Forex Market Size And Liquidity

Forex Market Size And Liquidity: Lesson no 4

Now, when we talk about forex, the majority of the action takes place on something called the “interbank market.” It’s not like the New York Stock Exchange or the London Stock Exchange, there is no physical location or central exchange.

Consider this the forex market functions electronically, much like a very large internet network connecting banks and financial institutions.The forex market never sleeps.

So, why is it known as an over-the-counter (OTC) market? That’s because it’s not limited to a single region, it’s happening all around the world. As long as you have an internet connection, you may participate in the action from anywhere!

Now let’s talk about the main player, the Forex Interbank Network. This is where the real action takes place. The forex OTC market is the largest of all financial marketplaces. People and organisations from all around the world participate in this worldwide trading entertainment.

In the OTC world, you have options. You can choose who you trade with depending on factors such as trading conditions, how favourable the prices appear, and the other party’s reputation.

Take a look at this chart, which provides information on the seven most popular currencies in the forex market.

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The US dollar remains superior, accounting for 84.9% of all transactions. It is the preferred option for many people.

The euro comes next, at 39.1%, followed by the yen (19.0%). These main currencies are the big shots in the money world, much like the popular kids at school.

So, when it comes to the forex market, these currencies are the actual leaders, driving the action and occupying the top positions on the charts. 

The Dollar is King in the Forex Market

Let’s talk about the US dollar (USD), which is very essential in forex.

Why? Half of the top currency pairs include the USD. And you know what? These key pairs account for 75% of all trades. As a result, the USD remains dominant in the FX market!

According to the International Monetary Fund (IMF), USD accounts for around 62% of the world’s important foreign money savings. So, what are foreign money savings? It’s similar to how a large bank holds money in multiple currencies.

It’s important since the USD is held by almost everyone, from investors to corporations and large banks. Everyone is keeping an eye out for the US dollar!

Let’s discuss why the US dollar is so important in the FX business. Here are a few main reasons:

First and foremost, the United States has the world’s greatest economy. It’s similar to the heavyweight champion of economy.

The United States (US) dollar is the world’s reserve currency. Consider it the currency that everyone accepts and relies on.

Financial Powerhouse: The US has the world’s largest and busiest financial markets. It’s the worldwide version of the financial markets.

Politics: Stability is important! The US has a strong and stable political structure, which contributes to people’s trust in the US dollar.

Military Superpower: In addition to being an economic powerhouse, the United States is also a military superpower. It is the only superpower in the entire world.

International Borrowing: Approximately half of all international loans and bonds are in US dollars. Many countries and businesses borrow in USD.

Medium of Exchange: The US dollar is the preferred currency for many global transactions. For example, when countries buy and sell oil, all transactions are conducted in US dollars, sometimes known as “petrodollars.” So, if Japan wants to buy oil from Saudi Arabia, it must pay in US dollars. If Japan does not have any, they will have to exchange their yen for US dollars.

Simply put, the world relies heavily on a stable supply of US dollars. Why? We utilise them to trade, make payments, and take out loans. It’s like the universal currency everyone needs to keep things functioning properly.

Speculation in the Forex Market

So, what does the forex market actually do? Here are the main functions such as

Move Money Between Countries: It facilitates the transfer of funds from one country’s currency to another.

Give Quick financing for International Trade: It offers short-term financing for transactions between countries.

Safeguard Against Currency Changes: People use it to safeguard themselves from currency fluctuations when doing business with foreign countries.

Speculate, Speculate, Speculate: A large portion of the forex market consists of people guessing (or speculating) about how currency prices will move.

Here’s an interesting fact: while businesses and financial transactions occur regularly in the forex market, most of the time, people are simply betting on whether a currency’s price will rise or fall in the short term.

And get this these speculators account for over 90% of all forex market activity! It’s like a big guessing game.

Because there is so much activity taking place in the forex business, it is extremely simple to purchase or sell a large amount of money without causing significant price fluctuations. We call this “market liquidity,” and it refers to how smoothly items may move in the market.

Since the 1970s, this liquidity has been a game changer, making it easier and more beneficial for everyone involved, particularly those looking to purchase or sell in the short time.

So, if you’re a short-term trader, you’re focused on liquidity since it determines how quickly prices fluctuate.

In the forex business, we have this amazing concept known as a “liquid market.” It’s similar to a large party when there is a lot of trade but it doesn’t actually move up the prices – this is referred to as “price action.”

Now, even though the forex market is normally very liquid, things can change. The “market depth,” or the amount of trading that takes place, is determined by the currencies involved and the time of day.

In our forthcoming sessions, we’ll look at how the timing of your transactions can affect the pairs you’re working with.

But, for the time being, let’s shift modes and look at how ordinary people like you and me may get involved in forex trading.