Forex Trading Introduction: An In-Depth Look at the World's Largest Financial Market

What Exactly Is Forex? Understanding from the English Name

Forex is short for Foreign Exchange, often abbreviated as Forex or FX. In simple terms, forex refers to the act of exchanging one currency for another. Forex trading further extends to buying and selling different currencies to profit from exchange rate fluctuations.

For example: Suppose Tom is preparing to travel from Taiwan to the United States. He arrives at the currency exchange counter at the airport, looks at the displayed exchange rates, and decides to exchange NT$10,000 at a rate of 0.034 for $340 USD. In this process, Tom is actually participating in the forex market—selling New Taiwan Dollars and buying US Dollars.

Exchange rate movements are influenced by various factors, including a country’s economic strength, fiscal policies, international relations, and more. Because these fluctuations constantly occur, traders can profit by predicting the direction of exchange rate movements.

The Uniqueness of the Forex Market: Global, Decentralized, 24/5 Trading

The forex market is the largest financial market in the world and is a global, decentralized market. All world currencies can be traded here 24 hours a day, five days a week.

The most impressive aspect is the trading volume: the daily trading volume of the forex market reaches $6.6 trillion, compared to the well-known New York Stock Exchange’s daily volume of about $22.4 billion. The daily forex trading volume is 293 times that of the NYSE. Even when considering only the spot forex market (daily volume of $2 trillion), it still far exceeds stock exchanges.

The forex market has exceptional liquidity, allowing traders to execute buy and sell orders almost instantly. Additionally, the trading hours are very special—the market is open 24 hours a day, five days a week. Trading begins in Auckland/Wellington, then shifts to Sydney, Singapore, Hong Kong, Tokyo, Frankfurt, London, and finally New York, cycling back again. This seamless global trading mode enables traders to participate anytime and anywhere.

What Is Traded in the Forex Market? How Do Currency Prices Reflect Economic Conditions?

The core product traded in the forex market is currencies. Since there is no physical delivery involved, many people find forex trading confusing. An analogy that helps understanding is: imagining buying currencies as purchasing the “economic stock” of a country.

Currency prices usually directly reflect the market’s assessment of that country’s current and future economic conditions. Suppose you expect the US economy to flourish; you might buy US Dollars. If the economy develops as expected and remains stable, you can sell your USD back to the market for profit by buying low and selling high.

It’s important to note that, aside from forex transactions related to international trade and tourism involving physical goods, most forex trading is speculative. Retail traders’ daily trading volume is estimated to account for about 3-5% of total forex volume, roughly $200-300 billion, possibly even less.

Major Forex Currencies and the Currency Code System

Although many currency pairs are tradable in the forex market, novice traders usually prefer trading major currency pairs. Major currencies are those with the largest trading volume and represent key global economies, including USD, EUR, CAD, GBP, CHF, AUD, JPY, and NZD.

How Currency Codes Are Formed

Currency codes consist of three letters: the first two represent the country, and the third represents the currency’s initial letter. For example, USD stands for US Dollar, where US is the United States, and D is Dollar.

The Origin of Currency Codes

In 1973, the International Organization for Standardization (ISO) established the three-letter currency code system, known as ISO 4217. Since then, all countries’ currencies follow this standardized coding system.

The US dollar, being the most frequently traded currency globally, has several nicknames, such as Buck or Greenback. The nickname “Greenback” originated during the US Civil War in 1861, because the dollar bill’s back was printed in a prominent green color.

The Five Core Advantages of Forex Trading

1. Low Cost Structure

Forex trading does not require paying commissions to brokers. Most transactions do not involve clearing fees, transaction fees, or commissions. Retail forex brokers typically earn through the bid-ask spread, which is usually below 0.1%; for large-volume trades, spreads can be as low as 0.07%.

2. Flexible Trading Sizes

Unlike futures markets, where lot sizes or contract sizes are standardized (e.g., a standard silver futures contract is 5,000 ounces), forex traders can decide their trading size freely. Many brokers allow opening positions as small as 1,000 units of currency.

3. 24/5 Trading Convenience

The forex market operates continuously five days a week, 24 hours a day. From the opening in Auckland/Wellington on Monday to the closing in New York on Friday, traders can trade anytime and anywhere, without being restricted to fixed trading hours.

4. Leverage Amplifies Profit Potential

Forex trading allows traders to control larger positions with a small amount of capital. For example, a leverage of 50:1 means that with $50 margin, you can control a $2,500 position; with $500 margin, you can control a $25,000 position, and so on.

5. Market Liquidity Advantage

Thanks to the enormous daily trading volume, the forex market has excellent liquidity. Under normal market conditions, traders can execute buy and sell orders instantly without worrying about finding a buyer or seller.

Forex vs Stocks: Why Choose Forex Trading?

Trading Hours Difference

Stock exchanges are only open on trading days. For example, the US stock market opens at 9:30 AM and closes at 4:00 PM Eastern Standard Time. In contrast, the forex market is a seamless 24-hour market, giving traders full time flexibility.

Liquidity and Trading Volume

Although the NYSE has about 2,800 listed stocks and NASDAQ has 3,300 listed companies, the daily trading volume of the forex market is $6.6 trillion, far surpassing the hundreds of times larger stock market. This means the forex market has stronger liquidity and more stable prices.

Democratic Short Selling

Stock markets impose special restrictions on short selling, but the forex market has no such restrictions on long or short positions. Traders can find trading opportunities regardless of market direction.

Influence of Analysts

Unlike the stock market, where analyst opinions can significantly impact stock prices, the forex market is less affected by analyst forecasts. Company earnings reports that beat or miss expectations can cause sharp stock price swings; however, forex rates are driven more by fundamental factors, as they generate billions of dollars in revenue for global banks, making them essential to the global market.

Forex vs Futures: Comparing Liquidity and Risks

Absolute Liquidity Advantage

The daily trading volume of the forex market is $6.6 trillion, far exceeding the futures market’s $30 billion, giving it a clear liquidity advantage.

Trading Hours Flexibility

The forex market operates 24 hours a day. Although futures have overnight markets with improving liquidity, they still have less liquidity compared to the spot forex market.

Execution Certainty

Forex trading offers fast execution and price certainty under normal market conditions. Futures and stock markets cannot guarantee immediate execution at fixed prices.

Risk Management Mechanisms

The forex market has relatively lower risks. When traders lose more than their margin, the trading platform automatically issues a margin call, and open positions are immediately closed to limit losses. In contrast, futures traders may incur losses exceeding their account balance and need to bear the excess loss themselves.

Summary: Why Forex Is the Preferred Choice for Global Investors

The forex market is the largest and most liquid financial market worldwide. With its high transparency, low entry costs, and flexible trading rules, forex has become an essential channel for global investors to make effective investments. Whether you are a conservative investor seeking stable returns or an aggressive trader pursuing leverage gains, the forex market offers corresponding trading opportunities.