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Forex Market Overview

Introduction

The following facts and figures relate to the foreign exchange market. Much of the information is drawn from the 2010 Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity conducted by the Bank for International Settlements (BIS) in April 2010. 53 central banks and monetary authorities participated in the survey, collecting information from 1,309 market participants.

Excerpt from the BIS:

"The 2010 triennial survey shows another significant increase in global foreign exchange market activity since the last survey in 2007, following the unprecedented rise in activity between 2004 and 2007. Global foreign exchange market turnover was 20% higher in April 2010 than in April 2007. This increase brought average daily turnover to $4.0 trillion (from $3.3 trillion) at current exchange rates...The higher global foreign exchange market turnover in 2010 is largely due to the increased trading activity of "other financial institutions" - a category that includes nonreporting banks, hedge funds, pension funds, mutual funds, insurance companies and central banks, among others. Turnover by this category grew by 42%, increasing to $1.9 trillion in April 2010 from $1.3 trillion in April 2007." - BIS

Structure

  • Decentralised 'interbank' market
  • Main participants: Central Banks, commercial and investment banks, hedge funds, corporations & private speculators
  • The free-floating currency system arose from the collapse of the Bretton Woods agreement in 1971
  • Online trading began in the mid to late 1990's


Source: BIS Triennial Survey 2010

Trading Hours

  • 24 hour market
  • Sunday 5pm EST through Friday 4pm EST.
  • Trading begins in the Asia-Pacific region followed by the Middle East, Europe, and America

Size

  • One of the largest financial markets in the world
  • $4.0 trillion average daily turnover, equivalent to:
     
    • More than 12 times the average daily turnover of global equity markets1
    • More than 50 times the average daily turnover of the NYSE2
    • More than $500 a day for every man, woman, and child on earth3
    • An annual turnover more than 10 times world GDP4

  • The spot market accounts for over one-third of daily turnover

1. About $320 billion - World Federation of Exchanges aggregate 2009
2. About $70 billion - World Federation of Exchanges 2009
3. Based on world population of 6.9 billion - US Census Bureau
4. About $58 trillion - World Bank 2009.

 


Source: BIS Triennial Survey 2010

Major Markets

  • The US & UK markets account for over 50% of daily turnover
  • Major markets: London, New York, Tokyo
  • Trading activity is heaviest when major markets overlap5
  • Nearly two-thirds of NY activity occurs in the morning hours while European markets are open6

5. The Foreign Exchange Market in the United States - NY Federal Reserve
6. The Foreign Exchange Market in the United States - NY Federal Reserve

Average Daily Turnover by Geographic Location

Source: BIS Triennial Survey 2010

Concentration in the Banking Industry

  • 9 banks account for 75% of turnover in the U.K.
  • 7 banks account for 75% of turnover in the U.S.
  • 2 banks account for 75% of turnover in Switzerland
  • 8 banks account for 75% of turnover in Japan

Source: BIS Triennial Survey 2010

Technical Analysis

Commonly used technical indicators:

  • Moving averages
  • RSI
  • Fibonacci retracements
  • Stochastics
  • MACD
  • Momentum
  • Bollinger bands
  • Pivot point
  • Elliott Wave

Currencies

  • The US dollar is involved in over 80% of all foreign exchange transactions, equivalent to over US$3.3 trillion per day

Currency Codes

  • USD = US Dollar
  • EUR = Euro
  • JPY = Japanese Yen
  • GBP = British Pound
  • CHF = Swiss Franc
  • CAD = Canadian Dollar (Sometimes referred to as the "Loonie")
  • AUD = Australian Dollar
  • NZD = New Zealand Dollar

Average Daily Turnover by Currency

N.B. Because two currencies are involved in each transaction, the sum of the percentage shares of individual currencies totals 200% instead of 100%.

Source: BIS Triennial Survey 2010

Currency Pairs

  • Majors: EUR/USD (Euro-Dollar), USD/JPY, GBP/USD - (commonly referred to as the "Cable"), USD/CHF
  • Commodity currencies: USD/CAD, AUD/USD, NZD/USD - (commonly referred to as the "Kiwi")
  • Major crosses: EUR/JPY, EUR/GBP, EUR/CHF

Average Daily Turnover by Currency Pair

Source: BIS Triennial Survey 2010

   

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Risk Disclosure: Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.

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