$7.5 trillion trades daily in the forex market. Why? Not everyone is trying to profit. Multinational corporations hedge to protect margins. Central banks intervene to stabilize currencies. High-frequency traders arbitrage microsecond inefficiencies. But one group drives 90%+ of volume and creates every tradable trend: Speculators. Understanding who trades, why they trade, and which group moves the market is the difference between following random noise and riding institutional momentum.
Welcome to Lesson 6
You've mastered Market Structure, Sessions, and Liquidity Providers. You know WHAT moves and WHEN it moves. But here's the missing piece:
WHY does $7.5 trillion change hands every day?
The Professional Difference: Retail traders see price movement and chase it blindly. Professionals ask: "What's the INTENT behind this flow? Is this hedging (temporary), speculation (tradable trend), or arbitrage (instant correction)?" They analyze order flow, positioning data (COT reports), and session timing to identify speculative momentum. Intent determines outcome.
The Professional Difference: Retail traders see price movement and chase it blindly. Professionals ask: "What's the INTENT behind this flow? Is this hedging (temporary), speculation (tradable trend), or arbitrage (instant correction)?" They analyze order flow, positioning data (COT reports), and session timing to identify speculative momentum. Intent determines outcome.
Lesson Chapters
1The Three Primary Drivers
2Hedging - Risk Minimization
3Speculation - The Engine of Profit
4Arbitrage - Market Efficiency
5Summary, FAQs & Quiz
Summary
The forex market is driven by three key intentions:
Key Principles (0/3)
The Critical Insight: 90% of volume is speculation, and 100% of tradable trends come from speculation. Your job is to filter out hedging noise and align with speculative momentum.
Frequently Asked Questions
Q1: Is retail trading considered hedging or speculation?
Retail trading is 100% speculation.
Why:
- Goal: You trade to profit from price movements
- No underlying exposure: You don't own a business needing currency conversion
- Directional bets: You go long or short based on analysis
Professional Identity: Embrace this. You're a speculator. Your edge comes from aligning with larger speculators (institutions) who create the trends you ride.
Q2: Why is the volume of arbitrage so low today?
Technology killed arbitrage opportunities.
Today (2024):
- HFT algorithms, co-located servers
- Price updates every 0.001 seconds
- Arbitrage opportunities last 0.01-0.1 seconds
- Only algorithms can exploit them
- Arbitrage volume: less than 1% of market
Quiz
Which motive is responsible for creating sustained price trends and the majority of daily forex volume?
Answer:
Correct Answer: Speculation - Speculation is responsible for 90%+ of daily forex volume and creates all sustained price trends. Speculators trade with the intent to profit from directional moves, holding positions for hours/days/weeks. This sustained pressure creates the trends you trade.
A US-based car manufacturer selling Yen received from Japanese sales back into USD is an example of:
Answer:
Correct Answer: Commercial/Hedging Activity - This is Commercial/Hedging Activity. The manufacturer isn't speculating on USD/JPY direction—they're simply converting revenue for business purposes. This creates temporary volume but no sustained trend.
What is the fundamental goal of a trader engaging in Hedging?
Answer:
Correct Answer: To protect existing profits and minimize currency risk - The fundamental goal of hedging is to protect existing profits and minimize currency risk. Hedgers already have currency exposure and want to eliminate the risk of adverse rate moves.
Why is two-currency arbitrage no longer viable for retail traders?
Answer:
Correct Answer: High-Frequency Trading (HFT) algorithms instantly eliminate the price differences - HFT algorithms instantly eliminate price differences. Arbitrage opportunities now last 0.001-0.1 seconds. HFT firms detect and execute in milliseconds, capturing profit before the price updates on your screen.
How can you identify if a spike is likely speculative (tradable) or hedging (noise)?
Answer:
Correct Answer: All of the above are valid identification methods - Professional traders use multiple context clues: timing, duration, and correlation to distinguish speculative momentum from hedging noise.
Call to Action
You now know the three fundamental forces that move the market. Your focus must remain on the largest—Speculation.
Align Your Strategy with Institutional Flow
Practice identifying speculative momentum vs. hedging noise. Learn to trade WITH the 90% (speculation) and avoid the 9% (temporary hedging). Master the context clues that separate tradable trends from false signals.
Deriv
- Zero-spread accounts for tighter entries
- Swap-free (Islamic) available
XM
- Consistently low spreads on majors
- Micro accounts — start with a smaller risk
- Swap-free (Islamic) available
- No trading commission
🚀 Ready to align your strategy with institutional flow? Use our exclusive link to open your practice account!
Proceed to Lesson 7: Lot Sizes, Margin & Leverage
Prerequisites
Before studying this lesson, ensure you've completed:
Ready to understand market drivers? Knowing WHY participants trade helps you distinguish tradable trends from temporary noise.
Ready to continue?
Mark this lesson as complete to track your progress.