The Size of the Forex Market: A Trader's Advantage

The FX market's size and depth make it an ideal trading venue. Because of its liquidity, traders may quickly sell and buy currencies. For favorable quotes, this results in tight spreads. It is the most regularly traded market in the world due to its low costs, wide range of markets, and flexible trading schedules. The magnitude of the forex market will be clarified in this article, allowing for a better grasp of the mechanisms behind it on a macro scale. Finally, for beginners to advanced traders, a solid basis in forex trading is provided.

TALKING POINTS ON FOREX MARKET SIZE:

  • The currency market is the world's largest and most liquid market.
  • The majority of FX transactions are conducted in US dollars.
  • The forex market's high liquidity benefits traders by allowing them to trade with confidence.
  • To be able to enter and exit the market at any time.

WHAT IS THE SIZE AND VALUE OF THE FOREX MARKET?
The foreign exchange market cap averaged $5.1 trillion per day in 2016, according to the Bank for International Settlements' triennial report. This value is lower than the $5.4 trillion reported in the preceding report in 2013. Only a few countries account for the vast majority of forex trading volume. The following graph depicts the major global trading desks as a percentage of total average turnover.

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

The extremely high level of liquidity in the forex market attracts traders from other markets. Liquidity is vital because it allows traders to easily enter and exit positions 24 hours a day, five 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/JPY account 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.

HOW TO TAKE ADVANTAGE OF THE FOREX MARKET
Traders who want to take advantage of the forex market's sheer size and volume should think about which strategy or combination of methods best 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.