The world runs on money. The foreign exchange or forex market is the largest financial market in the world, processing more than $7.5 trillion in transactions daily as of April 2022, according to the Bank for International Settlements. This is significantly larger than the global stock market or decentralized cryptocurrencies, as the New York Stock Exchange has an average daily trading volume of around $200 billion.
Due to the high demand for foreign exchange trading and the different time zones around the world, the foreign exchange market is open 24 hours a day, Monday to Friday. Despite the staggering size of the forex market, retail traders account for less than 10% of trades, meaning that nearly 9 out of 10 trades are made by established institutions, hedge funds and billionaire traders.
Understand how the Forex market really works
Before going into details, it is important to understand what Forex trading is and how it works. All transactions with other countries generally must be financed with foreign currencies. For example, the United States imports cash and other agricultural products from Southeast Asian countries like India and Pakistan. Payment for these purchases is usually made in the reserve currencies of the exporting country, such as the Indian Rupee (INR) and the Pakistani Rupee (PKR).
The largest volume of foreign exchange transactions is carried out in the interbank market, where commercial and investment banks operate. In addition to foreign exchange transactions carried out by customers, banks often carry out speculative transactions in foreign exchange markets in order to take advantage of fluctuations in exchange rates. Some of the largest financial institutions such as JPMorgan Chase & Co. and Deutsche Bank AG often act as market makers. Central banks also play an influential role in foreign exchange markets and exchange rates.
What’s so special about Forex?
The main factor that distinguishes forex from stocks or cryptocurrencies is the sheer size of the global foreign exchange market. Although the risk associated with Forex trading is generally higher, the profit margins are also significantly higher. The foreign exchange market is significantly more volatile than the stock market, which means that large fluctuations in exchange rates are often more frequent than a similar movement in stocks. Traders who are able to identify these fluctuations and act quickly on them tend to make huge profits.
Most trades are carried out with leverage in the foreign exchange markets. Forex traders have margin requirements as low as 2%, while the going leverage rate for stocks is 50%.
Forex markets have been around since the late 1800s, while cryptocurrencies have only just started to gain traction in recent years. Foreign exchange is much more stable than crypto. While recent macroeconomic trends have led to the demise of several cryptocurrencies such as Terra Coin and Luna, foreign exchange markets have persevered, albeit with increased volatility.
17 Facts and Figures About Forex Trading
- The size of the global foreign exchange market is $2.09 quadrillion in 2021. In comparison, the total global gross domestic product (GDP) of 194 countries was $93.86 trillion last year.
- The average daily foreign exchange trading volume increased by 14%, from $6.6 trillion in 2019 to $7.5 trillion in April.
- Transactions in the spot foreign exchange market total approximately $2 trillion per day.
- Around 180 currencies are traded on the foreign exchange market.
- The main currency pairs are EUR/USD, USD/JPY, GBP/USD and USD/CHF. These are some of the most traded currency pairs in the forex market.
- In April, the US dollar accounted for approximately 88% of all foreign exchange transactions.
- USD/EUR is the most traded currency pair in the world, accounting for almost 20% of all foreign exchange transactions.
- Trading activity in five countries – the UK, Japan, the US, Singapore and Hong Kong – accounted for 78% of all foreign exchange trading, according to the BIS 2022 Triennial Survey of Central Banks .
- The three most traded currencies after the US dollar are the euro, the Japanese yen and the pound sterling. EUR accounted for almost 30.5% of all foreign exchange transactions, while JPY and GBP accounted for 17% and 13% of all transactions, respectively.
- The Chinese renminbi has recorded the largest increase in market share since 2019 and is currently the fifth most traded currency in the world.
- The forex market is open 24 hours a day, from 5 p.m. EST on Sunday to 4 p.m. EST on Friday.
- Around 90% of all Forex transactions are speculative in nature.
- There are approximately 10 million forex traders worldwide.
- Foreign exchange markets were established around 1880. However, currency trading rose to prominence in the early 1970s after the establishment of the Bretton Woods agreement and system.
- Exchange rates were previously set and controlled by central banks around the world. Over time, with the rapid increase in international trade, exchange rates became market regulated.
- Typically, forex brokers in the United States offer 50 to 1 leverage to qualified traders.
- A standard lot size/exchange includes 100,000 currency units.
Should you start investing in Forex now?
Having adequate information about Forex can be a good starting point, but it is important to have an idea of the risk-reward tradeoff. With the market highly leveraged, the potential for losses is also immense in the event of a bad bet.
Understanding the fundamentals of Forex trading and choosing a suitable online broker that matches your investment goals should be first on your list before you start trading.
High Level Forex Facts
The Forex industry is a very volatile and exciting market where traders can make significant profits if they fully understand the underlying principles and strategies. Before you jump into the world of Forex, it is important to familiarize yourself with the basic facts about the market.
Forex means foreign exchange and refers to the trading of currencies between different countries. Forex trading can take place 24 hours a day, five days a week, and involves exchanging one currency for another in the hope of profiting from price fluctuations. The value of a currency is determined by several factors such as economic and political events, monetary policy decisions, and global market trends. Understanding these factors is essential to making informed business decisions.
Another important fact about Forex trading is the use of leverage. Leverage is the ability to trade a position larger than the amount of capital deposited in your trading account. Although leverage can potentially increase profits, it also magnifies losses, making risk management an essential part of a successful trading strategy.
Finally, it is crucial to know that Forex is a highly regulated market. Regulatory bodies such as the Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA) oversee and enforce strict regulations to protect investors and prevent fraudulent activity.
The Forex market is an exciting and potentially profitable market, but it is important to understand the basic facts, including the nature of foreign exchange, the use of leverage and the importance of regulation. By keeping these key factors in mind, traders can make informed decisions and mitigate risks in their pursuit of trading success.
Frequently asked questions
Although historians are not sure of a specific time period, Forex trading is believed to have first originated in Amsterdam, Netherlands, almost 500 years ago.
The foreign exchange market is significantly larger than any other financial market or economy combined, making it one of the most popular markets in the world.
Forex markets were created centuries before cryptocurrencies. The former is also more stable than decentralized cryptocurrencies.