A Detailed Overview of the Forex Market

Introduction

The following facts and figures relate to the foreign exchange market. Much of the information is drawn from the Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity conducted by the Bank for International Settlements (BIS) in April 2004, and published in March 2005. 52 central banks and monetary authorities participated in the survey, collecting information from approximately 1200 market participants.

Structure

• Decentralised, over-the-counter market, also known as the 'interbank' market
• Main participants: Central Banks, commercial and investment banks, hedge funds, pension funds, corporations & private speculators
• The free-floating currency system began in the early 1970's and was officially ratified in 1978
• Online trading began in the mid to late 1990's

Source: BIS Triennial Survey 2004

Trading Hours

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

Size

• Largest financial market in the world
• $1.9 trillion average daily turnover, equivalent to:
  
• More than 10 times the average daily turnover of global equity markets¹
• 40 times the average daily turnover of the NYSE²
• $300 a day for every man, woman, and child on earth
• An annual turnover more than 10 times the value of all the world's goods and services combined (GDP)³
  
  
• The spot market accounts for about one-third of daily turnover

1. About $167 billion - World Federation of Exchanges aggregate 2004
2. About $46 billion - NYSE 2004
3. About $36 trillion - World Bank 2003

Source: BIS Triennial Survey 2004

Major Markets

• The US & UK markets account for more than 50% of turnover
• Major markets: London, New York, Tokyo
• Trading activity is heaviest when major markets overlap⁴
• Nearly two-thirds of NY activity occurs in the morning hours while European markets are open⁵

4. NY Federal Reserve
5. NY Federal Reserve

Average Daily Turnover by Country

Concentration in the Banking Industry

• 16 banks account for 75% of turnover in the U.K.
• 11 banks account for 75% of turnover in the U.S.
• 11 banks account for 75% of turnover in Japan

Note: The reference here is to individual banking offices rather than banking organisations.

Source: BIS Triennial Survey 2004

Trading

• Retail brokers research: 90% of traders lose money, 5% break even, 5% make money

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 approximately 90% of all foreign exchange transactions, equivalent to over US$1.5 trillion per day

Currency Codes

• USD = US Dollar
• EUR = Euro
• JPY = Japanese Yen
• GBP = British Pound
• CHF = Swiss Franc
• CAD = Canadian Dollar
• 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 2004

Currency Pairs

• Majors: EUR/USD, USD/JPY, GBP/USD, USD/CHF
• Dollar bloc: USD/CAD, AUD/USD, NZD/USD
• Major crosses: EUR/JPY, EUR/GBP, EUR/CHF

Average Daily Turnover by Currency Pair