What is Forex and Why is it So Big?

Many people have heard of trading, which involves buying and selling assets on global markets to make a profit when they appreciate. Forex is one of those markets, and is the place where currency is exchanged between traders and institutions as an asset.

It is undoubtedly one of the most popular markets in the world, so here is some useful information about how it works and why it is so big.

Exchange Rates

Since forex involves buying and selling currency, it is global exchange rates which govern its activity and the value of each currency pairing. These exchange rates obviously differ depending on which currency pairings are traded, and are influenced by a number of different factors.

One of the main things which influences the value of a currency is political events, which often lead to economic uncertainty as well as uncertainty over the future of that currency. After the Brexit vote in Britain back in 2016, for instance, the value of the pound slumped 10% against the dollar, and it has yet to fully recover.

Currency Pairings

There are numerous different currency pairings to choose from when trading forex. They are separated into three categories, called major, minor and exotic. Major pairings all include the dollar and are the most popular to trade. Minor do not include the dollar but do include some of the most powerful currencies like the euro and the pound, and exotic pairings include currencies from emerging economies/countries outside the Euro Zone.

There are currency pairings to suit every type of forex trader, and each displays different behaviour in terms of market activity. This range of options is, in part, why trading forex has become so popular.

Volatility

Another reason the forex market is so large and popular is that its volatility and liquidity attract many traders. Currency is constantly shifting in value and can rocket up or down in relatively short periods of time. As a result, opportunities to invest are constantly appearing (and disappearing), so trading forex is ideal, and potentially rewarding, for those who like to do research and speculate on the future value of a currency.

The high liquidity also contributes to the market’s high velocity and popularity, as it means currency can usually be bought and sold immediately, without having to wait a lengthy amount of time.

Leverage

The majority of brokers also offer the option to leverage investments in the forex market. Whilst this can certainly be risky (losses can exceed gains), it also affords traders the opportunity to make more money off a lower investment if it is successful.

This contributes towards the overall size and popularity of forex because it entices those who have less capital to spare, as well as those who are confident in their trading experience and want to make more money for less.

Forex will continue to grow as a market as an increasing amount of prospective traders become interested in its nonstop activity and variety. The various aspects which make it unique, such as its high liquidity and volatility, will undoubtedly serve to maintain its reputation as one of the largest and most popular markets in the world.