What is Forex: Market Size And Liquidity
Unlike other financial markets like the New York Stock Exchange,
the forex market has neither a physical location nor a central exchange.
The forex market is considered an Over-the-Counter (OTC),
or “Interbank” market due to the fact that the entire market is run
electronically, within a network of banks, continuously over a 24-hour period.
This means that the spot forex market is spread all over the
globe with no central location. They can take place anywhere, even at the top
of Mt. Fuji!
The forex OTC market is by far the biggest and most popular
financial market in the world, traded globally by a large number of individuals
and organizations.
In the OTC market, participants determine who they want to trade
with depending on trading conditions, attractiveness of prices, and reputation
of the trading counterpart.
The chart below shows the seven most actively traded
currencies.
The dollar is the most traded currency, taking up 84.9% of all
transactions. The euro’s share is second at 39.1%, while that of the yen is
third at 19.0%. As you can see, most of the major currencies are hogging the
top spots on this list!
*Because two currencies are involved in each
transaction, the sum of the percentage shares of individual currencies totals
200% instead of 100%
The chart above shows just how often the U.S. dollar is traded
in the forex market. It is on one side of a ridiculous 84.9% of all reported
transactions!
The
Dollar is King in the Forex Market
You’ve probably noticed how often we keep mentioning the U.S.
dollar (USD). If the USD is one half of every major currency pair, and the
majors comprise 75% of all trades, then it’s a must to pay attention to the
U.S. dollar. The USD is king!
In fact, according to the International Monetary Fund (IMF), the U.S. dollar
comprises roughly 62% of the world’s official foreign exchange reserves!
Because almost every investor, business, and central bank own it, they pay
attention to the U.S. dollar.
There are also other significant reasons why the U.S. dollar
plays a central role in the forex market:
§ The United States economy
is the LARGEST economy in the world.
§ The
U.S. dollar is the reserve currency of the world.
§ The
United States has the largest and most liquid financial markets in the world.
§ The
United States has a super stable political system.
§ The
United States is the world’s sole military superpower.
§ The U.S.
dollar is the medium of exchange for many cross-border transactions. For
example, oil is priced in U.S. dollars. So if Mexico wants to buy oil from
Saudi Arabia, it can only be bought with U.S. dollar. If Mexico doesn’t have
any dollars, it has to sell its pesos first and buy U.S. dollars.
Speculation
in the Forex Market
One important thing to note about the forex market is that while
commercial and financial transactions are part of trading volume, most currency
trading is based on speculation.
In other words, most trading volume comes from traders that buy
and sell based on intraday price movements.
The trading volume brought about by speculators is estimated to
be more than 90%!
The scale of the forex market means that liquidity – the
amount of buying and selling volume happening at any given time – is extremely
high.
This makes it very easy for anyone to buy and sell currencies.
From the perspective of an investor, liquidity is very important
because it determines how easily price can change over a given time period. A
liquid market environment like forex enables huge trading volumes to happen
with very little effect on price, or price action.
While the forex market is relatively very liquid, the market
depth could change depending on the currency pair and time of day.
In our forex trading
sessions part of the school, we’ll tell you how the time of
your trades can affect the pair you’re trading.
In the meantime, here are a few tricks on how you can trade
currencies in gazillion ways. We even narrowed it down to four!
#StartTradingWithUs #Forex #Trading
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