The forex market, unlike other financial markets such as the New York Stock Exchange (NYSE) or the London Stock Exchange (LSE), does not have a physical location or a central exchange. Because the entire market is run electronically, inside a network of institutions, continually over a 24-hour period, the FX market is classified as an over-the-counter (OTC) market.
This means that the foreign exchange market is dispersed globally, with no central center.
Trading can be done from anyplace with an internet connection.
The OTC forex market is the world’s largest and most popular financial market. A significant number of individuals and organizations trade it on a global scale. Participants in the OTC market can be selective and choose who they want to trade with based on trading conditions, pricing attractiveness, and trading partner reputation.
The seven most actively traded currencies are depicted in the graphic below.
*Because two currencies are involved in each transaction, the percentage amount is part of the individual currency amounts to 200%, not 100%.
The most traded currency is the US Dollar (USD), accounting for 84.9% of all transactions! The euro was second with 39.1%, and the yen was third with 19.0%.
As you can see, the majority of the main currencies are at the top of this list!
US Dollar is King of Stock Market
You may have noticed how frequently we bring up the US currency (USD).
If the USD takes up half of every major currency pair, and the major accounts for 75% of all trades, you should pay attention to the US dollar. The US dollar is supreme!
In fact, the International Monetary Fund (IMF) estimates that the US dollar accounts for over 62% of the world’s official foreign exchange reserves! Foreign exchange reserves are assets held by the central bank as reserves in foreign currency. The US dollar is important since practically every investor, enterprise, and central bank owns one.
- The United States has the WORLD’S LARGEST economy.
- The US dollar is the world’s reserve currency.
- The United States possesses the world’s largest and most liquid financial markets.
- The political system of the United States is stable.
- The United States is the only military superpower in the world.
- The US dollar accounts for over half of all international loans and bonds. Many countries and overseas corporations borrow in USD.
- For many cross-border transactions, the US dollar serves as the medium of exchange. Oil, for example, is priced in US dollars. Also known as “petrodollars.” As a result, if Japan wishes to buy oil from Saudi Arabia, it can only do it in US dollars. If Japan does not have any dollars, it must first sell its yen and then purchase US dollars.
Speculation in the Forex Market
One thing to keep in mind regarding the forex market is that, while commercial and financial transactions account for a portion of trade activity, the majority of currency trading is speculative.
In other words, the majority of trading volume is generated by traders buying and selling currency pairs based on short-term price changes.
The trading volume brought in by speculators is estimated to be more than 90%!
Because of the size of the forex market, liquidity – the amount of buying and selling activity that occurs at any given time – is quite high. Anyone can purchase and sell currencies as a result of this. From the perspective of a trader, liquidity is critical since it dictates how easily prices can move over time. Large trading volumes can occur in a liquid market environment, such as forex, with no effect on pricing or price behavior.
While the forex market is very liquid, the market depth varies based on the currency pair and time of day.
Next Lesson: Buying and Selling Currency Pair