The way the banks trade forex differs from the way that you or I trade. You will not be able to trade millions of dollars or have the confidence to stay in a market for hours at a time, but you can learn how to make money in the forex market by analyzing the way the big banks trade. By understanding how the big banks trade, you will be able to make moves based on what drives the market, and not relying on your own trading decisions.

The forex market is comprised of two main tiers: the interbank market and the over-the-counter market. In the interbank market, banks exchange currencies and set the exchange rate, while in the over-the-counter market, transactions are made electronically without involving third parties. Some historians believe that forex first came into existence thousands of years ago in the form of a barter system in which one person traded goods for others. This system developed during the Mesopotamian tribes, and was eventually refined by the Greeks, Egyptians, and other ancient civilizations.

The way the banks trade forex is largely dependent on the type of currencies that are traded. A Saudi oil billionaire can buy a stock in the US using money in a UK account, for example. But in the same way, the banks must balance their dollars and pounds, and purchase and sell assets to meet their balance sheets. When you buy something overseas with your credit card, you start a series of transactions. The same is true for other foreign currency purchases you make on your vacation.

While the forex spot market is decentralized, the largest banks in the world are the ones that determine the exchange rates and bid/ask spreads. These institutions collectively control the interbank market, and they take on massive amounts of currency transactions each day. In fact, some of them are called "flow monsters" because they take on huge amounts of transactions daily. The competition between the banks ensures that the exchange rates remain fair and the bid/ask spreads are narrow.

While there is an important practical component to Forex, it is primarily driven by the need of multinational corporations to pay for products and services overseas. This trade is the main reason for currency values, as over $5 trillion worth of products is bought and sold worldwide every day. It is important for banks and central banks to balance their holdings because every time an asset is bought or sold, funds move from one bank account to another. The result of all this is that currency values fluctuate, and this largely depends on the currency s value.

In addition to the commercial banks, foreign exchange dealers also play a vital role in the foreign exchange market. For example, Apple must exchange its U.S. dollars for Japanese yen when it buys electronic components from Japan. However, these transactions are done on a smaller scale than the interbank market, and the large volume of these deals create volatility in currency exchange rates. Governments and central banks are also regularly involved in the foreign exchange market.