In the last article we showed you how foreign exchange participants do not place trades on a centralized market. Instead, each individual person and entity is essentially a little piece of a larger market.
Forex Market Size: Massive.
The foreign exchange market is the largest market by total nominal value of all things traded. Each day, some $4 trillion in value trades hands between governments, institutional investors, corporations, and individual traders who trade world currencies between themselves.
Other markets find it hard to compete against the foreign exchange market’s massive size. The chart below shows the total value of the foreign exchange market versus several other financial markets:
The Dollar’s Global Role in Forex
You have probably noticed by now that the US Dollar is the common denominator between all of the different types of currency pairs—exotics, cross-majors, and major currency pairs.
The US dollar is incredibly important to international commerce, which is partly to do with history as much as it is partly to do with the present.
Exotic Currency Pairs
Exotic currency pairs are currency pairs that include the US dollar, and another currency from a riskier, emerging market currency. These currencies—USD/THB, USDMXN, USD/NOK, among others—are not highly liquid, and come with greater spreads in the bid and ask prices.
The list of exotic pairs is far longer than the list of 7 major currencies. It includes all currency pairs in which the US dollar is included, but another less commonly traded currency is pair with it. Trading these pairs can be costly since there are fewer market participants and traders buying and selling them, and brokers usually raise the costs to trade less popular pairs.
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