Foreign Exchange (FX Dealers & Trading Strategies/Forward FX Market)

Trading in the Money Markets and Foreign Exchange

Money Markets

  • Buying and selling currencies
  • Trading short term debt instruments
  • 24 hours per day and is either OTC or through automated electronic systems
  • Financial Data Needs:
  1. FX rates
  2. Bank deposit rates
  3. News
  4. Graphical/Technical Analysis
  5. Economic indicators

Foreign Exchange

  • Trade in the same environment
  • Use the same trading methods
  • Financial Data Needs:
  1. FX rates
  2. Bank deposit rates
  3. Graphical/Technical Analysis
  4. News
  5. Economic indicators


  • Can operate across all markets
  • Buying and selling futures, options, swaps
  • Trading on their own account or for clients
  • Financial Data Needs:
  1. Information on underlying instruments
  2. Prices from exchanges
  3. Technical analysis
  4. News

Important Principles of Foreign Exchange Trading

Bid/Offer Spread

  1. Bid/offer spread for interest rates and exchange rates vary, market conditions
  2. Market is calm and volumes are high, spreads are small
  3. When market is volatile and volumes are thin, the spread will widen

Position Control

  1. Danger of over exposure to an individual counterparty
  2. Management must control and evaluate positions quickly
  3. Dealers need to know their average position
  4. The slower the average position is calculated, the higher the risk


  1. Early access to news is crucial
  2. Reuters and Bloomberg

Foreign Exchange Dealers

How do they operate?

  1. Most dealers specialize in one of the major currency pairs
  2. USD is the predominant currency in FX dealings and appears in over 80% of all transactions
  3. Dealers are motivated by profits, fast moving environment, quick thinking and able to prioritize information

Dealing Task

  • In order to form opinions and set rates for currencies:
  1. Fundamental factors
  2. Technical factors
  3. Institutional factors

Types of Foreign Exchange Dealers

Corporate/Marketing Dealers

  1. Handles and looks after the interest of the bank’s corporate customers
  2. Do not take currency positions
  3. Obtain information and rates
  4. Needs to have a wide knowledge of market developments and products

Interbank Dealers/Traders

  1. Trade currencies on behalf of the bank
  2. Takes calculated risk
  3. Trade mostly with other banks
  4. Divided into three types:


  • Short term traders
  • Mainly junior dealers
  • Intra-day traders
  • Trade on impulse, rumors, instincts


  • Day trader
  • Longer term view
  • Maybe interday or intraday trader
  • Long/short position


  • Strategic dealers
  • Structural positions
  • Sizeable/highly risky positions
  • Experience traders

FX Positions Keeping and Trading Limits

Positions Keeping

  1. Dealers holding open positions must work out aggregate positions across all deals done
  2. Dealers need to know the positions and whether or not to square these positions
  3. The net position at the end of the day is marked to market at current exchange rates

Dealers Limits

  1. Maximum size a dealers open positions is controlled by the bank
  2. Limits are set based on risk and traders track record
  3. Traders make more profit by taking less risk is given larger limits
  4. Unless computerized, dealers keep track of their FX positions through manual trading blotters or trading sheets

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