April 15, 2021 | AtoZ Markets – The forex market is not a centralized exchange like other financial markets such as the New York Stock Exchange (NYSE). Forex trading happens at an interbank market. Furthermore, the forex market does not have a physical location as it is an over-the-counter market. And when we say over-the-counter market, we say that it is electronic, within bank networks, and works for almost 24 hours a day.
So, in a nutshell, the forex market can happen at any point of the world as it has no central location. One of the essential requirements to make a forex trade possible is the internet.
Tell me more about the forex market and how it works
Today, we can say that the forex market is the most enormous and most famous financial market in the world. Individuals and organizations create a breathtaking average of $5.1 trillion trading volume in just a single day. In otc markets, traders can customize the way they want to trade. They can choose the traders they wish to transact with depending on their conditions and requirements, desired prices, and the reputation of the person on the other side of the trade.
Did you know?
The currencies that traders actively use are USD, EUR, JPY, GBP, AUD, CHF, CAD. In this list, we enumerated them from the most actively traded currency to the least. Although these currencies are what traders use commonly, USD is the most traded currency since it makes up 84.9% of all forex trading transactions. Succeeding the USD is the EUR at 39.1% of transactions, and next is the Japanese Yen that makes up 19% of all trading transactions.
The USD is the most traded currency in the forex market
It is no wonder that the USD is the most traded currency. It takes up one-half of each major currency pairs. Furthermore, major currency pairs make up 75% of all the trades. The international monetary fund even mentioned that the USD makes up more or less 62% of the global official foreign exchange reserves. If you are not aware of foreign exchange reserves, they are assets that the central bank holds on reserve in foreign currencies.
The USD is the reserve currency of the world and many cross-border transactions’ medium of exchange. USD is a currency that comes from the United States of America, the world’s largest economy with a stable political system. With that being said, the US holds the world’s most enormous and liquid financial markets. The US is also the sole military superpower of the world.
Forex market speculation
Traders usually speculate on forex market trading. It means that trading volumes come from traders when they buy and sell depending on the currency pair’s short-term price movements. Market speculations bring about 90% of the trading volume.
The forex market is very liquid. We can say that something is very liquid or has high liquidity when you can buy or sell it quickly anytime. The forex market is liquid because massive trading volumes do not affect the price and price action. However, it is not the same case with market depth as it can change depending on the time and currency pair. Liquidity is an essential element that traders consider because it determines price movements and fluctuations in a given period.