Month: August 2018

Not only is the forex market the largest financial market worldwide, but it also includes a high number of participants.

One of the primary benefits of having more active participants in a market is that it usually contributes to greater liquidity in that market.

Advantages of Liquidity

The basic idea behind liquidity involves how quickly you can convert an asset into cash. Of course, with currency trading, you can turn your spot trade into cash within just a couple of business days.

When a market is highly liquid, that implies that it operates in a very efficient manner. Usually dealing spreads would also be quite competitive, with relatively low transaction costs.

Read our previous article: Winning Forex Trade with Major Currencies

Another advantage of high liquidity is the ability of a market to handle large transactions without the price moving too far as a result. Liquidity also generally means that orders will tend to be executed well, with minimal slippage on stop losses.

When it comes to liquidity, the huge forex market easily comes out on top when compared to other financial markets like those for stocks, bonds, and commodities. It also offers 24-hour trading during the business week.

Forex Participants That Help Provide Liquidity

The main participants in the forex market that assist in providing liquidity generally fall into one of the following basic types:

• Major Commercial and Investment Banks

  These are the big professional players in the forex market. By acting as both speculative traders and as market makers to clients and one another, their activities provide substantial liquidity to the forex market.

• Governments and Central Banks

  These institutions can have a major impact on the forex market as they intervene to manage the exchange rate of their nation’s currency or shift currency reserves. At especially volatile times, central banks will often provide liquidity to help stabilize the forex market.

• Large Corporations

  Many companies engage in business in other countries and this often requires that they participate in the forex market. Their hedging activities of foreign currency exposures often help provide considerable liquidity in the forex market, and they generally participate by acting as a large bank’s customer.

• Hedge Funds

  These players largely act as speculative trades in the forex market to enhance their funds’ profits. Their large transactions can significantly increase trading volume and hence liquidity in the forex market.

• Investment Funds

  When the managers of these funds invest internationally or shift investments from one nation’s market to another’s, they need to use the forex market to convert currencies. Usually acting as customers of large banks, their often large forex transactions, and orders, as they enter, exit and protect their foreign investments, can add significant market liquidity.

• Individual Traders

  Such participants can range from wealthy individuals, who can often trade forex using credit lines that banks extend to them, to retail traders who participate on margin via online forex brokers. This group of participants provides an increasing amount of liquidity in the forex market.

• Interbank and Retail Forex Brokers

  These firms act as intermediaries in forex transactions. Interbank brokers will generally only handle sizeable transactions between large banking counterparties, while retail forex brokers tend to provide access to the forex market for much smaller individual accounts. This access has made the forex market available to a much larger segment of the population and has significantly increased both the breadth and liquidity of the forex market.

One of the reasons that many savvy traders consider forex the best market to trade is the little effort required to assimilate the knowledge required for trading.

Also, the fact that most currency trading activity is limited to a handful of key currencies and currency pairs, commonly referred to as the majors, is a distinct advantage relative to other markets.

This makes trading currencies a much simpler trading process, with only eight major and minor currencies to follow. The following sections provide a list of these primary currencies and descriptions of their most active pairs traded in the forex market.

Check our previous article: How to get Forex latest market Information

The Major and Minor Currencies

The so-called major and minor currencies are listed below after their standard ISO 4217 three letter code. They are listed in order of importance as determined by their average daily trading volume seen in the forex market.

• Majors

1. USD – United States Dollar
2. EUR – European Union Euro
3. JPY –  Japanese Yen
4. GBP – Great Britain Pound Sterling
5. CHF – Switzerland Franc

 

• Minors

1. AUD – Australian Dollar
2. CAD – Canadian Dollar
3. NZD – New Zealand Dollar

 

According to a 2017 survey by the Bank of International Settlements or BIS, the major and minor currencies listed above account for over 87% of all daily currency trading volume.

In addition, the U.S. Dollar acts as either the base currency or counter currency in over 85% of all forex trades and so clearly dominates forex trading activity.

The Primary Currency Pairs

Below find a brief description of all the currency pairs which make up the main currency pairs traded in the forex market:

 

• EUR/USD – The European Union’s Euro quoted in U.S. Dollar terms. The E.U. has the largest economy in the world by GDP, followed by the United States. This currency pair accounts for 27% of all forex transaction by trading volume.
• USD/JPY – The second most active currency pair, the USD/JPY currency pair accounts for 13% of daily forex trading volume. The USD/JPY pair is one of the most liquid, and the dealing spread can be as low as one pip.
• GBP/USD – Number three on the list is Cable or GBP/USD. The pair received its nickname at the end of the 1800’s from the Trans-Atlantic cable used to transmit the rate between New York and London. Cable makes up 12% of overall daily trading volume.
• USD/CHF – The U.S. Dollar against the Swiss Franc. While not the most liquid currency pair, it still accounts for over 5% of total daily forex volume.
• AUD/USD – The Australian Dollar versus the U.S. Dollar and nicknamed the Aussie. This pair reacts to commodities prices primarily because Australia is a major mining goods producer. China is one of the main markets for Australian exports.
• USD/CAD – The Canadian Dollar versus the U.S. Dollar. Nicknamed the Loonie after Canada’s national bird that appears on its one dollar coin, the Canadian Dollar also acts as a commodity currency and so reacts to movements in both crude oil and gold.
• NZD/USD – The New Zealand Dollar versus the U.S. Dollar and nicknamed the Kiwi. Not as actively traded as other commodity currencies, this particular currency pair accounts for less than 4% of forex trading volume. Nevertheless, it is a popular currency to trade among speculators.

Conclusion

Basically, a trader has a whole lot less to watch and hence less to worry about when trading in the forex market versus other capital markets. Having a limited number of currencies is clearly an asset that forex traders can use to their benefit.