Turnover is one of those terms you’ll hear thrown around in the forex, but what does it mean?
How does it affect traders like you and me? If you’ve ever been curious about this concept, then you’re in the right place.
In forex trading, turnover is more than just a word, it helps to understand the flow of the market and how it operates.
Let’s explain the term step by step so that even a complete beginner can understand.
In This Post
What Does Turnover Mean in Forex?
In forex trading, turnover refers to the total value of all the trades (buying and selling of currencies) executed in the forex market during a specific period.
It’s also called trading volume. This number shows how active the forex market is and how much money is moving around.
For example:
If traders buy and sell $5 trillion worth of currency in a day, that day’s turnover is $5 trillion.
The global forex market sees a daily turnover of over $7.5 trillion as of 2024, making it the most liquid financial market in the world.
Turnover is like the heartbeat of the forex market, the higher the turnover, the more active and liquid the market.
Why Is Turnover Important in Forex?
Understanding turnover isn’t just for fun, it’s a practical tool that can help you make better trading decisions.
Below is why turnover is important:
1. Liquidity in the Market
High turnover = High liquidity: This means you can easily buy or sell currencies without waiting too long or losing money due to large price changes.
Low turnover = Low liquidity: This can make it harder to trade, and you might experience higher volatility (sudden price movements).
2. Tighter Spreads
Turnover directly impacts spreads, which is the difference between the buying price (ask price) and the selling price (bid price).
Higher turnover leads to tighter spreads, which is good because it reduces your trading costs.
3. Market Sentiment
High turnover often signals that traders are confident and active.
Low turnover could indicate uncertainty or less participation in the market.
Factors That Influence Turnover in Forex
Several factors can affect how much trading activity happens in the forex market.
These include:
1. Economic News and Events
Major events like interest rate decisions, unemployment reports, or GDP announcements often lead to higher turnover.
For example, when the U.S. Federal Reserve announces a rate hike, traders rush to buy or sell USD, increasing turnover.
2. Political Stability
Political events, such as elections, conflicts, or major policy changes, can drive turnover.
A stable government often attracts more traders to a country’s currency, increasing turnover.
3. Market Hours
Turnover is higher during peak trading hours, especially when the London and New York sessions overlap.
On weekends, turnover drops as most traders take a break.
4. Central Bank Activity
Central banks, like the European Central Bank (ECB) or the Bank of Japan (BoJ), influence turnover through monetary policies.
How is Turnover Calculated in Forex?
Turnover in forex is calculated by adding up the total value of all executed trades (buying and selling of currencies) within a specific period.
It represents the total activity or trading volume in the market. Below is how the calculation works in detail:
1. Identify the Total Volume of Trades
Volume refers to the number of currency units traded in a given time. For example, if traders buy and sell 1 million EUR/USD contracts, the volume is 1 million.
Remember, this includes trades made in different ways, like spot trades, forwards, futures, and swaps.
2. Multiply by the Trade Size
Each trade has a specific notional value, which is the amount of money involved in the trade. For instance, a standard lot in forex is 100,000 units of currency.
Example: If 1 million EUR/USD trades occur and the trade size is $100,000 per contract, the total turnover would be:
1 million x $100,000 = $100 billion.
3. Account for All Currencies Traded
Since turnover reflects the overall activity in the forex market, all currency pairs (like EUR/USD, GBP/USD, USD/JPY) are included in the total.
Add the turnover for each pair to get the overall market turnover.
Formula for Forex Turnover
The general formula for calculating turnover is:
Turnover = Trade Volume x Notional Value Per Trade
If you want the daily turnover for the entire forex market, you calculate it by summing up the turnover from all trades executed globally in one day.
Example of Turnover Calculation
Let’s assume the following:
500,000 trades of EUR/USD are executed in a day, each worth $100,000.
- Turnover for EUR/USD:
500,000 x $100,000 = $50 billion.
300,000 trades of GBP/USD are executed, each worth $200,000.
- Turnover for GBP/USD:
300,000 x $200,000 = $60 billion.
200,000 trades of USD/JPY are executed, each worth $150,000.
- Turnover for USD/JPY:
200,000 × $150,000 = $30 billion.
The total forex market turnover for the day would be:
$50 billion + $60 billion + $30 billion = $140 billion.
Conclusion
Turnover is like the pulse of the forex market, it shows how active and liquid the market is.
For traders, understanding turnover is essential for navigating the market effectively and reducing risks.
The next time you hear about turnover, you’ll know exactly what it means and why it’s so important.