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The world runs on money. So the foreign exchange, or forex, market is the largest financial market globally, processing more than $7.5 trillion dollars worth of trades daily as of April 2022, according to 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 about $200 billion.
Because of the high demand for foreign exchange transactions and different time zones around the globe, the forex market is open 24 hours from Monday to Friday. Despite the staggering size of the forex market, retail investors account for less than 10% of the transactions, meaning almost every 9 out of 10 forex trades are placed by well-established institutions, hedge funds, and billionaire traders.
Understanding How the Forex Market Really Works
Before diving into the specifics, it is important to understand what forex trading is and how it works. All trades made with other countries are typically required to be financed by the foreign currency. For instance, the United States imports species and other agricultural products from Southeast Asian countries such as India and Pakistan. The payment for these purchases is typically made in reserve currencies of the exporting country, such as the Indian rupee (INR) and Pakistani rupee (PKR).
The largest volume of forex trades is placed in the interbank market, where commercial and investment banks operate. Apart from forex transactions placed by customers, banks often heavily trade in the forex markets speculatively to capitalize on the fluctuating 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 the forex markets and exchange rates.
What Is Special About Forex?
The major factor that sets forex apart from stocks or crypto is the sheer size of the global forex market. While the risk associated with forex trades is generally higher, the profit margins are significantly higher as well. The forex market is substantially more volatile than the stock market, meaning material fluctuations in exchange rates are often more frequent than a similar move in stocks. Traders who are able to identify and act promptly on such fluctuations tend to make enormous profits.
Most trades are placed on leverage in forex markets. Forex traders have margin requirements as low as 2%, while the going leverage rate for equities is 50%.
Forex markets have been around since the late 1800s, while cryptocurrencies have just started gaining traction over the past few years. Foreign exchange is much more stable than crypto. While the recent macroeconomic trends have caused several cryptocurrencies such as Terra coin and Luna to become defunct, forex markets have persevered, albeit with increased volatility.
Forex Trading Facts and Figures
- The global forex market size is $2.09 quadrillion as of 2021. In comparison, the total global gross domestic product (GDP) of 194 countries is $93.86 trillion as of last year.
- The average forex daily trading volume increased by 14% from $6.6 trillion in 2019 to $7.5 trillion in April.
- Trades placed in the spot forex market add up to roughly $2 trillion per day.
- Around 180 currencies are traded in the forex market.
- The major currency pairs are EUR/USD, USD/JPY, GBP/USD and USD/CHF. These are some of the most widely traded currency pairs in the forex market.
- The U.S. dollar was on one side of approximately 88% of all forex transactions, as of April.
- USD/EUR is the most commonly traded currency pair in the world, accounting for nearly 20% of all forex transactions.
- Trading activity in five countries — the U.K., Japan, U.S., Singapore and Hong Kong — accounted for 78% of all forex trading, according to the BIS Triennial Central Bank Survey 2022.
- The three most-traded currencies after the U.S. dollar are the Euro, Japanese yen and pound sterling. EUR was on one side of nearly 30.5% of all forex transactions, while JPY and GBP were on one side of 17% and 13% of all trades, respectively.
- The Chinese renminbi 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 during the week, from 5 p.m. EST on Sunday to 4 p.m. EST on Friday.
- Roughly 90% of all forex trades are speculative in nature.
- There are approximately 10 million forex traders in the world.
- Foreign-exchange markets were established circa 1880. However, forex trades gained prominence in the early 1970s after the establishment of the Bretton Woods Agreement and System.
- Exchange rates were previously fixed and controlled by central banks globally. Over time, thanks to the rapid rise in international trades, foreign-exchange rates have become market regulated.
- Typically, forex brokers in the U.S. provide 50-to-1 leverage to qualified traders.
- A standard forex trade/lot size comprises 100,000 currency units.
Should You Begin Investing in Forex Now?
Having adequate forex information might be a great place to start, but it is important to have an idea about the risk-return trade-off. As the market is highly leveraged, the potential for losses is also immense in the case of a bad bet.
Understanding the fundamentals of forex trading and choosing an appropriate online broker that suits your investment goals should be first on your list before you dive into trading.
Tap into the Forex Market with These Top Brokers
If you're ready to put these forex facts to good use and tap into a market worth $2.09 quadrillion, you need the right broker. Check out these top forex brokers and start trading today.
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CedarFX is not regulated by any major financial agency. The brokerage is owned by Cedar LLC and based in St. Vincent and the Grenadines.
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Frequently Asked Questions
Who invented forex?
While historians are unclear regarding a specific time frame, forex trading is said to have been first established in Amsterdam, Netherlands, nearly 500 years ago.
Why is forex so popular now?
Forex market is significantly bigger than any other financial market or all economies combined, making it one of the most popular markets in the world.
Which is better crypto or forex?
Forex markets were established centuries before cryptocurrencies. The former is also more stable than decentralized cryptocurrencies.
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