Forex or currency trading involves exchanging one currency for another. Individuals or companies may have functional purposes for engaging in currency trading, such as traveling or operating abroad and the need to exchange dollars for the currency of the country you are in, but they may also have financial or speculative reasons to to trade in currencies.
Here you will find some important information about forex trading, its history and trading strategies.
Key forex trading statistics
- According to a New York Fed study, the average daily currency volume in North America was $1.02 trillion in October 2023.
- That volume showed an increase of almost 26 percent from the level of $810.9 billion in April 2019.
- The global forex average daily trading volume reached $7.5 trillion in April 2023, according to a three-year report from the Bank for International Settlements (BIS).
- The US dollar is by far the most popular currency in foreign exchange transactions. It was involved in about 90 percent of transactions and accounted for one side or the other of $6.6 trillion of average daily volume in April 2023, the BIS found.
- According to the BIS report, the next most popular currencies were the euro at $2.3 trillion and the Japanese yen at $1.3 trillion.
What is Forex Trading?
Forex markets can be used to exchange one currency for another, and there are several reasons why this might be necessary. Companies that operate in more than one country, financial traders, and people who want to travel abroad all have a reason to participate in forex trading.
Due to the enormous need for foreign exchange, forex markets are typically the largest and most liquid in the world, but some currencies can be volatile.
The History of Forex Trading
Currency trading has existed in one form or another for centuries. People have long needed a way to pay for goods and services, and different currencies have been an important part of that. But today’s more modern forex markets are a relatively recent creation.
- In July 1944, representatives from 44 countries met in Bretton Woods, New Hampshire, to create a monetary system that would create exchange rate stability, prevent competitive currency devaluations, and promote economic growth.
- The Bretton Woods System became fully operational in 1958, under which currencies were convertible, international debts were settled in dollars, and dollars could be converted into gold at a fixed exchange rate.
- In 1971, US President Richard Nixon ended the convertibility of the dollar into gold after the amount of US dollars held in foreign hands exceeded the US supply of gold.
- After the collapse of the Bretton Woods system, countries were free to choose any arrangement for the exchange of their currencies, except pegging it to gold. Currencies can be tied to another currency, a basket of currencies, or solely by market forces.
- Today, forex trading is mainly done by banks on behalf of clients, and trading takes place 24 hours a day, from 5:00 PM ET on Sunday to 4:00 PM ET on Friday. Individuals can even trade through an app on their phone.
The largest forex trading centers
Most forex trading takes place in London, followed by New York, Singapore and Hong Kong. Some thought Britain’s decision to leave the European Union would damage London’s position as the largest foreign exchange market, but that has not proven to be the case.
| Rank | Country | Average daily volume ($millions) | Share of the forex market |
|---|---|---|---|
| 1 | United Kingdom | 3,754,661 | 38.1 percent |
| 2 | United States | 1,912,350 | 19.4 percent |
| 3 | Singapore | 929,460 | 9.4 percent |
| 4 | Hong-Kong | 694,359 | 7.1 percent |
| 5 | Japan | 432,527 | 4.4 percent |
| 6 | Switzerland | 349,742 | 3.6 percent |
| 7 | France | 213,730 | 2.2 percent |
| 8 | Germany | 183,934 | 1.9 percent |
| 9 | Canada | 171,952 | 1.7 percent |
Source: BIS Triennial Central Bank Survey 2023. The average daily dollar volume in all other countries is $1,200,420 million, or 12.2 percent of the total market share on a ‘net-gross’ basis.
Risks of Forex Trading
Like most trading strategies, forex trading is not without risk. Here are some of the top Forex trading risks you should be aware of.
- Interest risk: Changes in a country’s interest rate will have an impact on the exchange rate. When interest rates change, the forex markets can fluctuate drastically.
- Lever: Most forex trading involves the use of leverage or borrowed money. The nature of leverage is that it magnifies profits and losses, meaning a small change in price has a big impact on your position. If prices drop, you could face a margin call.
- Country risk: When trading forex, you need to understand the stability of the underlying countries whose currencies you are investing in. Understanding a country’s financial system is critical, including the role of central banks and whether its currency is pegged to another country. countries such as the US dollar. All these factors can affect the forex markets.
- Counterparty risk: Counterparty risk refers to the risk that the party on the other side of a transaction will fail to fulfill its side of the deal. This could come into play during extremely volatile markets if a market maker were to become insolvent and unable to meet its obligations.
Forex trading strategies
Forex trading is quite simple in concept, but that doesn’t mean you can make money trading currencies. If you’re just starting out, make sure you do your due diligence and understand what trades you’re placing and how they can go wrong.
You can trade forex with some of the same online brokers that offer stock trading, but it may be worth it to work with a top forex dealer instead. Here are some strategies for beginners and more experienced traders.
- Beginners: Many traders use technical analysis to plan their next moves, looking at charts and price action to try to anticipate where a currency is going. Trend trading is a strategy that is good for beginners because it is quite easy to understand and is essentially a prediction that recent price trends will continue.
- Intermediate: If you are looking for a slightly more advanced approach, a carry trade can be a profitable option. A carry trade involves shorting a currency with a low interest rate and buying a currency that pays higher interest. The Japanese yen is often used in this strategy because of the low interest rates in Japan. The trader then buys another currency to capture the difference in rates. But be careful: exchange rates can change in such a way that the interest rate increase is canceled out.
Forex traders typically use significant amounts of leverage to magnify the relatively small movements of exchange rates on a daily basis.
How to get started with forex trading
Forex trading has similarities to other investment options, but a few things make it unique.
- Open a trading account. Before you can trade financial assets, you must create an investment account. You can easily do this online through places like Interactive Brokers or Charles Schwab. Not all brokers offer forex trading, so make sure you check if a platform does before opening an account. Funding the account is quite simple and can be done via an electronic fund transfer or a physical check. Depositing money into the account online usually takes a few days.
- Learn the basics of forex. Trading forex comes with some unique challenges that you may not be aware of if you have only traded stocks or ETFs. The variables that drive forex trading and changes in exchange rates are different from the variables that drive stock prices. You will probably need to pay more attention to the macroeconomic factors of the countries whose currencies you are trading. GDP growth, trade deficits and interest rates can play a major role in exchange rates. Make sure you understand the key fundamentals before you start trading.
- Choose a strategy. Once you have mastered the basics, you can choose which trading strategy you want to follow. Will you use technical analysis to identify trends or take a more fundamental approach based on macroeconomic data? Both approaches can be successful, but it’s important to choose a strategy that makes the most sense for you.
- Start slowly. It’s best to go slow when you’re just starting out. There is no need to aim for the moon on your first trades. Start with small amounts as you learn so that any mistakes don’t wipe you out. As you gain experience, you can increase position size and identify trends more quickly.
