The foreign exchange or Forex Market is the world’s largest financial market, even larger than the stock market, with a daily trading volume of 6.6 trillion US dollars, according to the 2019 Triennial Central Bank Survey of FX and OTC derivatives markets. Currency can be exchanged for other currencies. The foreign exchange market has many unique features that may surprise beginners.
Since currencies from all over the world never sleep, the market is open 24 hours a day. The 24-hour interbank market is the main foreign exchange market. The market moves with the sun, moving from one major bank in the city centre to another, from the United States to Australia, from New Zealand to Southeast Asia, then to Europe, and back to the United States.
In this article, we will learn about Forex Market and how and why they exist. Let’s begin!
What is FOREX Market?
FOREX is the abbreviation of the Foreign Exchange Market, where different banks, investors and speculators exchange currencies in this market. The most active are the five currencies: U.S. dollar, British pound, Eurodollar, Swiss franc and Japanese yen.
Foreign currencies are rising and falling every day. As with anything that changes in price, traders can benefit from these changes. The foreign exchange market is open 24 hours a day, which makes it very liquid. This surprised many investors. This is how big the foreign exchange market is, it is actually the largest financial market in the world. Its daily average trading volume is slightly higher than 1.1 trillion US dollars.
The Forex Market is considered an interbank market because all transactions between the two participants are processed through the communication network. The transaction itself is not concentrated on the exchange like exchanges and derivatives markets. Compared with other financial markets, foreign exchange investors can react to all exchange rate fluctuations of a currency due to political, economic or social influences in real time, day and night.
Professional traders from large international investment and commercial banks dominate the foreign exchange market, but multinational companies, global financial managers, registered traders, international currency brokers, futures traders, options traders and private speculators also participate.
How Does the Forex Market Work?
Trading Forex is similar to buying and selling other types of securities, such as stocks. The main difference lies in currency pair trading, such as EUR/USD (Euro/U.S. dollar) or JPY/GBP (Japanese Yen/Pound sterling). When you trade foreign exchange, you are selling one currency and buying another currency. When you buy more currency than you sell, you will make a profit.
Suppose the exchange rate between the euro and the US dollar is 1.40 to 1. If you buy 1000 euros, you pay 1400 US dollars; if the exchange rate subsequently changes from 1.50 to 1, you can sell these euros at a price of 1,500 US dollars to get a profit of 100 US dollars.
Most foreign exchange transactions include foreign exchange transactions between:
- Large international companies
- Central banks
- High-wealth individuals
Although hedging and speculative commercial transactions account for the bulk of foreign exchange transactions, a large part of it is in the Forex market, and the central bank often intervenes in large markets to avoid excessive exchange rate fluctuations.
The most liquid and most traded currency in the largest market of the world, Forex is the United States Dollar. This currency has maintained this status for a long time, probably mainly because it is the most commonly held reserve currency by central banks around the world.
Why is Forex the Largest Financial Market in the World?
The following are some of the key reasons why the foreign exchange market has become the largest market today:
First of all, foreign exchange transactions have a panoramic existence and the most flexible transactions, thereby providing high liquidity. You only need a computer with internet access. At this time, the market is open 24 hours a day, 7 days a week. You can always find someone you can trade with.
Secondly, the Forex market has opened doors of various opportunities for traders. You can trade without actual currency. You can trade short-term and long-term currency pairs of your choice and thereby, obtain huge benefits in your activities.
Thirdly, you can take advantage of the high volatility of the currency market. If handled properly, high volatility will increase the chances of higher profits.
Another reason why the foreign exchange market has become the largest market is that it is used by large organizations such as multinational companies, commercial banks and investment banks, hedge funds, investment managers, and central banks all around the world.
Forex Market in Today’s World
According to a survey conducted by the Bank for International Settlements, the average daily trading volume in the foreign exchange market in April 2019 was as high as US $6 trillion, and the total value of the global foreign exchange market was approximately US $2,409 trillion.
The performance of Forex even surpassed that of a large exchange like NASDAQ, which has a daily trading volume of US $200 billion. The foreign exchange market is traded in 170 countries around the world. The eternal foreign exchange market provides unlimited opportunities for traders and investors.
The market is the largest and most liquid because it allows the most flexible trading and the benefits of global influence. Although the market is already large, some forecasts point to an annual growth rate of 6% in the next five to six years.
The Final Word
The Forex market is the world’s largest market for a reason as it allows everyone from central banks to retail investors to see the potential benefits of currency fluctuations in the context of the global economy. Take arbitrage trading, for example, which shows how foreign exchange participants affect the global economy.
There are many reasons for trading in foreign exchange, such as speculative trading of banks, financial institutions, hedge funds and private investors is profit-oriented. The company exchanges currencies for global business and risk hedging.