The World's Largest Trading Market: What is Forex and How to Participate

The True Scale of the Foreign Exchange Market

To say the largest and most active trading stage in the global financial markets, it must be the Foreign Exchange Market. Every day, $6.6 trillion worth of transactions flow through this market. In comparison, the New York Stock Exchange’s daily trading volume is only $22.4 billion, illustrating the vast difference. The foreign exchange market is not only large in scale but also a global decentralized market, operating 24 hours a day without a single central exchange, but rather a vast network of banks, brokers, and investors around the world.

What Does Forex Actually Represent

Simply put, foreign exchange (abbreviated as Forex or FX) is the act of exchanging one currency for another. Forex trading is an investment method that profits from buying and selling different currencies based on fluctuations in exchange rates.

Imagine walking into an airport currency exchange when traveling abroad, looking at the displayed exchange rates, and deciding to convert your New Taiwan Dollars into US Dollars — this act is participating in the forex market. For example, if the exchange rate is 0.034, and you exchange NT$10,000 for $3,400 USD, you are essentially selling NT$ and buying USD. This is the most basic form of forex trading.

Exchange rate is the relative price of two different currencies, constantly changing every second. These fluctuations are influenced by multiple factors—national economic strength, fiscal policies, international relations, and more, all driving the rise and fall of exchange rates. For instance, when the Japanese Yen shows a clear depreciation trend, many traders borrow Yen to buy US Dollars, profiting from the exchange rate difference.

Why the Forex Market Is Always Trading

Unlike stock or bond markets, the forex market is open almost all the time — operating five days a week, 24 hours a day. Trading begins in Auckland/Wellington, New Zealand, then shifts sequentially to Sydney, Singapore, Hong Kong, Tokyo, Frankfurt, London, and finally New York, before starting over. This means that as long as you have an internet connection, you can trade forex at any time, regardless of your location or time zone.

It’s worth noting that although the daily trading volume reaches $6.6 trillion, the actual spot forex market’s trading volume is about $2 trillion per day. Retail investors’ daily trading volume accounts for only 3-5% of the total, roughly $20-30 billion. Nevertheless, it remains a highly liquid market.

What Is Bought and Sold in the Forex Market

In simple terms, forex trading involves buying and selling currencies. Although you don’t physically exchange cash, you can think of it this way: purchasing a currency is akin to buying that country’s “stock.” Currency prices typically reflect the market’s assessment of that country’s current and future economic conditions.

If you expect the US economy to improve, you can buy US Dollars. If your prediction proves correct and the US economy indeed improves gradually, you can sell the USD back into the market, realizing profit through buying low and selling high. Essentially, exchange rates reflect a country’s economic strength relative to others.

Major Currencies in the Forex Market

The forex market offers a wide range of currency pairs, but beginners usually focus on major currency pairs. These represent the world’s largest economies, including USD, EUR, CAD, GBP, CHF, AUD, JPY, and NZD.

How to Read Currency Codes

Each currency has a three-letter code. The first two letters represent the country, and the third letter indicates the currency name’s initial. For example, USD stands for the US dollar, where US represents the United States, and D stands for Dollar.

This coding system was established in 1973 by the International Organization for Standardization (ISO), known as ISO 4271 currency codes, and is still used worldwide today.

As the most traded currency globally, the US dollar has many nicknames, such as Buck or Greenback. The nickname “Greenback” has an interesting origin: during the US Civil War in 1861, the dollar’s back was printed with a prominent green color, hence the name Greenback.

Advantages of Forex Trading Compared to Stocks

• Lower Costs. Forex trading does not require paying broker commissions, nor are there clearing or transaction fees. Retail forex brokers profit from the bid-ask spread, which is typically below 0.1%, and can be as low as 0.07% for large trades.

• Flexible Trading Sizes. Futures contracts are standardized by exchanges, but forex allows for small positions. Many brokers support minimum trades of just 1,000 units of currency.

• High Flexibility in Timing. The forex market is open 24 hours from Monday to Friday, from the Australian market opening on Monday morning to the New York market closing on Friday, allowing traders to trade anytime and anywhere.

• Leverage Support. Traders can control large positions with a small amount of capital. For example, a 50:1 leverage means $50 margin can control a $2,500 position, and $500 margin can control a $25,000 position.

• High Liquidity. The enormous daily trading volume ensures that trades can be executed instantly under normal market conditions, with price execution being reliable.

Forex Market vs Stock Market

The world’s top two stock exchanges combined have only about 6,000 stocks, whereas the most traded currency pairs in the forex market are just 7 major pairs — meaning focus and attention are more concentrated.

Forex also has other unique advantages: stock trading is limited by exchange hours (e.g., US stocks from 9:30 to 16:00), while forex operates seamlessly 24 hours. The trading volume and liquidity of forex far surpass those of stocks. There are no special restrictions on short selling in forex; both long and short positions are available. Additionally, forex is less influenced by analyst opinions or broker recommendations — after all, forex is a primary revenue source for global banks and a necessary component of the global market, so individual analyst views have limited impact.

Forex Market vs Futures Market

• Liquidity Comparison: The daily forex trading volume is $6.6 trillion, compared to only $30 billion in the futures market — a significant gap.

• Trading Hours: Forex operates 24 hours, while futures have overnight markets but with relatively lower liquidity.

• Trade Execution: Forex offers fast execution and reliable pricing under normal conditions, whereas futures and stocks do not always guarantee this.

• Risk Management: Forex spot market risks are relatively smaller. When losses exceed the margin requirement, platforms issue margin calls or automatically close positions. Futures markets differ: traders’ losses can exceed their account funds, and they must bear responsibility for the excess.

Summary

The forex market is the largest financial investment market in the world, attracting investors globally with its transparency and low entry barriers. Whether it’s companies engaging in international trade, individuals exchanging currency for travel, or traders seeking investment opportunities, the forex market provides a highly liquid and efficient platform.