Like other financial market like NYSE or LSE, the Forex market has neither a physical location not a central location. The bulk of Forex Trading takes place using the system called “Interbank market“.
Forex market is consider a Over the Counter (OTC) Market. It is because the entire market runs electronically within a networks of banks 24 hours a day. It means the Forex Market is spread all over the world with no central location. So it means your trade can take place from any where as long as you have an Internet Connection.
The Forex OTC market is far bigger and biggest than most of the popular financial market in the world, traded globally by a large number of Individuals & Organisations.
In Forex OTC market, participants determines whom they want to trade with looking on the trading conditions, the attractiveness of price and also the reputation of the trading counter-party (the other party who takes the other side of trade).
The below chart shows the most actively traded currencies.
Two currencies are involved in each transaction. The sum of the percentage shares of individual currencies totals 200% instead of 100%
The Dollar is King in the Forex Market
The U.S. dollar is the most traded currency, making up 84.9% of all transactions! The euro’s share is second at 39.1%, while that of the yen is third at 19.0%. As you can see, most of the major currencies are hogging the top spots on this list!
You’ve probably noticed how often we keep mentioning the U.S. dollar (USD). If the USD is one-half of each major currency pair, and therefore the majors comprise 75% of all trades, then it’s a requirement to concentrate to the USD. The USD is king! In fact, consistent with the International Monetary Fund (IMF), the USD comprises roughly 64% of the world’s official exchange reserves!
Because almost every investor, business, and financial institution owns it, they concentrate to the U.S. dollar.
There are also other significant reasons why the U.S. dollar plays a central role in the Forex market:
- The United States economy is the LARGEST economy in the world.
- The U.S. dollar is the reserve currency of the world.
- The United States has the largest and most liquid financial markets in the world.
- The USA has a stable political system.
- The United States is the world’s sole military superpower.
- The U.S. dollar is the medium of exchange for many cross-border transactions. For example, oil is priced in USD. Also called “petrodollars”. So if Mexico wants to buy oil from Saudi Arabia, it can only be bought with the U.S. dollar. If Mexico doesn’t have any dollars, it has to sell its pesos first and buy U.S. dollars.
Speculation in the Forex Market
One important thing to notice about the Forex market is that while commercial and financial transactions are a part of the trading volume, most currency trading is predicated on speculation.
Most of the trading volume comes from traders that buy and sell supported the worth movements of currency pairs. The trading volume caused by speculators is estimated to be quite 90%!
The scale of the Forex market means liquidity is extremely high. This makes it very easy for anyone to shop for and sell currencies. From the attitude of a trader, liquidity is extremely important. Because it determines how easily price can change over a given period of time .
A liquid market environment like Forex enables huge trading volumes to happen with little or no effect on the worth , or price action.
While the Forex market is comparatively very liquid, the market depth could change counting on the currency pair and time of day.