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Forex Market Size: A Traders Advantage


by Gregory McLeod

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Forex Market Size Talking Points

  • The Forex market is the largest and most liquid market in the world.
  • The US dollar makes up the majority of Forex transactions
  • The Forex market’s deep liquidity is advantageous to traders by allowing them to enter and exit the market instantaneously

According to the Bank for International Settlements, foreign-exchange trading increased to an average of $5.3 trillion a day. To put this into perspective, this averages out to be $220 billion per hour. T he foreign exchange market is largely made up of institutional investors, corporations, governments, banks, as well as currency speculators. Roughly 90% of this volume is generated by currency speculators capitalizing on intraday price movements.

Unlike the stock and futures market that are housed in central physical exchanges, the Foreign exchange market is an over-the-counter market , decentralized market completely housed electronically. Banks from Hong Kong to Zurich and from London to New York. Though most investors are familiar with the stock market, they are unaware how small in volume it is in relation to the Forex market.

Forex Vs Other Markets

In the diagram above, it can be easily seen how the FX market’s $5.3 trillion per day in trading volume dwarfs the equities and futures markets. In fact, it would take thirty days of trading on the New York stock exchange to equal one day of Forex trading!

Traders from other markets are attracted to the Forex because of this extremely high levels of liquidity. Liquidity is important as it allows traders to get in and out of a position at with ease 24 hours a day 5 ? days a week. It allows large trading volumes to enter and exit the market without the large fluctuations in price that would happen in less liquid market. This means that if you will never get in a position because of the lack of a buyer. This liquidity can vary from one trading session to another and one currency pair to another as well.

Volume of Currencies Forex

As the most traded currency, the US dollar makes up 85% of Forex trading volume. At nearly 40% of trading volume, the euro is ahead of the third place Japanese yen that takes almost 20%. With volume concentrated mainly in the US Dollar, Euro and Yen , Forex traders can focus their attention on just a handful of major pairs. In addition, the greater liquidity found in the Forex market is conducive to long, well-defined trends that respond well to technical analysis and charting methods.

In sum, the Forex market size and depth make it the ideal trading market. This liquidity makes it easy for traders to sell and buy currencies. This is why traders from all different asset classes are turning to the Forex market.

To get involved in the large and exciting world of forex check out our Forex for Beginners trading guide.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

Forex Market Size And Liquidity

Unlike other financial markets like the New York Stock Exchange (NYSE) or London Stock Exchange (LSE), 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.

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 an OTC market, participants determine who they want to trade with depending on trading conditions, the attractiveness of prices, and reputation of the trading counterpart.

The chart below shows the seven most actively traded currencies.

*Because two currencies are involved in each transaction, the sum of the percentage shares of individual currencies totals 200% instead of 100%

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!

The Dollar is King in the Forex Market

You’ve probably noticed how often we keep mentioning the U.S. dollar (USD).

In fact, according to the International Monetary Fund (IMF), the U.S. dollar comprises roughly 64% 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 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. Also called “petrodollars.” 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 the trading volume, most currency trading is based on speculation.

In other words, most of the 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 a trader, liquidity is very important because it determines how easily price can change over a given time period.

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!

Forex Market Overview

The foreign exchange market is the most actively traded market in the world. More than $5 trillion are traded on average every day. By comparison, this volume exceeds global equities trading volumes by 25 times.

Foreign exchange is largely an over-the-counter market, meaning trading takes place on electronic platforms and via telephone between banks and other market participants. Today only about three per cent of foreign exchange is transacted on exchanges in the form of futures and options contracts.

What is traded on the foreign exchange market? The simple answer to this question is currencies.

Although currencies from every country make up the foreign exchange market, most volume is concentrated in a small number of currencies. These currencies that are traded most often are called major currencies. They are:

  • USD: United States / Dollar
  • EUR: Euro Zone / Euro
  • JPY: Japan / Yen
  • GBP: United Kingdom / Pound
  • CAD: Canada / Dollar
  • CHF: Switzerland / Franc
  • AUD: Australia / Dollar

Similar to the major currencies, there are major currency pairs, which are the most commonly traded currency pairs. These major pairs are:

  • EUR/USD: Euro Zone / United States
  • USD/JPY: United States / Japan
  • GBP/USD: United Kingdom / United States
  • USD/CHF: United States / Switzerland
  • USD/CAD: United States / Canada
  • AUD/USD: Australia / United States

Notice how the USD is involved in each of these currency pairs. The reason behind this is that the USD is the reserve currency of the world, as it has the world's biggest economy with a stable political system. The USD can be trusted as a fallback currency as it has the highest amount of strength when compared to other currencies.

Although these are the most commonly traded currency pairs, it doesn't mean that they are the only ones that can be bought and sold.

There are also major currency crosses, also called, "minor pairs", and exotic currency pairs.

Major currency crosses are currency pairs that involve the major currencies but don't involve the USD in the pair. There are many currency crosses as many different combinations can be made but the most common minor pairs involve the euro, yen, or the pound, the most commonly traded one being the EUR/JPY pair.

Exotic pairs are currency pairs that involve the USD and a currency of an emerging economy. Some of the exotic pairs are:

  • USD/NOK: United States / Norway
  • USD/DKK: United States / Denmark
  • USD/SEK: United States / Sweden
  • USD/MXN: United States / Mexico
  • USD/ZAR: United States / South Africa
  • USD/THB: United States / Thailand
  • USD/ HKD: United States / Hong Kong
  • USD/SGD: United States / Singapore

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