Understanding Liquidity And Forex Market Size
Welcome to this lesson! Today, we’re diving into an essential topic: Understanding Forex Market Size and Liquidity.
The foreign exchange (forex) market is unique because it’s decentralized. This means there is no central location or headquarters for forex trading. Instead, it operates electronically across the globe. Whether you’re in a bustling city or a remote village, all you need is a strong internet connection and a smartphone or PC to access the market.
Because forex trading is conducted through a network of banks and non-bank financial institutions (NBFIs), it is classified as an Over-The-Counter (OTC) market. Trading is available 24 hours a day, from Monday through Friday, making it one of the most accessible markets in the world.
You’re In Control
As a forex trader in an OTC market, you have full control over your trading activities. You choose what to trade, who to trade with, and how. Your decisions to buy or sell will be based on your market analysis and strategy. This flexibility is one of the reasons many traders are drawn to the forex market.
Which Currency Dominates the Forex Market?
According to global financial data, the U.S. Dollar (USD) is the most traded currency in the world, accounting for approximately 84.9% of all forex transactions. The Euro (EUR) follows with about 39.1%. Since each trade involves a currency pair, the total percentage exceeds 100%.
This data highlights that the EUR/USD pair is the most traded currency pair globally. A list of currency distribution in the financial market is in the table below.
| CURRENCY | DISTRIBUTION |
| USD | 84.9% |
| EUR | 39.1% |
| JPY | 19.0% |
| GBP | 12.9% |
| AUD | 7.6% |
| CHF | 6.4% |
| CAD | 5.3% |
| Other Currencies | 25.0% |
In terms of global forex reserves, the USD also reigns supreme, making up 82% of the world’s official foreign exchange reserves, according to the International Monetary Fund (IMF), Q1 2012 report. The U.S. Dollar is the cornerstone of international finance, and it’s held by almost every central bank, major corporation, and investor.
Oh, I love the Dollar!
Why Is the Dollar Always on Top?
You might be wondering: “Why is the U.S. Dollar always leading the pack?”
One major reason is that the United States has the largest and most stable economy in the world. Its political stability further strengthens the USD’s global position. In times of uncertainty, the dollar is considered a safe haven, a trusted store of value for investors worldwide.
The Dollar is the King! Long live the King!
What Is the Forex Market Used For?
The forex market serves several important purposes:
- Hedging against exchange rate fluctuations between transaction initiation and payment.
- Speculation – taking advantage of short-term price movements for profit.
- Providing short-term credit to support international trade.
- Currency conversion – exchanging one currency for another.
The Role of Speculators
In forex, speculation means trading to profit from short-term price movements rather than holding a currency long-term. Did you know that speculators account for nearly 90% of the trading volume in the financial market? Yes, they play a massive role in the market’s growth and liquidity.
Understanding Liquidity in Forex
Liquidity refers to the flow of money and the level of trading activity in the market. It is a critical factor for any trader aiming to profit in forex. High liquidity ensures that large orders can be executed with minimal impact on market prices.
Liquidity is what drives price movements, and without price movement, there would be no opportunity to make money. Put, liquidity is money in the forex world.
I’ve taken the time to explain these foundational concepts because a strong understanding of the forex market is crucial for long-term success. While forex trading is risky, it can also be highly rewarding with the right knowledge and discipline.
In our next lesson, we’ll explore “Understanding How People Participate in the Forex Market.”
