Forex Market Size and Liquidity

Forex Market Size and Liquidity

 

Forex market size and liquidity. There is no other financial institution in the world whose size can compare to that of the Forex market. With almost USD$6 trillion daily turnover, it means that a single days trade can fund the annual budget of a whole continent like Africa. The Forex market is like a large sea, so your money will be like the smallest fish that no one will be able to notice.

 

Why is the market that large?

Forex market size and liquidity

It’s one question that you may be asking, but the simple answer is that the whole world is involved, so it makes the trading volume to rise. The Forex is a 24-hour market that takes place everywhere around the globe and has got no central location. So long as you’ve internet connection, you can part of the market.

Many business specialists consider Forex as an Interbank market because the whole system runs electronically across all the banks and continuously throughout the day and night. In fact, it’s okay if you just call the Forex market as Over-The Counter (OTC) since you can make a spot market at any time and from anywhere.

The transactions that make the Forex market to continue expanding is; outward forwards, Forex swaps, spot transactions, and derivative securities. These are the transactions that increase the trading volume.

The most used currency in Forex is US dollar, so many traders prefer to call the dollar as the king of currencies. However, this doesn’t mean that USD has a higher value than all the currencies. The truth is that the Euro and the Sterling pound have a higher value than the US dollar.

Of all the Forex transactions, 85% involve the use of US dollar while the remaining 115% is shared among the other remaining currencies. You may be wondering why the percentage adds up to 200% and not the traditional 100%. It’s because two currencies are involved.

 

What is Forex Arbitrage?

 

This is a form of trading in which traders seek to capitalize on the existing price discrepancies between identical instruments. Many traders argue that the strategy is less risky as it involves the buying of weaker currencies as you simultaneously sell the costly currencies within an interrelated market. A trader who takes part in arbitrage trade is known as an arbitrageur.

The first trader who spots the price anomaly in the price difference would buy the stock on the exchange with a cheaper price and sell on the exchange at a higher price. This strategy can lock in profit and help to safeguard you against the market risks.

 

Forex Triangular Arbitrage

 

This is a strategy that uses offsetting trade to realize the gain from price discrepancies in the Forex market. For you to understand this concept, you need to have knowledge on the pairs. When you enter in a forex market, you’re buying the first currency in the pair and consequently selling the second currency. When you use a pair without US dollar, it’s called cross currency pair.

This method of trading constitutes three currencies to safeguard your trade against any risk. For instance, in this cross pair of EURO/GBP 0.7911/0.7912, you can sell because the value is good enough, but it’s safe to create two trades in the two related majors. The two trades that you’re creating should be opposing the EURO/GBP pair that will help you lock in profits and offset your risks.

The other two trades that the ideal majors that oppose EUR/GBP should include EUR/USD and GBP/USD pairs.

So when you buy 10 lots of EUR/USD pair, a single lot is 100,000 units of the base currency. Therefore 10 lots is 10*100,000=1000, 000 EURs. This means that if the rate of EUR/USD is 1.1505, then you’ll rack in 1,150,500 USD.

Consequently, if you sell 10 lots of EUR in the EUR/GBP at the rate of 0.7911 then you’ll make 791,100 GBP because you’ll multiply the paired rate with 100,000 units

The last trade would incorporate GBP/USD at a rate of 1.4548. You’ll need to divide 791,100 by 100,000 to find the GBP units. The calculation will give you 7.91 units, so you want to buy 791,100 total units at the rate of 1.4548 which gives you 1, 150,892 USD.

To obtain your profit, you need to subtract the initial amount from the final amount, so 1,150,892-1,150,500= 392 USD. The profit is low considering the huge transactions you’ve undertaken and mark you, the spread and transaction costs haven’t been deducted yet. The big relief is that all the avenue of risks is sealed even though, the profit is low.