The main functions of the forex market are:
- To transfer funds from one currency of a country to another currency.
- To provide short-term credit to finance trade between countries.
- To avoid or “hedge” against foreign exchange rate fluctuations from when a transaction is initiated and when payment is received.
- To speculate.
One important thing to note about the forex market is that while commercial and financial transactions are part of the trading volume, most currency trading is based on speculation.
In other words, most of the trading volume comes from traders that buy and sell based on the short-term price movements of currency pairs.
The trading volume brought about by speculators is estimated to be more than 90%!
The scale of the forex market means that the amount of buying and selling volume happening at any given time is extremely large!
This makes market liquidity, which is the ability to buy or sell a large quantity of something with minimal price impact, very HIGH.
The increase in market liquidity since the 1970s has yielded many benefits
From the perspective of a short-term trader, liquidity is very important because it determines how easily a price can change over a given time period.A liquid market environment like forex enables huge trading volumes to happen with very little effect on the price, or price action.
While the forex market is relatively very liquid, the market depth could change depending on the currency pair and time of day.
In our forex trading sessions part of the School, we’ll explain how the time of your trades can affect the pair you’re trading.
In the meantime, let’s learn about the different ways that individuals can trade currencies.
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