The post Which Country Has the Largest Forex Market? by Stjepan Kalinic appeared first on Benzinga. Visit Benzinga to get more great content like this.
It might be an obvious fact, but behind every economy, there is a currency. While a currency might seem like a convenient tool in your daily spending, its role in the global market is much bigger than that.
In the larger picture, the forex market is the oil in the engine of globalization — ensuring that it keeps running smoothly and safely. Read on to learn the peculiar details of this system — how it works and why it will eventually change.
Disclosure
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 72% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
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How Big is the Forex Market?
Often overlooked, the forex market dwarfs almost every other financial market in the world. It works 24 hours, 5 days a week, in a decentralized way, ensuring that there is always a way to exchange currency immediately.
Although complicated, it is a well-oiled machine as central banks, commercial banks, hedge funds and institutions and individual speculators ensure high liquidity.
This access contributes to enormous size, which is estimated to be over $6 trillion in daily volume.
How Risky is the Forex Market?
While currencies are not affected by earnings, mergers and acquisitions or management step-downs like equities, the forex market is risky.
Although mere participation in the market exposes you to market risk, this is the minimal risk to take and is entirely out of your control. That also is the risk you need to take to profit from the market.
Yet, some risks might not be apparent to a new forex trader. Here are a few that could negatively impact your trading.
Margins and Leverage
One of the reasons why forex traders find forex so appealing is the low barrier of entry. You can regularly see advertisements promising financial freedom with investments as low as a few hundred dollars. While this is possible, it is unlikely and but, above all else, risky. Using extreme leverage is like playing with matches at a gas station — an accident waiting to happen.
Low Liquidity
Although liquidity is usually not an issue in the forex market, there are instances where high slippage might happen. This factor causes higher spreads that ramp up the cost of trading quickly if you are a high-frequency trader.
Ad Hoc Central Bank Decisions
In January 2015, the Swiss National Bank abruptly decided to unpeg the Swiss Franc from the euro and let it float. This caused a drop of over 35% in minutes, leaving traders facing margin calls.
This kind of risk is unavoidable but manageable if you use a reputable forex broker that honors stop-loss protections and offers negative balance protection.
Which Countries Have the Biggest Forex Markets?
As with many established markets, a few of the top participants control far more volume than the rest of the list combined.
In the forex market, this largely belongs to the Group of 10, also known as G10 currencies. Listed by the market share, these currencies include:
- United States dollar (USD): 88.3%
- Euro (EUR): 32.3%
- Japanese yen (JPY): 16.8%
- Pound sterling (GBP): 12.8%
- Australian dollar (AUD): 6.8%
- Canadian dollar (CAD): 5%
- Swiss franc (CHF): 5%
- New Zealand dollar (NZD): 2.1%
- Swedish krona (SEK): 2%
- Norwegian krone (NOK): 1.8%
The list is not without exception, with the Chinese yuan (CNY) taking 4.3% of the market share.
Because currencies trade in pairs, their volume measures 200%, as trading volume is counted twice — something is sold while something else is bought.
Why is the U.S. Dollar so Important?
Throughout much of history, the economy has been based on barter. This system changed with the introduction of commodity-based money after which, it became trading.
Precious metals took an important role because of their scarcity, chemical stability and smelting ability. Initially, paper money was nothing more but a warranty of possession of precious metals.
The U.S. dollar spent a long time directly pegged to the value of gold, even after the government banned the ownership of gold after the Great Depression. World War II prompted many countries to keep their gold in the U.S., allowing them to become a global gold custodian and the world’s largest creditor. This practice established the Bretton Woods system, where the U.S. dollar was redeemable for gold — not for domestic citizens but for foreign governments. The exchange rate was $35 per ounce.
Under those conditions, the speculative forex market was practically nonexistent as countries tied their currencies against the U.S. dollar with only a 1% oscillation.
As gold reserves dwindled while the U.S. foreign liabilities surged, the system became unsustainable. After its suspension in 1973, currencies started to float — creating the current foreign exchange market.
By that time, however, the U.S. dollar was so ingrained in the global trade system that it continued as a global reserve currency, primarily through the pricing of commodities (especially oil) and a way to fund emerging market debts.
In a way, this gave the U.S. an unchecked printing press. Because the demand for its currency was strong, it could summon paper money out of nothing and exchange it for something like hard commodities.
Yet, this doesn’t come without a downside, as it creates ever-growing foreign deficits. Eventually, as the share of the U.S. gross domestic product (GDP) in the global GDP declines, the world may have to create a new system as the U.S. dollar would become too small.
Benzinga’s Top Forex Brokers Picks
Every trader needs a good broker, an intermediary, to serve as a co-pilot. In the table below, you’ll find a list of Benzinga’s recommended brokers.
FOREX.com is a one-stop shop for forex traders. With a massive range of tradable currencies, low account minimums and an impressive trading platform, FOREX.com is an excellent choice for brokers searching for a home base for their currency trading. New traders and seasoned veterans alike will love FOREX.com’s extensive education and research center that provides free, informative forex trading courses at multiple skill levels. While FOREX.com is impressive, remember that it isn’t a standard broker.
Best For
- MetaTrader 4 users
- Beginner forex traders
- Active forex traders
- Demo account
- Impressive, easy-to-navigate platform
- Wide range of education and research tools
- Access to over 80 currencies to buy and sell
- Leverage available up to 50:1
- Exclusive trading tools like TradingView
- Crypto trading available on MT5 platform
- Cannot buy and sell other securities (like stocks and bonds)
- Higher inactivity fees
IG Group was established in 1974 and has over 313,000 clients worldwide. In 2019, IG launched its high-quality FX service in the US – empowering informed, decisive, adventurous people with access to over 80 currency pairs at competitive prices.
IG US operates on a commission-free basis whereby spreads are the main cost to trading forex, though overnight funding fees and currency conversion charges may apply. Spreads at IG can be as low as 0.8 pips for currency pairs like EUR/USD and USD/JPY (terms and conditions apply).
Minimum spreads for major currency pairs include:
EUR/USD: 0.8 pips
USD/JPY: 0.8 pips
GBP/USD: 1.0 pip
AUD/USD: 1.0 pip
Capital requirements are as low as 2%, or 50:1 leverage, for major currency pairs like EUR/USD.
IG offers forex trading on its own proprietary platform and application as well as MetaTrader 4 desktop, online and mobile platforms.
Best For
- New forex traders who are still learning the ropes
- Traders who prefer a simple, clean interface
- Forex traders who trade primarily on a tablet
- $0 minimum deposit
- $0 commission
- Excellent educational resources
- Volume-based rebates
- Inactivity fees
- Limited product range on MT4
A fully regulated broker with a presence in Europe, South Africa, the Middle East, British Virgin Islands, Australia and Japan, Avatrade deals with mainly forex and CFDs on stocks, commodities, indexes, forex, cryptocurrencies, etc. This brokerage is headquartered in Dublin, Ireland and began offering its services in 2006. It offers multiple trading platforms and earns mainly through spreads.
Best For
- Beginners
- Advanced traders
- Traders looking for a well-diversified portfolio
- Controlled by regulatory agencies of multiple countries
- Choice offered in terms of trading platforms
- Support available in 14 languages and trading platforms in 20 languages
- Practice/demo account available for trying out
- Breadth of trading assets
- Does not accept customers from the U.S. as it isn’t regulated in the U.S.
- Transferring funds to the account may take up to five days; withdrawals could take up to 10 days
86% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.
Plus500 is a European derivatives broker focusing on contracts for difference (CFDs). CFDs are similar to binary options in the U.S. where traders take all-or-nothing speculation on the prices of certain securities like indices, commodities or currencies. While not legal to trade in the U.S., CFDs are legal in many jurisdictions across the globe and Plus500 offers a wide array of tradable markets using these instruments.
Plus500 doesn’t charge commission and only profits off the spread, which is the difference between the buy and sell price of a specific security. But Plus500 is not a broker for beginners — the education materials are sparse and CFDs are risky derivatives capable of sapping out all of an investor’s capital. Only trade these instruments if you understand how they operate and the risks involved with buying them.
Best For
- Traders looking for a smooth mobile experience
- Great mobile app
- Low spreads and commissions
- Unlimited demo account
- Only derivatives are available
- Not open to U.S. residents
Though Australian and British traders might know eToro for its easy stock and mobile trading, the broker is now expanding into the United States with cryptocurrency trading. U.S. traders can begin buying and selling both major cryptocurrencies (like Bitcoin and Ethereum) as well as smaller names (like Tron Coin and Stellar Lumens).
eToro offers traders the opportunity to invest their assets into premade portfolios or cryptocurrencies, similar to services offered by robo-advisors through traditional brokers. Though eToro isn’t a one-stop-shop for everything an investor needs, its easy-to-use platform and low spreads is a great way to enter the cryptocurrency market.
Best For
- International Forex/CFD Traders
- New cryptocurrency traders looking for an easy-to-use platform
- Traders who want to buy and sell cryptocurrencies on-the-go
- Simple platform that is easy to master
- CopyTrader feature that allows new traders to copy the same strategies used by professionals
- Virtual dummy account that gives you $100,000 to practice trades
- U.S. traders currently limited to cryptocurrencies
- Only 15 major coins available to trade
HYCM is 1 of the world’s leading forex brokers, offering investors access to over 69 unique currency pairs. However, forex isn’t the only thing the broker offers — HYCM also offers high rates of leverage, stock and ETF trading, commodity investing and much more. Getting started with HYCM is quick and easy, and most investors can open an account in as little as 10 minutes.
HYCM offers a varying fee structure, which allows investors to choose the spread option that’s best for them. A wide range of educational and investing tools are available, which can be equally beneficial to both experienced and novice traders. Though HYCM isn’t currently available in the United States, it can be a great choice for residents of the other 140 countries where it offers service.
Best For
- Investors who want a customizable fee schedule
- Traders comfortable using the MetaTrader platform
- Islamic traders who need swap-free accounts that don’t build interest
- Mobile app with a simple trading experience
- Wide range of currency pairs available
- Excellent selection of educational tools
- Not currently available to traders based in the U.S.
Billing itself as the world’s 1st eco-friendly broker, CedarFX makes it easy to trade and give back to the planet. You can choose a 0% Commission Account or an Eco Account — or open multiple accounts to meet all your needs.
CedarFX offers access to a wide range of tradable securities, including stocks, futures, major and exotic forex pairs, cryptocurrencies and more. Though CedarFX could introduce a few additional educational resources, the broker remains a unique option for traders invested in giving back.
Best For
- Forex investors
- Investors interested in 0% commission or eco conscious trading
- Investors looking for 24/7 customer service
- Allows users to offset their carbon footprint
- 0% commission investing
- Offers demo account access
- 24/7 customer service available through live chat
- Eco Account Option (10 trees planted for each lot traded)
- Fast deposits/withdrawals with Bitcoin
- Limited number of educational resources for new investors
The Dollar is Still the King
While there are many currencies out there, the U.S. dollar remains above them all.
History shows that no currency stays on top of the world forever. Eventually, trade deficits catch up, and the world outpaces it. That has been the case with the British pound, and it could be the destiny of the U.S. dollar.
Right now, the dollar remains the most sought-after currency — and thus, the most liquid — and more importantly, the cheapest one to trade.
Frequently Asked Questions
Can forex make you rich?
Forex trading offers an unprecedented depth of market and liquidity. Yet, this doesn’t mean that forex is a get-rich-quick scheme, and that should be evident to anyone with an insight into game theory.
The biggest problem for most traders is facing adversity. No matter how good your trading strategy is, you will face losses — that is the nature of the market. Only those who overcome the instinct to chase the losses and stick with the plan will overcome those situations.
In short — yes. You can become rich from forex, but it is not an easy task.
How difficult is forex?
Many traders, analysts and other market-interested parties consider forex a difficult market to trade. This comes down to a number of factors.
To start, forex is a huge currency market with a vast number of participants — both in the private and public sectors. Anything can influence it — politics, personal consumption or even the weather.
The forex market doesn’t have a biased direction compared to an asset class like stocks that tend to rise over time. Its price quotes express the ratios between two currencies.
Last but not least, forex requires keeping emotions in check. Whether positive or negative, a big winning streak can make you as reckless as a losing one. Thus, like with any trading, it is mandatory to exercise patience and discipline.
Why do countries hold foreign reserves?
Countries hold foreign reserves to ensure financial stability, protect their currency, intervene in the foreign exchange market, provide a cushion during economic crises, facilitate international trade and investment and safeguard their economic well-being.
The post Which Country Has the Largest Forex Market? by Stjepan Kalinic appeared first on Benzinga. Visit Benzinga to get more great content like this.
