If we cast our minds back to the beginning of 2016, we see that the global forex market produced daily trading volumes of around $5.1 trillion.
Interestingly, this number had increased to $6.6 trillion by the end of 2019, despite the impact of the coronavirus pandemic and the diversification of markets and asset classes across the board.
But what exactly is forex trading, and what has powered this market’s incredible growth in the digital age?
What is Forex Trading – A Brief Introduction
The forex market is a global and 24-hour entity that sees the buying, selling and trading of international currencies.
Such currencies are traded in pairs and as derivative assets, creating a scenario where ownership of the underlying asset can be eschewed and investors can speculate on price movements in real-time.
Not all currency pairs are created equal, with the seven so-called “major” pairings boasting high levels of liquidity and accounting for 68% of the forex market’s cumulative trading volume. Minor pairings are slightly less liquid as they don’t feature the dominant greenback, while exotic pairs are highly volatile and typically pit the dollar against assets like the Mexican peso and Turkish lira.
Traders can also utilize increased leverage to open and control positions that are significantly larger than the size of their deposit, often at a ratio of up to 100:1.
This increases the size of potential gains and losses, so it must be used wisely and as part of an overarching trading strategy.
What has Driven the Growth of the Forex Market?
Undoubtedly, the primary sector that has driven growth in the global forex market is increased accessibility, with the emergence of online brokerage sites and trading platforms having bridged the once sizable gap between part-time investors and the execution of real-time forex trades.
More specifically, these tools have created a scenario where investors of all shapes and sizes can access the forex market in real-time, while providing them with access to detailed analytics, a wealth of technical indicators and swathes of live news and trading tutorials.
Interestingly, the coronavirus pandemic has also driven growth in the forex market, with the associated lockdowns and job losses have caused people to spend more time at home and seek out additional ways of making cash.
Make no mistake; forex investments have emerged as the most popular investment option in a post-Covid realm, alongside the wider trading of selected technology and biotech stocks.
This trend is likely to continue too, with last year projected to represent the beginning of a six-year span in which forex trading volumes will increase at a CAGR of approximately 6%.
The evolution of automated trading and artificial intelligence (AI) is also making forex trading increasingly popular, as this improves the efficiency of individual trades without compromising on the number of orders executed.