What is foreign exchange (II)?

Market size and liquidity

Unlike financial marekts such as the New York Stock Exchange, foreign exchangecash marketThere is neither a physical location nor a trading center.

foreign exchange marketConsidered over the counter (OTC for short) or "international bank". Due to this fact - the electronic operation of the entire market within the banking network requires the market to work continuously for more than 24 hours.

This means that spot foreign exchange markets are located all over the world and there is no specific central market. They can be found anywhere, even at the top of Mount Fuji.

The foreign exchange OTC market is by far the largest and most popular financial marekt in the world composed of many people and organizations.

In the OTC market, market participants decide with whom they want to trade based on trading conditions, attractive prices, and the credibility of their counterparties.

The chart below shows the ten most actively traded currencies.

The US Dollar is the most traded currency, accounting for 84.9% of all transactions. The Euro is second with a share of 39.1%, while the Japanese Yen is third with 19.0%. As you can see, the most dominant currencies occupy a favorable position on this list!

Since there are two currencies involved in each transaction, the volume of each transaction is 200% of the total amount of a single currency, rather than 100%.

The chart above shows how frequently the US dollar trades in the foreign exchange market. Of all known transactions, the US dollar accounts for 84.9% of all transactions.

Notes:According to the Bank for International Settlements (BIS) triennial report released in September 2016, the US dollar remains the most traded currency, with 88% of transactions in the US dollar. The euro, yen and Australian dollar saw a decline in trading volume, while emerging market currencies continued to grow. The renminbi doubled in trading volume, accounting for 4% of global foreign exchange trading volume and ranking eighth among the most actively traded currencies. Among them, the RMB/US dollar currency pair accounted for 95% of trading volume.

The dollar reigns supreme

If every major currency pair includes the US dollar, and these currency pairs account for 75% of all trading volume, then it is necessary to maintain a high level of attention to the US dollar. The US dollar is the dominant currency in the foreign exchange market.

In fact, according to the data provided by the international monetary fund (IMF), the dollar accounts for almost 62% of the world's official foreign exchange reserves! Because almost every investor, business and central bank owns dollars, they value the dollar.

There are other reasons why the US dollar plays a central role in the foreign exchange market.

The United States is the largest economy in the world.

The US dollar is the global reserve currency.

The United States has the largest and most liquid financial marekt in the world.

The United States has an ultra-stable political system.

The United States is the only military superpower in the world.

★ The dollar is the main currency medium for international cross-border transactions. For example, oil is priced in dollars. So if Mexico wants to buy oil from Saudi Arabia, it can only buy it in dollars. If Mexico doesn't have dollars, it has to sell pesos before buying dollars.

Speculation in the foreign exchange market

It is worth noting that commercial and financial foreign exchange transactions make up part of the total trading volume in the foreign exchange market, and the vast majority of foreign exchange transactions are based on speculation.

In other words, the vast majority of foreign exchange traders buy or sell foreign exchange based on intraday price movements.

The foreign exchange trading volume of foreign exchange speculators is estimated to be as high as more than 90% of the foreign exchange market trading volume.

The size of the foreign exchange market means that liquidity... the volume of transactions at any time period is quite high!

This makes it easy for anyone to buy and sell currency.

From an investor's perspective, liquidity is very important because it determines how easily prices can change at a given time. Without the influence of prices or price movements, it is difficult for a liquid foreign exchange market to generate significant trading volume.

Although the foreign exchange market is liquid, it depends on the currency pair and the time of day.

In this lesson on "Forex Trading Hours", we discovered how liquidity and money market rates change by looking at how a currency pair changes over the course of a day.

Different methods of foreign exchange trading

Since foreign exchange is so fascinating, traders have come up with different ways to invest in or speculate on currencies. Among them, the most popular is the spot,futures，optionAnd exchange-traded funds (ETFs).

cash market

cash marketIn this market, spot trading is carried out in an instant or "spot" manner using the current market price.

existcash marketCurrency transactions are traded instantly at the current market price.cash marketThe charm of it lies in its simplicity, liquidity, low spreads, and 24/7 uninterrupted trading. Due tocash marketaccount openingThe minimum amount is only $25, so invest incash marketTrading is very easy. But that's not why we recommend that you enter the market with a principal of $25. You'll learn about it in our Capital Liquidation related courses. In addition, most brokers usually provide graphics, news, and research reports for free.

futures

futuresA contract to buy or sell an asset at a certain price at a certain time, which is why we call itfuturesForeign exchangefuturesBy Chicago MerchandisefuturesThe first exchange (CME), given thatfuturesContracts are standardized and conducted in a centralized manner.futuresThe market is very transparent and highly regulated, which means that prices and trading information are easily accessible.

option

optionIt is also a financial instrument that allows the buyer tooptionThe right, not the obligation, to buy or sell an asset at a particular price on the expiration date. If a trader sellsoptionThen he or she will have tooptionTo buy or sell an asset at maturity.

andfuturesSame.optionOr floor trading, for example, in ChicagooptionExchange, International Stock Exchange or Philadelphia Stock Exchange. However, foreign exchangeoptionThe drawback of trading is that for someoptionFor example, market trading hours are limited and liquidity is limitedfuturesorcash market。

exchange traded fund

exchange traded fund(Or ETFs) are the youngest members of the foreign exchange market.

ETFs may contain a range of securities as well as certain currencies, which is beneficial for traders to diversify their assets. ETFs are established by the Financial Institutions Group and can be traded freely like securities. and foreign exchangeoptionLikewise, the limitation of ETF trading is that it cannot be bought and sold 24 hours a day. At the same time, since ETFs include securities, ETF trading also includes transaction commissions and other transaction fees.