reasons that currencies often times develop nice longer term trends, something that can be of benefit to the individual position trader.

Although not the typical way that Hedge funds profit from the market, probably the most famous example of a hedge fund trading foreign exchange is the example of George Soros' Quantum fund who made a very large amount of money betting against the Bank of England.

In short, the Bank of England had tried to fix the exchange rate of the British Pound at a particular level buy buying British Pounds, even though market forces were trying to push the value of the Pound Down. Soros felt that this was a losing battle and essentially bet the entire value of his $1 Billion hedge fund that the value of the pound would decrease. The market forces which were already at play, combined with Soro's huge position against the Bank of England, caused so much selling pressure on the pound that the Bank of England had to give up trying to prop up the currency and it preceded to fall over 5% in one day. This is a gigantic move for a major currency, and a move which netted Soros' Quantum Fund over $1 Billion in profits in one day.

Next in line are multinational corporations who are forced to be participants in the forex market because of their overseas earnings which are often converted back into US Dollars or other currencies depending on where the company is headquartered. As the value of the currency in which the overseas revenue was earned can rise or fall before that conversion, the company is exposed to potential losses and/or gains in revenue which have nothing to do with their business. To remove this exchange rate uncertainty many multinational corporations will hedge this risk by taking positions in the forex market which negate any exchange rate fluctuation on their overseas revenues.

Secondly these corporations also buy other corporations overseas, something which is known as cross boarder mergers and acquisitions. As the transaction for the company being bought or sold is done in that company's home country and currency, this can drive the value of a currency up as demand is created for the currency to buy the company or down as supply is created when the company is sold.

Lastly are individuals such as you and I who participate in the forex market in three main areas.

1. As Investors Seeking Yield: Although not very popular in the United States, overseas and particularly in Japan where interest rates have been close to zero for many years, individuals will buy the currencies or other assets of a country with a higher interest rate in order to earn a higher rate of return on their money. This is also referred to as a carry trade, something that we will learn more about in later lessons.

2. As Travelers: Obviously when traveling to a country which has a different currency individual travelers must exchange their home currency for the currency of the country where they are traveling.

3. Individual speculators who actively trade currencies trying to profit from the fluctuation of one currency against another. This is as we discussed in our last lesson a relatively new phenomenon but most likely the reason why you are watching this video and therefore a growing one.

Course Index

  1. An Overview of the Forex Market
  2. The Difference Between Over the Counter (OTC) and Exchange-Based Markets
  3. Who Really Controls the Forex Market?
  4. The Role of the Retail Forex Broker
  5. How Central Banks Move the Forex Market
  6. How Banks, Hedge Funds, and Corporations Move Currencies
  7. A Breakdown of the Forex Trading Day
  8. Forex Trading - Characteristics of the Main Currencies
  9. Setting Up Your Forex Trading Software
  10. Forex Trading - How to Read a Currency Quote
  11. Forex Trading - Understanding Currency Rate Movements
  12. Forex Trading - Understanding the Bid/Ask Spread
  13. How to Place Your First Forex Trade
  14. How to Determine Your Position Size in the Forex Market
  15. Forex Trading - Pips and Fractional Pip Pricing
  16. How to Calculate Forex Trading Profits and Losses
  17. An Introduction to Leverage in Trading
  18. How Trading on Margin Works
  19. How to Calculate Leverage in the Forex Market
  20. How to Calculate Leverage in the Forex Market Part 2
  21. How to Place a Market Order in the Forex Market
  22. How to Place a Stop Loss and Take Profit Order in Forex
  23. How to Place A Pending Entry Order in the Forex Market
  24. How Rollover Works in Forex Trading
  25. How Rollover Works in Forex Trading Part 2
  26. Free Forex Charts Userguide
  27. What Moves the Forex Market? - Trade Flows
  28. How Capital Flows Move the Forex Market
  29. The Current Account: How Forex Traders Can Use it to Identify Opportunities
  30. Interpreting the Capital Account and Measuring Capital Flows
  31. Fundamentals that Move Currencies - Balance of Payments
  32. How Interest Rates Move the Forex Market Part 1
  33. How Interest Rates Move the Forex Market Part 2
  34. How To Trade the Carry Trade Strategy Part 1
  35. How To Trade the Carry Trade Strategy Part 2
  36. How To Trade the Carry Trade Strategy Part 3
  37. Fundamental Analysis Vs. Technical Analysis in Forex
  38. Forex Trading Fundamentals Quiz - Test Your Knowledge
  39. Why the US Dollar is Still King
  40. Determining the Fate of the US Dollar
  41. Determining the Fate of the US Dollar Part II
  42. Determining the Fate of the US Dollar, Part III
  43. Economic Releases that Move the US Dollar
  44. A Trader's Introduction to the Euro
  45. A Trader's Introduction to the Euro, Part II
  46. A Trader's Introduction to the Euro, Part III
  47. A Trader's Introduction to the Yen
  48. A Trader's Introduction to the Yen, Part II
  49. A Trader's Introduction to the Japanese Yen, Part III
  50. A Trader's Introduction to the British Pound
  51. A Trader's Introduction to the Swiss Franc
  52. A Trader's Introduction to the Canadian Dollar
  53. A Trader's Introduction to the Australian Dollar
  54. A Trader's Introduction to the New Zealand Dollar
  55. Why Choosing a Forex Broker is so Confusing
  56. Choosing a Forex Broker: Regulation and Financial Stability
  57. Choosing a Forex Broker Part III: Transaction Costs
  58. Choosing a Forex Broker, Part IV: Technology & Add-ons
  59. Choosing a Forex Broker: Evaluating Customer Service
  60. An Introduction to Forex Capital Markets (FXCM)
  61. An Introduction to DailyFX Plus

Course Description

This 61-video series is an introduction and in-depth look at the forex market, including how to place trades, the fundamentals of the forex market, profiles of the main currency pairs, and factors to consider when choosing a forex broker.



This is a continuation of The Basics of Trading course by Informed Trades.

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