Foreign Exchange Market and Liquidity Size
Unlike other financial markets such as the New York Stock Exchange (NYSE) or the London Stock Exchange (LSE), there is no physical site or central exchange in the foreign exchange market.The foreign exchange market is considered an over-the-counter (OTC) market or "interbank market", as the entire market is managed electronically, within a network of banks, for a period of 24 hours.
This means that the spot forex market is spread all over the world, with no central location.
As long as you have an internet connection, the conversation can take place anywhere!
Interbank foreign exchange network
The OTC foreign exchange market is the largest and best known financial market in the world as it is traded by a large number of individuals and organizations worldwide.
In an over-the-counter market, participants determine who they want to trade with based on the position of the business, the attractive price, and the reputation of the counterparty in the trade.
The graph below shows the seven most traded currencies.
Distribution of currencies on the foreign exchange market
* Since there are two currencies per transaction, the total shares in different currencies are 200% instead of 100%.
The dollar is the most traded currency, accounting for 84.9% of all transactions.
In the euro, the title is in second place with 39.1%, while the yen is in third place with 19.0%.
As you can see, most currencies have the best positions on this list!
The dollar is the king of the foreign exchange market
King's dollarYou must have seen how often we say US dollars (USD).
If the dollar represents half of each of the major currency pairs and the major currencies represent 75% of all transactions, the US dollar should be taken into consideration. Dollar is King!
Formation of currency from the global currency reserves on the foreign exchange market
According to the International Monetary Fund (IMF), the US dollar represents about 64% of the world's official foreign exchange reserves! Since almost all investors, entrepreneurs and central banks own them, they care about the US dollar.
Foreign exchange market continues
There are other important reasons for the dollar to play an important role in the foreign exchange market:
The economy in the United States is the largest in the world.
The US dollar is the world's currency.
The United States is the largest and most liquid financial market in the world.
The United States has a stable political system.
The United States is the only military power in the world.
The US dollar is the medium of exchange for many cross-border transactions. For example, the price of oil is in US dollars. Also known as "petrodollars". So if Mexico wants to buy oil from Saudi Arabia, it can only be bought in US dollars. If Mexico has no dollars, it must first sell its weight and buy US dollars.
US Dollar as a reserve currency
Speculation on foreign exchange market
An important thing to note in the foreign exchange market is that when commercial and financial transactions are part of the traded volume, most currency trades are based on betting.
In other words, most trading volumes come from traders who buy and sell based on price movements during the day.
Foreign exchange market question
Trading volume of bookies is estimated to be over 90%!
The size of the foreign exchange market means that liquidity - the number of purchases and sales at any given time - is very high.
This makes it very easy for anyone to buy and sell currency.
From the point of view of a trader, liquidity is very important because it determines the ease with which it is possible to change the price at a given point of time.
A liquid market environment, like foreign exchange, creates huge volumes with minimal impact on prices or price movements.
While the foreign exchange market is relatively liquid, the depth of the market may change depending on the currency pair and time.
In our Forex trading sessions which are part of the school, we will tell you how your trading time can affect the pair you are trading.
In the meantime, here are some suggestions for exchanging gazillion means. We reduced it to four!