Currency trading or “foreign exchange trading” is based on the exchange rate of two different currencies at the time of exchange. It is a transaction in which you exchange (buy and sell) two currencies at the same time i.e. buy one of the two different currencies and sell the other.
In addition, the combination of currencies such as dollar/yen, euro/yen, euro/dollar, etc. when conducting this transaction is called a “currency pair”. The currency displayed on the left side is called a “base currency”.
Actual condition of currency trading:
There are two types of currency transactions, speculative transactions and actual demand transactions. In the foreign exchange market, speculative transactions account for more than 90% of the total transaction volume.
- Speculative trading:
This is aimed at pure profit through counter-trading, and liquidity improvement.
- Actual demand trading:
Supports economic activity with almost no counter-trading.
Types of currency transactions:
The two types of currency transactions are outright transactions and swap transactions.
- Outright trading:
This is single trading of spots and futures.
- Swap trading:
This is a combination of trading of spots and futures.
Currency trading position:
Currency trading positions (holdings) can be long, short or square.
- Long : Buy
- Short : Sell
- Square : Equilibrium between buy and sell
Which currency has the most trading volume?
Overwhelmingly, a large volume of US dollars characterizes the FX market. According to data released by the Bank for International Settlements (BIS) in 2019, the share by currency accounts for 44% of the market, which is almost half.
The US dollar, which has the world’s largest economic and military power, has good creditworthiness and is used as a key currency for various transactions such as trade and financial transactions outside the United States, and is also in high demand as a foreign currency reserve.
Then, following the US dollar, the euro is 16%, the yen is 8.4%, the pound is 6.4%, the Australian dollar is 3.4%, and so forth.
Transaction volume by currency pair is also center on the dollar:
Usually, it is always a combination of “buying one currency” and selling the other currency in currency trading
Looking at the transaction volume for each currency pair, the currency pair involving the US dollar still occupies the top position.
The currency pair with the largest trading share is EUR/USD, which is a combination of the top two currencies, with 24%, followed by the dollar/yen pair with 13.2%, which is the second highest share.
Of these two currency pairs, the third currency pair, GBP/USD, accounts for nearly half of the total.
What is the difference between a currency pair with a large volume and a currency pair with a small volume?
Currency pairs with low trading volumes tend to be more volatile than currency pairs with high trading volumes.
In the Forex market, the seller and the buyer meet, and the price is decided upon.
For this reason, in the case of a currency pair with a large volume of transactions, it has many market participants, therefore it is possible to find people who want to sell or buy immediately in the market, so the price movement tends to be relatively smooth.
On the other hand, in the case of a currency pair with a small trading volume, that is to say, a currency pair with a small number of market participants, it is more difficult to find a person who wants to sell or buy than a currency pair with a large number of market participants, so price ranges tend to be wider and price movements tend to be rougher.
What is liquidity?
“Liquidity” is a word we often hear when talking about the Forex market.
Generally, the term “liquidity” is used to mean whether it can be easily converted into money.
In other words, “high liquidity” means that you can cash in immediately, and “low liquidity” means that you cannot cash in immediately.
Liquidity in the Forex market can be divide into “liquidity by currency type” and “liquidity by time zone and market conditions”.
Liquidity by currency type:
Liquidity by currency type is based on the volume of transactions in each currency.
As mentioned above, the market currencies of major countries with high trading volumes have many market participants and are highly liquid, while currencies with few market participants such as emerging market currencies are less liquid.
Liquidity depending on time of day and market conditions:
The Forex market can be traded 24 hours a day, but depending on the time of day, there are times when there are many market participants and times when there are few.
During periods of low liquidity, even currency pairs in major countries with high trading volumes tend to be less liquid and volatile.
Holidays in each country also have a significant impact on liquidity.