Forex Market (FX): It’s Size and Liquidity

The entire FX market runs electronically (online) using internet technology over a period of 24 hours and is surrounded by a chain of banks. Hence, it is known as the Over-The-Counter (OTC) market.

May 19, 2022 - 06:04 PM 501 views

Forex Market (FX): It’s Size and Liquidity

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The "Internet Bank Market" is a place where the volume of Forex trading (FX) takes place.

Unlike the other stock exchange markets such as the New York Stock Exchange (NYSE) or London Stock Exchange (LSE), the Forex market (FX) does not have any fixed office (i.e., neither a physical location nor a central exchange).

The entire FX market runs electronically (online) using internet technology over a period of 24 hours and is surrounded by a chain of banks. Hence, it is known as the Over-The-Counter (OTC) market.

Hence, we can conclude that the Forex market (FX) is spread across the globe with no physical existence. Therefore, the FX traders can trade and exchange currencies from anywhere in the world by just using an internet connection.

Therefore, the Forex OTC (Over the Counter) market is considered as the biggest and the most popular financial market in the world and it is traded world-wide by a large number of individuals and firms.

Depending on trading conditions, the price attractiveness, and the influence of trading counter-parties, in an OTC market, the traders can choose with whom they are willing to trade.

The below chart describes the seven most actively traded currencies in the world and their distribution in the Forex (FX) market.

The U.S. (USD) currency is the most traded currency in the world, comprising of 84.9%.

The Euro (EUR) occupies the second position and occupies 39.1%, and the Yen is placed at third with 19.0%.

The above chart clearly indicates that the major currencies are occupying the top spots.

In the FX market, the U.S. dollar is the king.

If the USD makes up half of every major currency pair and the majors account for 75% of all trades, paying attention to the dollar is a must. Hence, the US dollar (USD) becomes supreme.

According to the International Monetary Fund (IMF), the U.S. dollar (USD) occupies 62% of the world’s official foreign exchange reserves.

The central bank's foreign exchange reserves are assets kept in foreign currencies.

FX trading is done by the vast majority of traders, businesses, and central banks; they pay a major attention to the US. Dollar (USD).

Besides, there are various other important reasons why the U.S. dollar (USD) plays a significant role in the Forex market (FX):

·         The United States economy is the largest and biggest economy in the world.

·         The U.S. dollar (USD): It is the reserve currency (large quantity of currency stored by central banks and other major financial firms) of the world.

·         The United States (USA): It is the biggest, largest, and the most liquid financial market in the world.

·         The United States (USA): It has a stable political system.

·         The United States (USA) – It is the world’s sole military super power.

·         The United States (USA) comprises about half of all the international bonds and loans. Besides, lots of businesses, organizations, and foreign firms borrow in USD.

·         For major cross-border transactions, the U.S. dollar is the medium of exchange. For example, oil prices are determined in the U.S. dollars. For example, if Mexico wants to purchase oil from Saudi Arabia, first it has to convert its pesos into the US dollar and carry transaction by using the U.S. dollar.

Fundamentally, the world is heavily dependent on the USD to carry out its major transactions in businesses, loans, and payments.

Forex Market (FX) Speculations

The most important point to be noted in the Forex market (FX) is that although the financial transactions depend on the trading volume, but the majority of the currency trading is based on speculation (i.e., guesswork).

Based on the near-term price movements of the currency pairs, the majority of the trading volume will come from traders who can buy and sell currencies.

However, the trading volume brought by the speculation is predicted to be more than 90%.

The FX market is measured in terms of liquidity; the quantity of buying and selling volume happening at any given period of time should be extremely high. This makes it easy for anyone to purchase and sell currencies.

In terms of a trader’s perspective, liquidity is highly important because it determines how easily the price varies over a period of time.

A liquid market environment, such as in Forex, it allows for large trading volumes with little impact on the price or price action.

The Forex market (FX) happens to be of high liquidity, hence the market depth varies depending on the currency pair and time of the day.

In our upcoming Forex sessions, we will be learning how the trading time could have adverse affects on the currency pair you’re trading.

So, for the time being and in our next class, we will learn about – In how many different ways an individual can trade currencies.

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