FOREX MARKET SIZE KEY POINTS:
- The forex market is the biggest and most active market globally.
- Forex transactions are primarily dominated by the US dollar.
- The market’s deep liquidity benefits traders by enabling quick entry and exit.
WHAT IS THE SIZE AND VALUE OF THE FOREX MARKET?
The Bank for International Settlements’ 2016 triennial report stated that the average daily turnover in the foreign exchange market was $5.1 trillion. This is a decrease from the 2013 report, which stated a daily average of $5.4 trillion. The majority of forex trading occurs in only a few countries. The chart below shows the percentage of total average turnover represented by the major global trading desks.
The large capitalization of the forex market means that it is less susceptible to volatility, as large trades do not significantly impact market prices. In smaller markets, large institutions or traders can easily influence prices, but this impact is diluted in the forex market.
The forex market consists of several key players, with banks being the most influential. The interbank market, where banks trade with each other, clients, and their own desks, accounts for the largest volume of foreign exchange trading. US banks hold the majority share of this market. Other participants include central banks, investment managers, hedge funds, corporations, and retail traders. Approximately 90% of this volume is generated by currency speculators taking advantage of intraday price movements.
As a retail trader, it is important to understand the size and complexity of the forex market and how its various components interact in order to develop a successful trading strategy.
VOLUME OF FOREX TRADING
The high liquidity of the forex market attracts traders from other markets. Liquidity allows traders to easily enter and exit positions 24 hours a day, 5.5 days a week, without causing large price fluctuations that would occur in less liquid markets. This means that traders will never be stuck in a position due to a lack of buyers. However, liquidity can vary between trading sessions and currency pairs.
The most traded currency pairs, EUR/USD and USD/JPY, account for about 41% of all forex trades annually, which is significant considering the size of the forex market. Interestingly, most of the pairs shown in the diagram below are USD crosses.
The US Dollar accounts for 85% of forex trading volume, with the Euro in second place at nearly 40% and the Japanese Yen in third at almost 20%. With trading volume concentrated in these three currencies, forex traders can focus on just a few major pairs. The high liquidity of the forex market also makes it conducive to well-defined, long-term trends that respond well to technical analysis and charting methods.
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HOW TO BENEFIT FROM THE FOREX MARKET?
Forex traders need to know how to analyze the market based on different factors that affect the price and demand of currencies. These factors include:
Fundamental Analysis: This is the study of how economic, social and political events influence the supply and demand of currencies. For example, interest rates, growth, inflation and political stability can make a currency more or less attractive to investors.
Technical Analysis: This is the use of charts and patterns to identify trends and key levels where traders can buy or sell currencies, depending on the signals they get from the charts.
Money Management: This is the skill of managing risk and reward in trading. Traders need to know how much they can afford to lose or gain on each trade, and how to adjust their position size, entry and exit points accordingly. Forex traders combine these methods of analysis to find a trading style that suits them. They also keep track of the latest news and events that can affect the forex market. A technical trader may rely on various tools and indicators to make trading decisions based on the chart movements. Client sentiment can also help forex traders to anticipate potential reversals, entry and exit points in the market.
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