Every trade has two sides. When you buy, somebody sells. That is not a technicality, it is the structure of the entire market, and it raises a question that beginners rarely ask early enough.
Who are these people?
The answer turns out to be one of the most clarifying things you can learn. Currency prices stop looking like weather, arbitrary and unexplainable, and start looking like the outcome of specific decisions made by specific kinds of institution for specific reasons.
Most of them are not trying to do what you are trying to do. That fact is worth holding onto, because it explains a great deal about how prices actually behave.
The currency market has a hierarchy, and the clearest way to picture it is as a pyramid.
At the narrow top sits a very small number of extraordinarily powerful institutions. Each layer below is larger in number and smaller in individual influence. At the wide base sit millions of ordinary people, each one tiny.
Five layers, from the top down.
Layer Who They Are What They Are Actually Doing
Central banks The Fed, the ECB, the Bank of Setting the rules that everything else Japan, the Bank of England responds to
Big banks A handful of global institutions Running the market's daily machinery
Hedge funds Large private investment firms Betting on direction, at enormous scale
Corporations International businesses of every Converting money because they have to kind
Retail traders Individuals, including you Reading the market and taking positions
Notice the third column. Only two of these five groups are primarily trying to profit from price movement. The other three are in this market for entirely different reasons, and between them they account for most of what happens on a chart.
Every major currency has a central bank standing behind it. The United States has the Federal Reserve. The eurozone has the European Central Bank. Japan has the Bank of Japan. The United Kingdom has the Bank of England.
These are not banks in the ordinary sense. You cannot open a checking account at the Federal Reserve. They are closer to referees of an entire monetary system. They set the country's main interest rate, they influence how much currency exists, and they answer for the health of the currency itself.
Recall the three reasons currencies move: interest rates, economic strength, and news. Central banks directly control the first, heavily influence the second, and generate a large share of the third. They sit at the top of the pyramid because they sit at the source of the price.
Here is the genuinely strange part, and it is the most useful thing in this lesson.
Central banks are by far the most powerful movers of currency prices, and they hardly ever place a trade.
When the Federal Reserve wants to affect the dollar, nobody logs into a platform and clicks buy. They publish a statement. They hold a press conference. They change a rate by a quarter of a percentage point.
And then every other layer of the pyramid moves. Banks reposition. Funds reprice their bets. Corporations adjust their hedging. Millions of retail traders react. The price can travel a long way before the central bank itself has transacted anything at all.
This is why the biggest single-day moves on most pairs cluster around central bank announcements, and why experienced traders keep those dates marked well in advance. It is not the transaction that moves the market. It is the information.
One layer down sit the large global banks. A small number of institutions handle an enormous share of the world's currency trading, every second of every day.
If central banks are the referees, big banks are the field itself. They do two things. They execute currency transactions for very large clients, including governments, corporations, funds, and each other. And they trade their own money, in size.
This connects directly to something you already know. The bid and the ask, the two prices every pair carries, exist because institutions are willing to quote both sides continuously. That willingness is what makes the market usable. Without someone standing ready to buy when you want to sell, your order would simply sit there.
The market these institutions trade with each other is called the interbank market, and it is where the prices you eventually see on a retail screen originate.
Below the banks sit hedge funds and other large investment firms.
These are the participants doing most nearly what you are doing. They are trying to work out which direction a price will go and to profit from being right. The difference is scale and resources. They operate with enormous sums, teams of researchers, and infrastructure built to act on information faster than a person can read it.
They do not shape the market the way central banks do, and they do not carry the daily volume that the big banks do. But when a large number of them reach the same conclusion at the same time, the effect is plainly visible on a chart.
Below the funds sit ordinary international businesses, and this layer surprises people.
A French winemaker sells cases to an American distributor and is paid in dollars. Its workers, its suppliers, and its rent are all in euros. Somebody has to convert that money, and the currency market is where it happens.
Now multiply that by every manufacturer selling abroad, every airline buying fuel overseas, every retailer paying foreign suppliers, every government paying a foreign contractor. The total is staggering, and it is happening constantly.
Here is what matters about this layer. These businesses have no view on where prices are going. They are not betting. They convert because their operations require it, and they would do it whether the rate is favorable or not. Many also lock in future rates in advance to protect themselves from movement, which is called hedging.
A large share of everything that happens in this market is not speculation at all. It is the plumbing of global commerce.
At the wide base of the pyramid are retail traders. People at kitchen tables, on phones, in offices during a lunch break. Individuals, trading their own money.
Retail is the largest layer by number of participants and the smallest by share of volume. There are millions of retail traders worldwide and, at the top of the pyramid, a number of major central banks you could count on your fingers.
Estimates of retail's share of daily currency volume vary, but every serious estimate puts it in the low single digits as a percentage. Whatever the exact figure, the shape of the answer is not in dispute. Individually and collectively, retail traders do not move this market.
That last sentence can land badly, so let's be clear about what it does and does not mean.
It is true that you will never move a currency price. It is also true that this does not matter, because moving the market was never the job.
The job is reading it. Central banks set the direction. Big banks carry the flow. Funds and corporations push prices around in the course of their own business. All of that activity produces a chart, and that chart is equally visible to everyone.
Your size does not determine your skill. The market does not know how large your position is and does not behave differently because of it. A pair that moves thirty pips moves thirty pips for a bank and for a beginner alike. The only question that separates them is whether each one read the move correctly.
Being small has some real advantages, too. You are not obliged to trade. You have no clients expecting activity, no quarterly performance to report, no positions so large that entering or exiting one moves the price against you. You can simply wait for something you understand. Most of the pyramid above you cannot.
Ten minutes. This is where the pyramid stops being a diagram and starts being visible on a chart.
| Term | What It Means |
|---|---|
| Central bank | The institution responsible for a country's currency and its main interest rate. Examples: the Federal Reserve, the European Central Bank, the Bank of Japan, the Bank of England. |
| Intervention | The rare occasions when a central bank buys or sells its own currency directly to influence its price. |
| Interbank market | The market in which large banks trade currency with one another. The origin of the prices that reach retail screens. |
| Liquidity | How readily something can be bought or sold without difficulty. Provided in currency markets by institutions quoting both a bid and an ask continuously. |
| Hedge fund | A large private investment firm that trades to profit from price movement, typically with substantial resources and scale. |
| Hedging | Locking in a future exchange rate in advance to protect against unfavorable movement. Common among international businesses. |
| Counterparty | The other side of a trade. The party who sells when you buy, or buys when you sell. |
| Retail trader | An individual trading their own money, as opposed to an institution trading on behalf of clients or a firm. |
Eight questions. Answer them all before checking the key on the following pages. If a question gives you
trouble, the answer key tells you exactly which section to revisit.
Each answer explains why the correct choice is correct, why the others are not, and where to reread if
you want the fuller picture.
Central banks occupy the narrow top of the pyramid because they control the interest rate and the conditions that every other participant is reacting to.
A and C name participants who sit lower and operate within the conditions central banks set, though the big banks do carry far more daily volume. D describes the layer with the least influence over direction of the four listed, since corporations convert currency without any view on price.
Review: Section 2, The Pyramid
The mechanism is information rather than transaction. A rate decision or a statement causes every other layer to reposition, and the price moves before the central bank transacts anything.
A is the intuitive answer and the one this lesson exists to correct, though direct intervention does occasionally happen. C is wrong because commercial banks are not directed to trade in this way. D describes capital controls, which exist in some countries but are not how major central banks operate.
Review: Section 4, Why They Move Prices Without Trading
Big banks are the market's daily machinery. They handle enormous transaction volume and quote both a bid and an ask continuously, which is what makes the market usable for everyone else.
A is the central banks' role. C is wrong because regulation comes from government agencies rather than from banks. D describes what analysts and commentators do, which is not what makes big banks structurally important.
Review: Section 5, Big Banks
Corporations convert currency because their operations demand it. They get paid in one currency and have obligations in another, and would convert regardless of the rate.
A describes hedge funds and retail traders, not ordinary businesses. C misunderstands the relationship, since corporations are not acting on behalf of central banks. D is wrong because liquidity is a byproduct of their activity rather than its purpose.
Review: Section 7, Corporations
There are millions of retail traders and only a handful of institutions at the top, but retail accounts for a small single-digit share of daily volume by every serious estimate.
B is right about number and wrong about volume, which is the exact confusion this section addresses. C wildly overstates retail's share. D inverts the picture, since central banks number in the dozens worldwide while retail traders number in the millions.
Review: Section 8, Retail Traders
An announcement changes what everyone believes about a currency at the same moment, and every layer of the pyramid adjusts at once. Simultaneous repositioning produces large moves.
A is wrong because volume typically rises rather than being restricted. C misunderstands the mechanism, since the move happens without central bank transactions. D describes a real effect around major news, but it is a consequence of the volatility rather than its cause.
Review: Section 4, Why They Move Prices Without Trading
The pyramid widens downward because each layer contains more participants than the one above, while each individual participant carries less influence over price.
A inverts the relationship the shape is designed to show. C is wrong because wealth concentrates toward the top rather than the bottom. D is wrong because the pyramid describes present-day structure and says nothing about historical sequence.
Review: Section 2, The Pyramid
The market has no knowledge of your position size and does not behave differently because of it. A thirty pip move is a thirty pip move for everyone, so the task is reading direction.
A attributes an awareness to the market that it does not have. C confuses activity with skill, and trading more frequently to compensate for size is a reliable way to lose money. D is wrong because costs apply to positions of every size.
Review: Section 9, Your Size Does Not Determine Your Skill
Forex Foundations is written by Kanin D. Alldredge for The Currency Classroom, and it is free to read. CNS Pro adds a brief before every market open, his column, and the weekly and monthly letters.
See CNS Pro →