Complete Guide to the Forex Market: Basic English Concepts and Detailed Trading Insights of the World's Largest Financial Market

Foreign exchange is the largest investment sector in the global financial markets. The name comes from the English term “Foreign Exchange,” abbreviated as “Forex” or “FX,” representing the act of exchanging one currency for another. Understanding the meaning of “Foreign Exchange” in English and how the market operates is crucial for investors looking to enter the global financial arena.

Why is it called “Foreign Exchange”? The Meaning Behind the English Name “Foreign Exchange”

The term “Foreign Exchange” in English refers to “外匯” in Chinese, where “Foreign” means foreign or international, and “Exchange” signifies swapping or trading. This term accurately captures the core essence of forex trading — converting one country’s currency into another.

In practical terms, forex trading involves buying and selling different currencies to profit from changes in exchange rates. Let’s use a real-world example: when traveler Bill prepares to visit the United States from Taiwan, he needs to convert New Taiwan Dollars (NTD) into US Dollars (USD). At the currency exchange counter in the airport, Bill sees a screen displaying various exchange rates — these rates represent the relative value between two different currencies.

Suppose the rate shows NTD to USD as 0.034. Bill exchanges 10,000 NTD and receives 3,400 USD. In this transaction, Bill is participating in the forex market — he sells NTD and buys USD, which is the fundamental operation of forex trading.

How the Forex Market Works: A Decentralized Financial Ecosystem Operating 24/5

The forex market is the largest and most liquid financial market in the world, and it is a fully global, decentralized marketplace. Currencies from around the world are traded 24 hours a day, Monday through Friday, without interruption.

Why Do Exchange Rates Fluctuate Constantly?

Exchange rates fluctuate due to various economic factors. A country’s economic strength, fiscal policies, international relations, trade balances, and interest rates all influence currency values. For example, when the Bank of Japan implements policies that cause the yen to depreciate, many investors may borrow yen to buy stronger currencies like the US dollar, aiming to profit from the exchange rate difference.

Trading Volume and Participants

The daily trading volume in the forex market reaches approximately $6.6 trillion, reflecting its enormous scale. To put this into perspective, compare it with the New York Stock Exchange, which has a daily trading volume of about $22.4 billion. This means the forex market’s daily turnover is hundreds of times larger than the stock market.

Although the overall forex trading volume is immense, the actual spot forex market’s daily trading volume is about $2 trillion. When considering retail investors, their participation accounts for roughly 3-5% of total daily volume — about $20 to $30 billion, sometimes even less. This indicates that institutional investors and banks dominate the market.

Besides forex transactions related to international trade and tourism, most currency trading is speculative — traders buy and sell based on their predictions of future exchange rate movements.

Unique Advantages of Trading Hours

The forex market is open nearly 24 hours a day, which is its most distinctive feature compared to other financial markets. It operates five days a week, 24 hours each day, closing only on weekends. Unlike stock or bond markets that cease trading after hours, the forex market moves in a continuous cycle across major financial centers worldwide.

A typical trading day begins in Auckland/Wellington, New Zealand, then shifts to Sydney, Southeast Asia’s Singapore and Hong Kong, Tokyo, Frankfurt, London, and finally New York, before starting over. This seamless global trading system allows investors to participate flexibly according to their time zones and schedules.

Major Currencies and the ISO 4217 Standard: Recognizing International Currency Codes

The Currencies Traded in Forex

Many newcomers wonder: what exactly are we trading in the forex market? The answer is simple: currencies. Since forex involves intangible ownership transfer of currencies rather than physical delivery, it can seem more abstract than traditional investments.

A helpful way to understand this is to think of buying a currency as purchasing a “stock” of that country’s economy. Currency prices often reflect market expectations about the current and future performance of that economy. For example, if you are optimistic about the US economy’s prospects, buying USD might be a rational decision. If your judgment is correct and the US economy continues to grow, you can sell USD at a higher price later, profiting from the difference. Essentially, the exchange rate of one currency against others reflects the relative economic health of that country compared to others.

What Are Major Currencies?

While there are many currencies available for trading, novice traders tend to focus on the most traded major currencies. These include the official currencies of the world’s largest economies: USD, EUR, CAD, GBP, CHF, AUD, JPY, and NZD.

Understanding Currency Codes and the ISO 4217 Standard

Each currency has a three-letter code standardized under the “ISO 4217” system. The code is constructed as follows: the first two letters represent the country’s name in English, and the third letter indicates the currency’s name.

For example, the US dollar is “USD” — “US” for United States, and “D” for dollar. Similarly, the euro is “EUR” (Europe + Euro), and the Japanese yen is “JPY” (Japan + Yen).

This standardized coding system was established by the International Organization for Standardization (ISO) in 1973, known as ISO 4217. It ensures that global financial markets can use a unified, clear way to identify currencies, which is vital for international trade and financial transactions.

The Unique Status and Nicknames of the US Dollar

As the most frequently traded currency worldwide, the US dollar has several well-known nicknames, including “Buck” and “Greenback.” The nickname “Greenback” originated during the American Civil War in 1861 — when US paper currency featured a prominent green back, leading people to affectionately call it “Greenback.” This nickname has persisted and become a colloquial term for the dollar.

Core Advantages of Forex Trading

Low Costs and No Commissions

Forex trading offers very low entry barriers and transaction costs. Most importantly, traders do not pay commissions to brokers — a significant advantage over stocks and futures markets. Most retail forex trades do not involve clearing fees or transaction commissions. The broker’s main income comes from the bid-ask spread, which under normal market conditions is typically less than 0.1%. For larger institutional trades, spreads can be as low as around 0.07%.

Flexible Trading Sizes

Unlike futures markets, where contract sizes are standardized (e.g., a silver futures contract is 5,000 ounces), forex offers much greater flexibility. Many brokers allow traders to open mini lots as small as 1,000 units of currency or even smaller, enabling investors with limited capital to participate.

24-Hour Trading Convenience

The all-week, 24-hour nature of forex provides unprecedented trading freedom. From the opening in Sydney on Monday morning to the close in New York on Friday afternoon, traders can execute trades at any time that suits their schedule, without being restricted to specific trading hours.

Leverage to Amplify Profits

Forex allows traders to use leverage to magnify gains, which is a key attraction. Leverage means controlling larger positions with a smaller amount of capital. For example, a broker might offer 50:1 leverage, meaning with $50 of margin, a trader can control $2,500 worth of currency. With $500 margin, they can control $25,000. This mechanism enables small investors to participate in large-scale trading.

Market Liquidity Advantage

The forex market’s enormous daily trading volume ensures high liquidity, meaning traders can usually execute buy or sell orders instantly at desired prices. This efficiency is especially important for those needing quick entry and exit.

Comparing Forex and Stocks: Major Market Differences

Diversity of Trading Assets

Compared to the world’s two largest stock exchanges — NYSE with about 2,800 listed stocks and NASDAQ with around 3,300 — the forex market’s most traded seven major currency pairs far surpass the attention and liquidity of thousands of stocks.

Trading Hours

Stock markets are limited by exchange hours — for example, US markets open at 9:30 AM and close at 4:00 PM Eastern Time. Trading outside these hours is not possible. In contrast, forex is a seamless 24-hour market, giving traders full control over their trading schedule.

Liquidity and Trading Volume

Forex’s higher liquidity and daily trading volume ensure that traders can execute orders quickly and with minimal price impact, unlike stock markets where liquidity can vary significantly.

Short Selling Restrictions

Stock markets impose restrictions on short selling, requiring certain conditions to be met. Forex markets do not have such restrictions; traders can freely go long or short regardless of market direction, providing more balanced trading opportunities.

Influence of Analysts

Stock prices are often heavily influenced by analyst opinions and broker recommendations. When a company’s earnings fall short or beat expectations, its stock can swing dramatically. In forex, analyst opinions have less impact on exchange rates, which are driven more by macroeconomic fundamentals and global economic conditions.

Comparing Forex and Futures: Deep Market Contrast

Liquidity and Market Size

Forex’s daily trading volume of $6.6 trillion vastly exceeds that of futures, which is about $30 billion per day. This difference means forex offers more liquidity and faster execution.

Continuous Trading Hours

Forex provides a true 24-hour trading cycle, while futures markets are limited to specific trading hours, with some overnight trading but less liquidity outside main sessions.

Execution Speed and Price Certainty

Forex traders generally experience rapid order execution and more predictable prices under normal conditions. Futures and stocks may not guarantee the same level of speed and price certainty.

Risk Management

Forex’s risk controls include automatic margin calls and forced liquidation when losses exceed certain levels, helping prevent excessive losses. Futures also have risk controls, but traders may face larger losses beyond their account balance, requiring careful management.

Conclusion: The Global Significance of the Forex Market

Now you have a comprehensive understanding of what forex is, its English meaning, and how to trade in the world’s largest financial market. With its transparency, low entry costs, and flexible trading hours, the forex market has become a vital channel for investors worldwide to participate in international finance. Whether you are a traditional investor seeking diversification or an active trader looking to leverage gains, forex offers extensive opportunities. As global economic integration deepens, understanding the forex market will remain an essential skill for modern investors.