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What is the size of the forex market and its liquidity?

What is the size of the forex market and its liquidity?


Another interesting week in markets as the week comes to an end. We could see more volatility as $2.1 trillion option notional expires. Read below to find out more.

Foreign exchange, also referred to as Forex or FX, is the buying and selling of other currencies with the intention of profiting from variations in their value. The forex market has a high level of liquidity as it is by far the biggest market in the world, bigger than the stock market or any other. 

The “interbank market” is where majority of FX trading is conducted. Although deemed the largest financial market, it lacks both a physical location and a central exchange when compared to the New York Stock Exchange (NYSE) or London Stock Exchange (LSE).

The forex market is considered a global decentralized or over-the-counter (OTC) market due to the fact that the entire market is operated electronically, continually throughout a 24-hour period, within a network of institutions.

The FX market is therefore dispersed globally and lacks a core center. Trading is possible from anyplace as long as you have an Internet connection.

The FX OTC market, which is traded on a global scale by numerous people and businesses, is by far the largest and most well-known financial market in the world.

Participants choose who they wish to trade within an OTC market based on trading conditions, price appeal, and the reputation of the trading counterparty (the other party who takes the opposite side of your trade).

The seven currencies that are exchanged the most are displayed in the graph below.

*Each transaction involves two different currencies, therefore the sum of their respective percentage shares is actually 200% rather than 100%.

With 84.9% of all transactions being in the U.S. dollar, it is the most frequently exchanged currency.

With a share of 39.1%, the Euro is in second place, followed by the yen with a share of 19.0%.

As you can see, this list’s top slots are taken up by the majority of the main currencies!

The Dollar is King in the Forex Market

You may have noticed how frequently we refer to the US dollar (USD) in the global market.

The U.S. dollar must be taken into consideration since it makes up half of all major currency pairs and 75% of all trades. Hence, the USD is supreme!

The International Monetary Fund (IMF) estimates that the dollar makes up about 62% of the world’s official foreign exchange reserves. The assets held in reserve by a central bank in foreign currencies are known as foreign exchange reserves. They pay attention to the U.S. dollar since practically every investor, company, and central bank owns it.

Other important factors that contribute to the U.S. dollar’s dominant position in the forex market include:

The United States has the biggest economy on earth.

The US dollar serves as the world’s reserve currency.

The largest and most liquid financial markets are found in the United States.

The political system in the United States is one of the most stable.

The only military superpower in the world is the United States.

For many cross-border transactions, the medium of exchange is the U.S. dollar. For instance, the price of oil is expressed in USD. Likewise known as “petrodollars.” Therefore, Mexico may only use U.S. dollars to purchase oil from Saudi Arabia. Mexico must first sell its pesos and purchase dollars to initiate transactions.

Market Speculation in Foreign Exchange

The majority of currency trading on the forex market is based on speculation, despite the fact that commercial and financial transactions make up a portion of the trading volume. In other words, traders who buy and sell based on short-term price movements  in the prices of currency pairs for the majority of trading volume.

Speculators are thought to be responsible for more than 90% of trade volume! Because of the size of the forex market, liquidity—the volume of buying and selling taking place at any given moment—is very high.

This makes buying and selling currencies incredibly easy for anyone who wants to pursue trading.

Liquidity is crucial from a trader’s point of view since it affects how quickly prices can fluctuate over a specific time frame.

Large trade volumes can occur in a highly liquid market setting, such as the currency market, with relatively little impact on pricing or price action.

The market depth may vary based on the currency pair and time of day even though the FX market is generally quite liquid.

We’ll discuss how the time of your transactions can impact the pair you’re trading in our section on forex trading sessions.

In the next article, you will learn different ways that individuals can trade currencies

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