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Forex Market Size: A Trader's Advantage

Forex Market Size: A Trader's Advantage

2019-01-15 14:46:00
Warren Venketas, Markets Writer
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Forex Market Size Talking Points:

  • The forex market is the largest and most liquid market in the world
  • The US dollar makes up the majority of forex transactions
  • The forex market’s deep liquidity is advantageous to traders by allowing them to enter and exit the market instantaneously

The size and depth of the forex market make it an ideal trading market. Its liquidity makes it easy for traders to sell and buy currencies without delay. This creates tight spreads for favorable quotes. Low costs, large scope to various markets and flexible trading times make it the most frequently traded market in the world. This article will clarify the enormity of the forex market, which allows for a better understanding of the mechanics behind it on a macro scale. Ultimately providing a solid foundation to forex trading for beginners through to the advanced trader.

Forex market size pie chart showing counterparty

How big is the forex market and how much is it worth?

According to the Bank for International Settlements triennial report of 2016, the foreign exchange market cap averaged $5.1 trillion per day. This figure is down from the previous report in 2013 of $5.4 trillion. There are only a few countries that account for the majority of forex trading turnover. The graph below depicts the major global trading desks as a percentage of total average turnover.

Bar chart showing forex market size by country

From a trader’s perspective, large forex market capitalization lends to less volatility as large trades do not have as significant impact on the price of the market. Smaller markets can be influenced by large institutions/traders with relative ease, however within the forex market this impact is comparatively diluted.

The forex market is comprised of several key constituents. The most influential being banks. The interbank market encompasses the largest volume of foreign exchange trading within the currency space. This includes trading between banks, trades for clients and facilitated trading by their individual desks. The US banks control the majority share of this market. Central banks, investment managers, hedge funds, corporations and lastly retail traders round off the rest of the market. Roughly 90% of this volume is generated by currency speculators capitalizing on intraday price movements.

As retail traders, it is essential to comprehend the enormity of the forex market in to be successful in your trading strategy, as well as how these different components interact with each other on a larger scale.

Forex trading volume

Traders from other markets are attracted to forex because of its extremely high level of liquidity. Liquidity is important as it allows traders to get in and out of a position at with ease 24 hours a day, five and a half days a week. It allows large trading volumes to enter and exit the market without the large fluctuations in price that would happen in less liquid market. This means that if you will never get in a position because of the lack of a buyer. This liquidity can vary from one trading session to another and one currency pair to another as well.

As the most traded currency pairs, EUR/USD and USD/JPYaccount for approximately 41% of all forex trades annually. This is an astounding percentage considering the scale of the overall forex market size. Another surprising fact is that most of the pairs reflective in the diagram below are USD crosses.

The US Dollar makes up 85% of forex trading volume. At nearly 40% of trading volume, the Euro is ahead of the third-place Japanese Yen that takes almost 20%. With volume concentrated mainly in the US Dollar, Euro and Yen, forex traders can focus their attention on just a handful of major pairs. In addition, the greater liquidity found in the forex market is conducive to long, well-defined trends that respond well to technical analysis and charting methods.

Pie chart showing the top traded currency pairs

How to take advantage of the forex market

Traders keen to capitalize on the advantages that come with the sheer size and volume of the forex market need to consider what method or combination of analysis suits their trading style. At a foundational level, traders need to understand the following pillars to forex trading:

  • Fundamental Analysis: Since currencies trade in a market, you can look at supply and demand. This is called fundamental analysis. Interest rates, economic growth, employment, inflation, and political risk are all factors that can affect supply and demand for currencies.
  • Technical Analysis: Price charts tell many stories and most forex traders depend on them in making their trading decisions. Charts can point out trends and important price points where traders can enter or exit the market, if you know how to read them.
  • Money Management: An essential part of trading. All traders need to know how to measure their potential risks and rewards and use this to judge entries, exits, and trade size. Forex traders employ these pillars in varying forms to craft a strategy they feel comfortable with. Once they find a balance between these central systems, they will turn their attention to specializing and honing their skills by keeping up to date with politics, monetary/fiscal policies etc. and making informed decisions based on the information at hand. A technical trader may utilize various indicators/drawings and place trades resulting from these technical signals. Client sentiment can also give forex traders an inside scoop as to potential reversals, market entry and exit points. Join our weekly Trading Sentiment webinar, or view our live IG client sentiment report for more information.

Further reading to boost your knowledge of the forex market

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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