The Interbank Market is the main location where forex trading occurs and unlike the major financial markets — think New York Stock Exchange — the forex market does not contain a central exchange or a physical location. All transactions are done electronically within a network of banks. As a result, the forex market is commonly considered to be an over the counter (OTC) exchange that operates around the clock.
This means the market is spread across the globe without any country- or city-based location. From a trader perspective, you can make trades any time of the day from anywhere in the world with an Internet connection. As a result of this convenience and since many organizations and individuals trade on it, the forex OTC market is the largest and most popular financial market on Earth.
Within the OTC market, participants choose who they wish to trade with based on the following three key factors:
- The appeal of the market prices
- The reliability of the trading counterparty — the broker, usually
- Trading conditions
The top seven most traded currencies in the forex market include the United States Dollar, Euro, Japanese Yen, British Pound, Australian Dollar, Swiss Franc, and the Canadian Dollar. In other words, the world’s major currencies are also the most prominently used in the forex market with the U.S. Dollar comprising 75% of all trades.
Below, you’ll find a chart of the most traded currencies (as of 2021):
In an article launched by the International Monetary Fund (IMF), statistics show that the U.S. Dollar comprises approximately 62% of all official foreign exchange reserves. These reserves are assets held into a reserve by central banks located in foreign countries. As a result, all owners (investors, companies, and central banks) pay close attention to the movement of the U.S. Dollar.
Several other considerable reasons the U.S. Dollar plays such a central role within the forex market include:
- The U.S. has the biggest economy on Earth.
- The U.S. has the most liquid and largest financial markets on Earth.
- The U.S. has a stable political system.
- The U.S. is a military superpower.
- The U.S. Dollar is considered the reserve currency of the world.
- The U.S. dollar is the most common financial medium of exchange within cross-border transactions. For instance, the cost of oil barrels is always priced in U.S. Dollars and even has a name called petrodollars. Therefore, if Mexico is purchasing oil from Venezuela, they can only buy it using the U.S. Dollar. If Mexico is fresh out of U.S. Dollars, then they must convert Pesos into Dollars to make the purchase.
Forex Market Speculation
One of the most important considerations regarding the forex market is that most currency trading is based on speculation and less on trading volume. This means that short-term price movements amongst currency pairs are the main reason traders buy and sell. The estimated trading volume from speculators is around 90%.
The scalability of the forex market equates to the high liquidity of assets, which is the amount of buying and selling volume occurring at any given time. This simplifies the transactions for those looking to make trades.
From a trader’s perspective, liquidity is critical because it governs how easily a price can shift within a specific amount of time. A liquid market environment allows for major trading volumes to occur with little impact on the price. Although the forex market is quite liquid, the market depth could swing depending on the time of day and currency pair.
Disclaimer: All information provided here is intended solely for study purposes related to trading financial markets and does not serve in any way as a specific investment recommendation, business recommendation, investment opportunity, analysis, or similar general recommendation regarding the trading of investment instruments. The content, in its entirety or parts, is the sole opinion of SurgeTrader and is intended for educational purposes only. The historical results and/or track record does not imply that the same progress is replicable and does not guarantee profits or future profitable trading records or any promises whatsoever. Trading in financial markets is a high-risk activity and it is advised not to risk more than one can afford to lose.