The foreign exchange market or forex market is an international and completely decentralized marketplace where different currencies are bought, sold, and traded by investors. These investors can be institutional, professional, or amateurs. The rates or value of each currency against another is typically dependent on economic, social, and political events both at a national and global level. Over the last 12 months, the market saw a surge of interest. But what drove this and is it sustainable?
An increase in new users
2020 saw a big increase in first-time traders opening forex trading accounts. Some leading forex platforms reported a 300% increase in the number of new accounts opened. Others said that trading volume increased by 50% on a month-to-month basis. Equating to hundreds of thousands of new traders, this was an unprecedented moment in what had previously been a somewhat niche sector.
Higher turnover in currency pairs
As of December 2020, exchanges reported a 10% increase in trading volumes from the year before. By the end of the year, the average daily trading volume was $1.76 trillion which was propelled forward by an increase in turnover between the EUR/USD and GBP/USD. This in turn led to a spike in individuals wanting to find out how to trade forex and seeking out platforms that could help educate them and be a part of their decision-making process. These sites, combined with news sites focussing on EU and US news and finances, helped many understand what was going on.
While December was a good month, in November they increased by as much as 30% around the time of the US Presidential Elections. This volume increase was also driven by news of successful vaccine trial outcomes and the Brexit trade deal between the UK and the European Union.
The impact of the pandemic
But one of the key drivers behind this growth was the COVID-19 pandemic. These topics regularly made the news as wild price fluctuations grabbed headlines. This increased exposure to financial markets news encouraged people to open accounts and begin trading.
Furthermore, the volatility across the foreign exchange market, particularly between EUR/USD and GBP/USD presented traders with plenty of opportunities to make money. By leveraging these price drops and increases they were able to turn a profit.
All of these factors contributed to the global increase in the number of beginner and amateur traders.
What could this mean for the future?
While some of these new traders may not be in it for the long haul, a large percentage are expected to continue. The forex market is already the largest in the world, some 12 times bigger than the futures market. Further growth could propel it forward and lead to a rise in retail forex trading. Similarly, the lack of stability in forex and the stock market are also likely to keep investors interested.
The international foreign exchange market has been opened up to a whole new class of investors. No longer the preserve of those involved in other aspects of the financial world, more and more ‘average’ people are expanding their financial literacy and taking the plunge.