Market participants

Unlike a stock market, the foreign exchange market is divided into levels of access. At the top is the interbank market, which is made up of the largest commercial banks and securities dealers. Within the interbank market, spreads, which are the difference between the bid and ask prices, are razor sharp and not known to players outside the inner circle. The difference between the bid and ask prices widens (for example from 0-1 pip to 1-2 pips for a currencies such as the EUR) as you go down the levels of access. This is due to volume. If a trader can guarantee large numbers of transactions for large amounts, they can demand a smaller difference between the bid and ask price, which is referred to as a better spread. The levels of access that make up the foreign exchange market are determined by the size of the "line" (the amount of money with which they are trading). The top-tier interbank market accounts for 53% of all transactions. From there, smaller banks, followed by large multi-national corporations (which need to hedge risk and pay employees in different countries), large hedge funds, and even some of the retail market makers. According to Galati and Melvin, “Pension funds, insurance companies, mutual funds, and other institutional investors have played an increasingly important role in financial markets in general, and in FX markets in particular, since the early 2000s.” (2004) In addition, he notes, “Hedge funds have grown markedly over the 2001–2004 period in terms of both number and overall size”.[9] Central banks also participate in the foreign exchange market to align currencies to their economic needs.
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Banks

The interbank market caters for both the majority of commercial turnover and large amounts of speculative trading every day. Many large banks may trade billions of dollars, daily. Some of this trading is undertaken on behalf of customers, but much is conducted by proprietary desks, which are trading desks for the bank's own account. Until recently, foreign exchange brokers did large amounts of business, facilitating interbank trading and matching anonymous counterparts for large fees. Today, however, much of this business has moved on to more efficient electronic systems. The broker squawk box lets traders listen in on ongoing interbank trading and is heard in most trading rooms, but turnover is noticeably smaller than just a few years ago.[citation needed]
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Commercial companies

An important part of this market comes from the financial activities of companies seeking foreign exchange to pay for goods or services. Commercial companies often trade fairly small amounts compared to those of banks or speculators, and their trades often have little short term impact on market rates. Nevertheless, trade flows are an important factor in the long-term direction of a currency's exchange rate. Some multinational companies can have an unpredictable impact when very large positions are covered due to exposures that are not widely known by other market participants.
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Central banks

National central banks play an important role in the foreign exchange markets. They try to control the money supply, inflation, and/or interest rates and often have official or unofficial target rates for their currencies. They can use their often substantial foreign exchange reserves to stabilize the market. Nevertheless, the effectiveness of central bank "stabilizing speculation" is doubtful because central banks do not go bankrupt if they make large losses, like other traders would, and there is no convincing evidence that they do make a profit trading.

Market psychology

Market psychology

Market psychology and trader perceptions influence the foreign exchange market in a variety of ways:
Flights to quality: Unsettling international events can lead to a "flight to quality", a type of capital flight whereby investors move their assets to a perceived "safe haven". There will be a greater demand, thus a higher price, for currencies perceived as stronger over their relatively weaker counterparts. The U.S. dollar, Swiss franc and gold have been traditional safe havens during times of political or economic uncertainty

Long-term trends: Currency markets often move in visible long-term trends. Although currencies do not have an annual growing season like physical commodities, business cycles do make themselves felt. Cycle analysis looks at longer-term price trends that may rise from economic or political trends.

"Buy the rumor, sell the fact": This market truism can apply to many currency situations. It is the tendency for the price of a currency to reflect the impact of a particular action before it occurs and, when the anticipated event comes to pass, react in exactly the opposite direction. This may also be referred to as a market being "oversold" or "overbought".[18] To buy the rumor or sell the fact can also be an example of the cognitive bias known as anchoring, when investors focus too much on the relevance of outside events to currency prices.
Economic numbers: While economic numbers can certainly reflect economic policy, some reports and numbers take on a talisman-like effect: the number itself becomes important to market psychology and may have an immediate impact on short-term market moves. "What to watch" can change over time. In recent years, for example, money supply, employment, trade balance figures and inflation numbers have all taken turns in the spotlight.

Technical trading considerations: As in other markets, the accumulated price movements in a currency pair such as EUR/USD can form apparent patterns that traders may attempt to use. Many traders study price charts in order to identify such patterns.

some rules of forex trading

ok now let us go through some rules of forex trading

1)Trading Is An Art, Not A Science
The systems and ideas presented here stem from years of observation of price action in this market and provide high probability approaches to trading both trend and countertrend setups, but they are by no means a surefire guarantee of success. No trade setup is ever 100% accurate. Therefore, no rule in trading is ever absolute (except the one about always using stops!). Nevertheless, these 10 rules work well across a variety of market environments, and will help to keep you out of harm's way.

2)Never Let A Winner Turn Into A Loser
The FX markets can move fast, with gains turning into losses in a matter of minutes, making it critical to properly manage your capital. There is nothing worse than watching your trade be up 30 points one minute, only to see it completely reverse a short while later and take out your stop 40 points lower. You can protect your profits by using trailing stops and trading more than one lot. For more on this

3)Logic Wins; Impulse Kills
It can be a huge rush when a trader is on a winning streak, but just one bad loss can make the same trader give all of the profits and trading capital back to the market. Reason always trumps impulse because logically focused traders will know how to limit their losses, while impulsive traders are never more than one trade away from total bankruptcy. To get a better understanding of traders

4)Never Risk More Than 2% Per Trade
This is the most common and most violated rule in trading. Trading books are littered with stories of traders losing one, two, even five years' worth of profits in a single trade gone terribly wrong. By setting a 2% stop-loss for each trade, you would have to sustain 10 consecutive losing trades in a row to lose 20% of your account.

5)Use Both Technical And Fundamental Analysis
Both methods are important and have a hand in impacting price action. Fundamentals are good at dictating the broad themes in the market that can last for weeks months or even years. Technicals can change quickly and are useful for identifying specific entry and exit levels. A rule of thumb is to trigger fundamentally and enter and exit technically. For example, if the market is fundamentally a dollar-positive environment, we'd technically look for opportunties to buy on dips rather than sell on rallies.

6)Always Pair Strong With Weak
When a strong army is positioned against a weak army, the odds are heavily skewed toward the strong army winning. This is the way you should approach trading. When we trade currencies, we are always dealing in pairs - every trade involves buying one currency and shorting another. Because strength and weakness can last for some time as economic trends evolve, pairing the strong with the weak currency is one of the best ways for traders to gain an edge in the currency market
7) Being Right And Early Means You Are Wrong
In FX, successful directional trades not only need to be right in analysis, but they also need to be right in timing as well. If the price action moves against you, even if the reasons for your trade remain valid, trust your eyes, respect the market and take a modest stop. In the currency market, being right and being early is the same as being wrong. Consider a scenario where a trader takes a short position during a rally in anticipation of a turnaround. The rally continues for longer than anticipated, so the trader exits early and takes a loss - only to find that the rally eventually did turn around and their original position could have been profitable

8)Differentiate Between Scaling In And Adding To A Loser
The difference between adding to a loser and scaling in is your initial intent before you place the trade. Adding to a losing position that has gone beyond the point of your original risk is the wrong way to trade. There are, however, times when adding to a losing position is the right way to trade. For example, if your ultimate goal is to buy a 100,000 lot, and you establish a position in clips of 10,000 lots to get a better average price, this type of strategy is known as scaling in

9)What Is Mathematically Optimal Is Psychologically Impossible
Novice traders who first approach the markets will often design very elegant, very profitable strategies that appear to generate millions of dollars on a computer backtest. Armed with such stellar research, these newbies fund their FX trading accounts and promptly proceed to lose all of their money. Why? Because trading is not logical but psychological in nature, and emotion will always overwhelm the intellect in the end. Conventional wisdom in the markets is that traders should always trade with a 2:1 reward-to-risk ratio, the trader can be wrong 6.5 times out of 10 and still make money. In practice this is quite difficult to achieve.

10)Risk Can Be Predetermined; Reward Is Unpredictable
Before entering every trade, you must know your pain threshold. You need to figure out what the worst-case scenario is and place your stop based on a monetary or technical level. Every trade, no matter how certain you are of its outcome, is an educated guess. Nothing is certain in trading. Reward, on the other hand, is unknown. When a currency moves, the move can be huge or small

11)No Excuses, Ever
The "no excuses" rule is applicable to those times when the trader does not understand the price action of the markets. For example, if you are short a currency because you anticipate negative fundamental news and that news occurs, but the currency rallies instead, you must get out right away. If you do not understand what is going on in the market, it is always better to step aside and not trade. That way, you will not have to come up with excuses for why you blew up your account. It's acceptable to sustain a drawdown of 10% if it was the result of five consecutive losing trades that were stopped out at a 2% loss each. However, it is inexcusable to lose 10% on one trade because the trader refused to cut his losses