HomeUnderstanding the 21st Century Forex Market

Understanding the 21st Century Forex Market

Forex or foreign exchange is the largest market in the world. It literally eclipses any other market, both in size and in volume. 

While the market grew exponentially since the Internet conquered the world, there is still room for growth. Typically, in the currency market, there are two types of investors that buy and sell over 150 currency pairs – institutional investors and retail traders.

Pros and Cons of Trading Forex

A recent study confirms what was known for a long time – that London is the largest financial center in the world. Over 40% of Forex trading takes place in the United Kingdom, most of it in the City of London. The United States comes in a distant second place, ending Singapore leading the Asia-Pacific region.

Institutional investors dominate the trading game in the currency market. Recently, retail traders are able to participate as well due to the rise of CFD (Contracts for Difference) trading, but the volume on the retail side is very small when compared to that of institutional investors.

Institutional traders, for example, buy and sell currencies at prices not visible to the market. On the other hand, retail traders have access to leverage so that they match small deposits with large trading orders.

The market changed dramatically after January 2015 when the Swiss National Bank was forced to drop the EURCHF exchange rate floor. It was keeping it to 1.20 artificially, and when it couldn’t do so anymore, the entire market collapsed. If you want, it was a decisive moment for the retail online trading community, one that sparked many regulatory changes in the years to come. Nowadays, regulations brought down leverage in most developed countries. Risks are better presented, and traders are better informed.

Despite having more than 150 currency pairs to choose from, most retail trading takes place on six major pairs – EURUSD, AUDUSD, GBPUSD, USDCAD, USDJPY, and USDCHF. If we add the USDCNY, too, then over 60% of global forex trading takes place on these pairs.

This is important because it offers a clear picture of what the dominant currency is – the U.S. dollar. Also, it shows what are the most liquid currency pairs to trade.

The FX market changed dramatically in the last decades, and there is still room to grow. It offers opportunities and a chance for small retail traders to compete with large investors for the same prize.

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