Forex Market’s Size and How It Works
Imagine a huge, worldwide market where people buy and sell currencies like dollars, euros, and yen. This is called the forex market.
Unlike a regular store or market, this one doesn’t have a physical place where you go to trade. Instead, it’s all done online! People from all around the world can participate anytime, day or night, as long as they have internet.
What is the Forex Interbank Network?
The forex market is the largest financial market out there, and many people and companies use it. Because it’s online, you can choose who you want to trade with based on the prices they offer and how trustworthy they seem.
To give you an idea, here’s a list of the most traded currencies:
- The U.S. dollar is used in about 84.9% of all trades.
- The euro is next with 39.1%.
- The Japanese yen comes in third at 19.0%.
This means the U.S. dollar is really popular in the forex market!
Why is the U.S. Dollar So Important?
The U.S. dollar (USD) keeps popping up, right? That’s because it’s super important in this market. If you look at the major currency pairs traded, the USD is in half of them.
Also, many countries and institutions keep the U.S. dollar as a backup in their reserves. About 62% of the world’s backup currency is in U.S. dollars!
Why Do People Pay So Much Attention to the U.S. Dollar?
Here are some reasons:
- The USA has the biggest economy in the world.
- Many countries and businesses use the U.S. dollar for their financial activities.
- The USA is politically stable and has a strong military presence.
- A lot of global transactions, like buying oil, require the U.S. dollar. If a country wants to buy oil and doesn’t have U.S. dollars, it first has to exchange its own currency for U.S. dollars.
Why Do People Use the Forex Market?
People use the forex market for a few main reasons:
- To exchange one country’s currency for another’s.
- To lend or borrow money between countries for short-term trade.
- To protect against the risk of currency values changing quickly.
- To guess and bet on future currency prices (speculate).
The surprising thing? Most of the trading on this market is because of this guessing game on future prices!
Fun Fact About the Forex Market
A big chunk (more than 90%!) of the activity on the forex market comes from people trying to guess short-term price movements and making quick trades based on those guesses.
What Does “Market Liquidity” Mean?
Imagine trying to sell a huge, rare diamond. It might take time to find a buyer willing to pay the right price. But if you were selling a popular toy, many people would want to buy it quickly. In the forex market, because of the vast amount of trades, buying or selling currencies is like selling that popular toy. This quick and easy trading is called “high liquidity.”
Benefits? For people who like to make quick trades (short-term traders), high liquidity means they can buy or sell large amounts without causing big changes in prices.
Does Liquidity Change?
Yes, it can. Even though the forex market has a lot of activity, how busy it is might vary based on the currency pair being traded or even the time of day.