How Big Is The Forex Market?

The Forex market is absolutely huge, and unlike other markets – the New York Stock Exchange, or the London Stock Exchange for instance –  the Forex market has no physical location anywhere in the world, and does not even have a central exchange. Everything in the Forex market is run electronically, inside a network of the major banks, and operates 24 hours a day. It is what is known as an OTC, or Over The Counter market.

What that means is that the Spot Forex market can happen anywhere – at the top of Mount Everest if you like. In fact, the Forex OTC market is far and away the largest market of any description in the world. A huge number of organizations and individuals trade Forex all over the world. Traders decide with whom they wish to trade, which will depend on the attractiveness – or otherwise – of prices, trading conditions, and also the business reputation of the entity with whom they are considering trading.

The most commonly traded currencies are the USD, followed by the EUR, the JPY, the GBP, AUD, CHF, and CAD. The most traded currency – by far – is the USD and is on one side of no less than 84.9% of all transactions. The Euro is second at 39.1%, and the yen is at 19.0%. (While this may look ridiculous, the fact is that there are two currencies involved in every transaction, so the percentage share of individual currencies adds up to 200% – not 100%).

Of course, you will have noticed that the USD keeps cropping up in the conversation. That’s because the USD is a half of every major currency pair, and the major pairs take part in 75% of all trades globally. So you cannot ignore the USD!

In fact, according to the IMF (International Monetary Fund), the USD is about 62% of the world’s foreign exchange reserves. Every bank, business, and investor owns US dollars, and so they pay close attention to it.

However, there are many other reasons why the USD has a major role in the Forex market. The first is that the economy of the US is the largest in the world. It is also the reserve currency of the world. Almost everything that you buy or sell online is in US dollars. If you live in the UK and enter into a transaction with someone in the US, they will pay you in USD, not GBP.

The US is the overall military power in the world. It also has a very stable political system, and it has the largest financial markets anywhere.

Furthermore, the USD is the medium of exchange for many transactions between different countries. If Great Britain wants to buy gas from Russia, it has to pay in US dollars. If Great Britain has a shortage of dollars, then it has to sell GB pounds and buy US dollars in order to pay for the transaction.

There is one very important thing that you should note about the Forex market. That is that, while financial and commercial transactions are a part of the trading volume, by far the most currency trading is founded on speculation. What that means is that most of the volume of trading is from traders who make decisions to buy or sell based on intraday price movements.

Ha! That fooled you! What the heck does “intraday” mean?

All it really means is that it is a price movement in a single trading session. Another way of looking at it is it means “within the day”.

The vast majority of trading volume is from traders who buy and sell on intraday price movements. Something approaching 90% of all trades is brought about by these speculators.

Because the Forex market is so huge, the liquidity – which is simply the amount of buying and selling going on at any given moment – is also very high. It follows that it is therefore very easy for anyone to buy and sell currencies. There are always buyers in the market, and there are always sellers.

From the investor’s point of view, liquidity is extremely important. It determines that the price can change easily over any given period of time. In a liquid market, vast trading volumes can occur without there being any notable effect on the price.

Of course, despite the Forex market being relatively liquid, the DEPTH of the market can change. This depends on the currency pair, and also the time of day.

Watch this space.

In the Forex Trading Sessions part of the FXHQ Trading Academy, we’ll explain how the time of day can have an effect on the pair of currencies that you are trading.

Meanwhile, there are hundreds of ways in which you can trade currencies. However, in order to keep things simple, we’ve narrowed them down to just four.