The world runs on money. Thus, 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 from Monday to Friday. Despite the staggering size of the forex market, retail investors account for less than 10% of trades, which means almost 9 out of 10 trades are placed by well-established institutions, hedge funds and billionaire traders.
Understand how the Forex market really works
Before diving into the details, it is important to understand what forex trading is and how it works. All transactions made with other countries must generally be financed with the foreign currency. For example, the United States imports species and other agricultural products from Southeast Asian countries such as India and Pakistan. Payment for these purchases is usually made in the reserve currencies of the exporting country, such as Indian Rupee (INR) and Pakistani Rupee (PKR).
The largest volume of foreign exchange transactions is placed in the interbank market, where commercial and investment banks operate. In addition to foreign exchange transactions made by customers, banks often trade speculatively in foreign exchange markets to take advantage of exchange rate fluctuations. 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 is special about Forex?
The main factor that distinguishes forex from stocks or crypto is the sheer size of the global forex 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 and act quickly on such fluctuations tend to make huge profits.
Most trades are placed on leverage in the forex markets. Forex traders have margin requirements as low as 2%, while the common leverage rate for stocks is 50%.
Forex markets have been around since the late 1800s, while cryptocurrencies are only just beginning to gain traction in recent years. Foreign exchange is much more stable than crypto. While recent macro trends have caused several cryptocurrencies such as Terra coin and Luna to demise, forex markets have persevered, albeit with increased volatility.
Forex trading facts and figures
- 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 is $93.86 trillion last year.
- Average daily forex trading volume increased 14% from $6.6 trillion in 2019 to $7.5 trillion in April.
- Transactions in the spot foreign exchange market amount to 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.
- The US dollar was on one side of about 88% of all foreign exchange transactions in April.
- USD/EUR is the most commonly traded currency pair in the world, accounting for almost 20% of all FX transactions.
- Trading activity in five countries – the UK, Japan, the US, Singapore and Hong Kong – accounted for 78% of all currency trading, according to the BIS Triennial Central Bank Survey 2022.
- The three most traded currencies after the US dollar are the euro, the Japanese yen and the pound sterling. The EUR was on one side of nearly 30.5% of all forex trades, while the JPY and GBP were on one side of 17% and 13% of all trades, respectively.
- The Chinese renminbi has seen the biggest 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 during the week, from 5:00 p.m. EST on Sunday to 4:00 p.m. EST on Friday.
- About 90% of all forex trades are speculative in nature.
- There are approximately 10 million forex traders worldwide.
- Foreign exchange markets were created around 1880. However, currency trading gained 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, thanks to the rapid expansion of international trade, exchange rates have become regulated by the market.
- Typically, forex brokers in the United States offer 50 to 1 leverage to skilled traders.
- A standard forex trade/lot size is 100,000 currency units.
Should you start investing in Forex now?
Having adequate information about forex can be a good start, but it’s important to have an idea of the risk-reward trade-off. As the market is highly leveraged, the potential for losses is also immense in the event of a bad bet.
Understanding the fundamentals of forex trading and choosing an appropriate online broker that matches your investment goals should be the first thing on your list before you get into trading.
Tap into the Forex market with these top brokers
If you are 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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Frequently Asked Questions
questions and answers
While historians are unclear on a specific time period, forex trading is believed to have first been established in Amsterdam, the Netherlands nearly 500 years ago.
Why is forex so popular today?
The Forex market is significantly larger 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.