Forex
Forex market size and liquidity
The forex market is an over the counter (OTC) market because it is run electronically between a massive network of banks and it operates 24 hours a day. There is no central location or even physical location where exchanges take place.
It’s not like people are throwing bags of money over the border! This means, that because the market is worldwide with no central location, we can trade forex anywhere that we can connect to a broker. You could be on a trading floor or even sitting at a local coffee shop. Thanks to the internet, you could be anywhere.
USD is the king of forex
Over 4 000 world banks are connected into the forex market, each bank having many clients using their services. On average, approximately 4 trillion USD is traded every day in the forex market. The USD is by far the most used currency when it comes to transactions. This is not just retail forex traders, but large imports and exports as well. 84.9% of all forex transactions will have the USD on one side of it. Followed by the Euro at 39.1%
Why is this important to forex traders?
Simply, it can help you keep your costs low. We will be discussing spreads a bit more later on, but for now you should know that some forex pairs have higher spreads than others.
Most of the time it is based on supply and demand. While the demand is high for the USD, the supply is massive. So you will find currency pairs that have the USD on one side of it are usually much cheaper than ones that don’t.
Now if you are thinking that the EUR USD should be the cheapest pair, you’re right. 99% of the time, the EUR USD forex pair is the cheapest pair to trade. Also with the increased liquidity it means that your trades are more likely to execute quickly so you can get the prices you want.
