The forex market stands as the largest and most liquid financial market in the world, dwarfing even the biggest stock exchanges like the NYSE and LSE.
Unlike centralized markets, forex trading happens entirely over-the-counter (OTC), meaning there is no physical location or central exchange. It operates electronically, 24 hours a day, across a global network of banks and financial institutions.
1. What Is the Forex OTC Market?
In the OTC market, trades are executed directly between participants via computer networks instead of through a centralized exchange.
As long as you have an internet connection, you can access the forex market and trade from anywhere in the world.
đź”— Internal Link: How the Forex Market Works and Who Participates
2. Who Trades in the Forex Market?
Participants in the forex market include:
- Central banks
- Commercial banks
- Institutional investors
- Corporations
- Retail traders
In this decentralized market, participants choose who to trade with based on pricing, trading conditions, and the counterparty’s credibility.
3. Most Actively Traded Currencies
Every forex transaction involves two currencies, so the total percentage share sums to 200%.
According to BIS (Bank for International Settlements), the top currencies are:
- USD: 84.9%
- EUR: 39.1%
- JPY: 19.0%
These dominant currencies account for the bulk of global trading volume.
4. Why the U.S. Dollar (USD) Is King
The USD plays a central role in global forex trading for several reasons:
- The U.S. has the largest economy in the world.
- USD is the global reserve currency, accounting for around 62% of foreign exchange reserves (IMF source).
- It’s used in international trade, including oil pricing (“petrodollars”).
- The U.S. financial markets are the most liquid and developed globally.
- The U.S. has a stable political system and is a global military superpower.
- Most global loans and bonds are issued in USD.
- USD dominates in foreign bank reserves and global transactions.
If a country like Japan wants to import oil from Saudi Arabia, it must pay in USD—even if its local currency is the Japanese Yen. This creates a constant global demand for USD.
5. Speculation & Liquidity in the Forex Market
While commercial and financial activities contribute to the forex market, over 90% of forex trading is speculative—driven by traders profiting from short-term price fluctuations.
The high volume of speculative trading boosts the market’s liquidity, which means you can buy or sell large amounts of currency with minimal price impact.
Liquidity is crucial for short-term traders as it enables smooth price action and tight spreads.
However, liquidity levels can vary depending on:
- The currency pair being traded
- The time of day (based on global forex trading sessions)
đź”— Internal Link: Best Times to Trade Forex Based on Market Sessions
Conclusion:
The forex market’s sheer size and global reach make it the most powerful and liquid financial market today. The U.S. dollar dominates this market due to its economic and political standing. For traders, understanding market size, liquidity, and the role of USD is essential to building a successful trading strategy.