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.
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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.
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.