THE FOREX MARKET OVERVIEW

The largest financial market in the world is foreign exchange market.   This is also known as the forex market. Publications from Reuters reveals that the average Forex daily value went beyond 5 trillion USD in March 2012.

This figure include the entire foreign exchange market, while retail traders trading the spot market can access approximately 1.49 trillion USD a day.

Major Currency Pairs

Previously forex trading sounded confusing due the fact that there is no physical product involved in the trade. You can for instance think about buying a currency as buying a share in a country or company. In this regard, the price of the currency is a direct reflection of what the market thinks about present and future state of the economy. For example, a purchase of the British pound means buying a share in the British economy. This implies you are placing a bet on that expectation the British economy is doing well now and will even be better in the future. Hopefully, as the shares are sold in the money/currency market there will be profit made.

Speaking in general terms, the exchange rate of a currency vis-à-vis other currencies is the reflection of the condition of that country’s economy as compared other countries’ economies.

Please note that the currencies are always traded in pairs thus making forex trading simultaneously buying one currency and selling another.

Market Size and Liquidity

The whole forex market business is conducted electronically within a network of banks in a period of 24 hours. This is also known as the Over-The-Counter (OTC) market. This is the biggest financial market in the world globally traded by a huge numbers of individual, institution and organizations. Depending on on trading conditions, attractiveness of the market, prices, and reputation of the trading counterpart, participants determine who they want to trade with.

Another important thing to note is that, most currency market is based on speculation. This implies, most traders who do buying and selling do so on the basis of price movements during a day.

According to Babypips.com, trading volume brought by speculators are estimated to be more than 90%. The high percentage of forex speculative market means that liquidity i.e. amount of buying and selling occurring at any given time is extremely high. This makes it easier for anyone to buy and sell currencies. From the investor’s perspective, liquidity is vital in the determination of price changes in a given period of time. A liquid market environment like forex enables huge trading volumes to happen with very little effect on price, or price action. Depending on the currency pair and time of day, the market depth can change. This can happen in spite of the fact that the forex market is relatively very liquid.

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