Deep Dive into the World's Largest Financial Market — The Forex Market

The Massive Scale of the Foreign Exchange Market

Foreign Exchange (commonly known as Forex or FX) refers to the investment activity of buying and selling different countries’ currencies. How big is this market? The daily trading volume reaches up to 6.6 trillion USD, which is hundreds of times larger than the New York Stock Exchange’s (approximately 22.4 billion USD daily trading volume).

Within this enormous trading volume, the spot forex market accounts for about 2 trillion USD, with retail trading estimated to make up approximately 3-5%, or around 200-300 billion USD. Despite this, the entry barrier for forex trading is much lower than that of the stock market.

What is Forex Trading? Core Concepts Explained

The essence of forex trading is simple—predict whether a currency will appreciate or depreciate, buy low and sell high to profit from the difference.

For example: Suppose you expect the US economy to improve. You can buy US dollars. If the US economy indeed improves and the dollar appreciates, you can sell the dollars for a profit. Throughout this process, you are trading the currency itself, not physical goods.

A more intuitive scenario is: Traveler Bill is going from Taiwan to the US. At the airport, he finds the exchange rate is 0.034 (TWD to USD). He exchanges 10,000 TWD for 3,400 USD. At this moment, Bill is participating in the forex market—selling TWD and buying USD.

How the Forex Market Operates

The forex market is a global decentralized market with no central exchange. It operates 24 hours a day, 5 days a week, starting from Auckland/Wellington in New Zealand, moving sequentially through Sydney, Singapore, Hong Kong, Tokyo, Frankfurt, London, New York, and back to New Zealand to start over.

Exchange rates are influenced by various factors—national economic strength, fiscal policies, international relations, etc. Traders analyze these factors to determine currency trends. For example, when the yen depreciates, many traders borrow yen to buy USD for profit.

Apart from the actual needs of some international trade and tourism, most forex trading is speculative, with traders trying to profit from exchange rate fluctuations.

Major Currency Pairs: The First Choice for Beginners

The forex market offers many currency pairs for trading, but beginners usually choose major currency pairs—the ones with the highest trading volume, representing the world’s major economies.

These include: USD, EUR, CAD, GBP, CHF, AUD, JPY, NZD.

Currency codes consist of three letters— the first two represent the country, and the third represents the currency name’s initial letter. For example, USD: US (United States) + D (Dollar). This standard was established by the International Organization for Standardization in 1973, called ISO 4271 currency codes.

Core Advantages of Forex Trading

Lowest trading costs: No commissions are required, and in most cases, no clearing or transaction fees. Retail forex brokers profit from the bid-ask spread, which is usually below 0.1%, and large transactions can be as low as 0.07%.

Flexible trading scale: Unlike futures markets with fixed contract sizes, forex allows small trades. Many brokers offer minimum starting points of 1,000 units of currency.

24/5 Market: Trading runs nonstop from Monday to Friday, from the opening in Australia to the closing in New York, allowing traders to participate at any time.

Leverage: Control large positions with a small amount of capital. For example, with 50:1 leverage, investing $50 in margin can control a $2,500 position; investing $500 can control a $25,000 position.

High liquidity: The daily trading volume of 6.6 trillion USD ensures traders can execute transactions instantly under normal market conditions.

Forex vs Stock Market

The US has about 6,100 stocks listed on its two major stock exchanges, whereas the most traded seven major currency pairs in the forex market are more concentrated and easier to grasp.

Stock markets have fixed trading hours (from 9:30 AM to 4:00 PM Eastern Time), while forex is a seamless 24-hour market. Forex trading volume and liquidity far surpass those of stocks, and short-selling is unrestricted, providing opportunities regardless of market direction.

Additionally, forex generates billions of dollars in revenue for global banks and is an essential part of the global economy. The influence of analysts’ opinions is much smaller compared to the stock market.

Forex vs Futures Market

The daily trading volume of forex is 6.6 trillion USD, vastly exceeding the futures market’s 30 billion USD, making liquidity incomparable.

Forex is a 24-hour market, while futures have trading hours and less liquidity overnight. In forex, traders enjoy fast execution and price certainty, which cannot be guaranteed in futures or stocks.

In risk management, if a trader’s losses exceed the margin requirement, the platform automatically issues a margin call or closes the position. In futures, traders may incur losses exceeding their account funds.

Summary

As the world’s largest financial investment market, the forex market’s transparency, low costs, high liquidity, and 24-hour trading make it an ideal choice for investors worldwide. Whether seeking short-term trading opportunities or conducting cross-border business settlements, the forex market provides the necessary tools and mechanisms. Mastering the basics of forex and understanding how the market operates are the first steps into this vast market.