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What Are The Different Types of Forex Traders?

Who can trade in the Forex market?

In the forex market, investors or (traders) are of three main types- Hedgers, Speculators and Arbitrageurs. All of these investors contribute to the substantial liquidity of the forex market. This classification is on the basis of their trading orientation or objective- to hedge currency fluctuations, making a quick profit from price differential or simply betting on expected rise and fall of the currencies.

1. Hedgers

Hedgers are investors who aim to eliminate the risk of fluctuations in currency rates, based on which their basic revenue or profitability depends. The hedger’s motive is not to make a huge gain but rather to safeguard their existing position. Hedging also helps investors and corporates (particularly export oriented) lock their profit stream by taking another position in the derivatives market.

In general, it is like insurance against the probability of a loss due to currency rate changes. The loss cannot be avoided completely, but the hedge can minimize the extent of the loss. A perfect hedge is rare, but investors can reduce or minimize their risk in the event that the market
goes against them.

For Example
– X YZ Ltd. has a main office in the US and one subsidiary in Japan. If the Japanese Yen weakens, it could reduce the revenue or profit in the Japanese segment. To overcome this situation, XYZ can hedge their position by making a short position in the Yen. If the Yen weakens they will get a profit from the short position which can be used to offset the business loss.

2. Speculators

Speculators tend to act like other equity or debt traders, taking a single position, intending to make a profit from the movement in price. Speculators usually end up taking a certain amount of risk, with the hope of a substantial profit.

For Example – Speculators may short the US dollar, with the hope that with a fall in the US GDP numbers, the USD may weaken. When the dollar actually falls, they will cover their positions making a profit.

3. Arbitrageurs – Arbitrageurs are those investors who trade in two different markets, exchanges or contracts, to simultaneously to take advantage of price inefficiencies. Price inefficiencies are very time sensitive, meaning that once a gap occurs, it has to be taken advantage of very
quickly or it will be lost. Typically speaking, arbitrage is a very low risk strategy as a trade is only made when the opportunity is available.

For Example
– Exchange rates

EUR/USD = 0.6522, (New York)         EUR/USD  = .6524 (London) with $10,000 one can buy 6522 Euros in New York, and with another $1000 one can short 6524 in London. With the help of that traders can earn 4 pips without any risk.

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