The foreign exchange (forex) market remains the largest and most liquid financial market in the world, with a daily trading volume surpassing $7.5 trillion. Unlike centralized exchanges such as the NYSE or NASDAQ, forex operates as an over-the-counter (OTC) marketplace, connecting banks, corporations, hedge funds, and retail traders across a decentralized network.
At its core, the forex market is driven by institutional participants, including central banks, commercial banks, sovereign wealth funds, and major investment firms. These entities collectively account for over 85% of global forex turnover. The interbank network forms the backbone of global liquidity, determining spreads, volatility, and price depth.
Liquidity is highest during the overlap of London and New York sessions, when institutional order flow peaks. This is when high-frequency traders, algorithmic systems, and macro funds execute large-scale transactions based on global interest rate differentials and cross-asset correlations.
Central banks, particularly the U.S. Federal Reserve, the European Central Bank, and the Bank of Japan, play pivotal roles in setting the tone for currency valuations through monetary policy decisions. Their interventions—whether direct or verbal—can lead to massive liquidity shifts and volatility spikes.
For advanced traders, understanding liquidity flows means analyzing institutional positioning data (like the CFTC’s Commitment of Traders report) and observing interbank swap rates. These indicators reveal where large money is moving and how sentiment is forming behind key pairs such as EUR/USD or USD/JPY.
In essence, professional forex trading involves following liquidity—not predicting price. The market moves where liquidity pools exist, and institutions exploit this through smart order execution, arbitrage, and algorithmic systems. Mastering these concepts gives traders a structural edge in navigating the most dynamic market on earth.
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