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How Much Is Traded In Forex Daily Could Blow Your Mind As A Retail Forex Trader

How Much Is Traded In Forex Daily Could Blow Your Mind As A Retail Forex Trader

The forex market is almost a mythical attraction to people who want to quit their day jobs and spend their days making easy money by clicking buttons on a PC. It’s easy to invest in forex, and best of all, there’s so much money to make here for those who know what to do.

How much is traded in forex daily compared to stock exchanges? We will answer this question in this article along with other related questions. But first, knowing how forex works is not difficult… And hey, the truth is, many people are indeed making money with forex. There’s actually a market for global currency exchanges, and you can indeed play it for extra funds.

How much money is traded in forex daily?

It should not be a matter of controversy when reporting on how much money is traded in forex daily around the world. This shouldn’t be news, considering all the facts on the table. But we should start by confirming that indeed the absurdly huge number that’s said to be the Forex market’s daily traded amount is indeed true. Forex volumes, when put together, surpasses the 5 trillion USD mark daily according to Business Insider.

Considering that so much has been reported on the forex market over the last decade, the numbers surely provide enough motivation for persons looking for a profitable market to trade in. What else can you expect? Trading platforms are available, and several brokers are within reach to give every investor the tools to have a bite of the forex goldmine.

How does it compare?

Naturally, a number with nothing assigned to it is worthless. The part many people would like to know is, how does this amount compare to the daily trades for other markets? How does the stock or commodities market stack up against Forex? It turns out, rather poorly.

Forex Vs. Stocks

The stock market is often thought of as huge, considering the massive amounts of money moved every minute during trading hours in the countries of the world.

The stock market is indeed huge. Massive amounts of money are moved there every minute and hour. Most money doesn’t end up there. In fact, if we go to numbers, currently the stock market (as per NASDAQ’s estimates) reaches 100 billion dollars in transactions a day. This, however, pales into insignificance when compared to how much money is traded in forex daily.

In truth, stock market volumes have receded in recent years. This is important because stock market trades have been dropping since 2015, and it’s quite possible the final number for this year follow this trend. The global market is thought to be facing the possibility of a recession-thanks to the China-US trade wars.

The question is, has the forex market followed suit with this trend? Right now, it’s impossible to know – although luckily, we’ll have answers soon enough. The global economy has considerably slowed down over the last few years, so it’s good to wonder whether the forex market has been hit by this – or if it manages to remain up regardless of the economy. Chances are it’s the former and 2019 numbers won’t differ so much from the reported highs.

Forex Vs. Commodities and Futures

Commodities and futures markets are much more difficult to estimate than forex and stock markets. Commodities make up a huge amount of markets, and said markets are controlled by different entities depending on the country – leading to a worldwide market that’s impossible to predict.

However, there’s one thing that can be said – the commodities market may churn out more money than Forex. Yet even if this is true, the commodity market is also more difficult to trade in than forex, and its products more difficult to move – after all, it’s easier to find somebody willing to exchange GBP for USD than somebody willing to purchase two tons of timber or a tanker load of crude oil.

That doesn’t mean you can’t make a profit on the commodities market, you definitely can, but it takes a lot more effort and a much bigger investment than with forex.

Who trades Forex?

A common question when entering the market is “is it for me?” It’s common to think that either only the big companies do forex or only official entities do so. or nobody at all would really risk playing a market like this and it sure must be illegal.

While companies and official entities do have a part in the forex market, since they often need to exchange currencies as a norm, they don’t “play” the market. The forex market is risky and complex, and most central banks have better things to do than risk losing the country’s whole GDP in a bad investment.

In truth, the forex market is complex and extensive enough that everyone has a role to play in it. That naturally includes you, the private investor and reader. If how much money is traded in forex daily is considered, you should indeed find a footing in this market space.

Central and Commercial Banks

Let’s get this one out of the way. We’ve already established that central banks don’t do day trading using the country’s GDP to receive leverage from the IMF. So, how do central banks play a part in the forex market?

They do so in several levels, to the point where central banks are a key part of the market. The full answer is quite long and complex, but it can be concisely rendered within this framework.

The main way the central market affects the forex market is by setting policies. These policies affect the economy of a country and, in turn, the value of its fiat currency. As such, every single action a central bank takes, even if not geared towards forex, will affect forex. Central banks are, therefore, one of the main factors affecting the forex market and its rates, because the currencies traded in forex depend directly on them.

There’s more. Even central banks from countries that don’t use the big eight currencies play a part. Smaller countries often keep a part of their savings liquid. However, a central bank can’t just keep a bunch of its own fiat currency in a vault and call it savings. As the issuer of said currency, it is effectively worthless to them.

So, they turn to other currencies for liquid savings. It’s not uncommon for many countries to keep large savings valued in USD, GBP, or EUR. And when a country needs to move these savings, or exchange them, who do they turn to?

It is the forex market, of course.

Institutional Investors

Institutional investors are entities that aren’t official – that is, they aren’t directly controlled by the government – but who indirectly feed the local and national economy by managing forex funds. This is common with hedge, retirement, and investment funds managed by corporations and global finance companies. These funds contain a substantial proportion of savings in forex (because they’re liquid) and are managed by third parties.

Although these institutional investors can be cataloged as speculators due to the way they move their holdings, their main task in the market is close to that of the banks: Setting the stage for trades. In fact, some of these big players are able to earn so much more just by moving funds from low-end forex to high-end forex as a result of their global spread.

It is often the case that at times of market turmoil, the institutional investors are the first to react and make a move due to their investment in market intelligence. So, if a particular currency loses as much as 10 percent in a day to the USD, it means someone somewhere has gained as much as 10 percent just by currency conversion. This ROI surely trumps a year’s earnings from savings accounts or treasury bills.

Corporations and Large Companies

These are the end users of the forex market. While banks and institutions set policies and give the market a large supply and demand, they don’t quite move the market since they’re relatively small in comparison. Corporations, on the other hand, do: These big players move the bulk of the money that’s traded in forex.

Multinational corporations have holdings in many parts of the world, usually also in many different currencies. They also make money in a variety of currencies and often sell products in countries other than where they produce their goods or where they’re headquartered.

So corporations turn to the forex market whenever they need to exchange money. These exchanges happen most of the time with two goals. First, helping pay for manufacturing, production, and shipping costs. Since goods are produced and sold in different countries, the revenue is generally received in a currency that manufacturers don’t trade in. So the forex market helps them fix that.

The second goal is simply funneling revenue towards the headquarters, either for investment or to keep as liquidity. While having funds all over the world isn’t a bad idea, corporations generally have preferred countries, currencies, or banks. When they need to move their holdings at any time, forex is the medium to do just that.

Retail Investors

While the word “retail” is often used to imply stores, forex retail investors don’t need to be tied to commercial entities – although some of them are. Retail investors refers to the Average Joes who might be looking for currency exchanges or trying to play the market. This set of persons can be found all over the world, from Tokyo to New York.

This is where you, the reader, would fit.

Now let’s make something clear: The deck is stacked against retail investors. The market moves in a way that makes profiting from it difficult, although not impossible, and earnings are often paper thin. This is partly because the forex market, no matter what some might say, doesn’t exist for retail investors. Unlike the stock market, which exists for all investors, retail investment is mostly a side effect of a healthy forex market.

In a live scenario, the difference in opening and closing rates or even the ruling rates are often minimal. When for example a change in USD: JPY is as much as +0.80, while a holder of 10,000 USD will earn 800JPY, another holder of 10m USD will earn 800,000JPY.

Forex trading is, thus, mostly speculative – and a large percentage of it consists precisely of people trying to play it, either with their own funds or using leverage (which requires they have funds to begin with.) Retail investors could disappear, and the forex market would keep on working as usual. Unlike Banking, Institutions, and corporations, the retail investor isn’t an important part of the market.

The retail investor would continue trading day after day, earning small margins with a spread of options, and the profit moment often comes when there is a substantial market movement.

The Takeaway

The forex market isn’t a private club for only large entities. In fact, the forex market is notoriously easier to enter than the stock market, in part due to its fluid nature, but also because prices of fiat currencies and trading platforms are low enough that any interested party can jump in. As such, the market allows for all types of investors and individuals to enter, as there’s a place for everyone.

Small investors can jump in and try to play the market for a quick buck, or even for a living. In many countries around the world, forex trading has become relatively common over the decade as more persons look to avenues for financial independence.

As a retail investor, a look at how much money is traded in forex daily should catch your attention. No matter how you invest (or not,) you’ll never move enough money for your movements to be noticed or make a dent in the market. Retail investors don’t shape or change the market, they can profit from it – meaning these traders can get great earnings (at a risk) without ever having any responsibilities towards the market like the big players do. Clearly, anyone can have a bite of the forex pie, and be glad!

 

References

  1. https://smallbusiness.chron.com/foreign-exchange-accounting-rules-77779.html
  2. https://www.ft.com/content/66e972dc-9ed2-11e3-8663-00144feab7de
  3. https://www.dummies.com/education/finance/international-finance/the-roles-of-speculators-and-central-banks-in-foreign-exchange-markets/
  4. https://www.investopedia.com/ask/answers/06/reserverequirements.asp
  5. https://www.businessinsider.com/heres-how-much-currency-is-traded-every-day-2016-9?IR=T

Author Profile

Fat Finger

Fat Finger

Hello everyone!

My name is Phat Fin Ge, but most people just call me Fat Finger or Mr. Finger.

Many years ago, I was a trader on the Hong Kong Stock Exchange. I became so successful that my company moved me to their offices on Wall Street. The bull market was strong, but my trading gains always outperformed market averages, until that fateful day.

On October 28th, 1929, I tried to take some profits after Charles Whitney had propped up the prices of US Steel. I was trying to sell 10,000 shares, but my fat finger pressed an extra key twice. My sell order ended up being for 1,290,000 shares. Before I could tell anyone it was an error, everyone panicked and the whole market starting heading down. The next day was the biggest stock market crash ever. In early 1930, I was banned from trading for 85 years.

I went back to Hong Kong to work at my family's goldfish store. Please come and visit us at Phat Goldfish in Kowloon, only a 3 minute walk from the C2 MTR entrance.

I thought everyone would forget about me and planned to quietly return to trading in 2015. To my horror, any error in quantity or price which cause a problem kept getting blamed on Fat Finger, even when it was a mix up and not an extra key being pressed. For example, an error by a seller on the Tokyo Stock Exchange was to sell 610,000 shares at ¥6 instead of 6 shares at ¥610,000. That had nothing to do with me or with how fat the trader's finger was, but everyone kept yelling, "Fat Finger! Fat Finger!" In 2016, people blamed a fat finger for a 6% drop in the GBP. It really was a combination of many things, none to do with me or anyone else who had a wider than average finger.

Now that I can trade again, I'm finding forex more interesting than stocks. I've been doing some research on trading forex and other instruments and I'll be sharing it here.

If you see any typing errors, you can blame those on my fat finmgert. If you see any strange changes in price, it's not my fault.

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