Forex Trading Introduction: Understanding the World's Most Active Financial Market

Foreign Exchange Names and Basic Concepts

Foreign Exchange is the English term for 外匯, commonly abbreviated as Forex or FX. Simply put, foreign exchange refers to the investment activity of exchanging one currency for another and earning profits through exchange rate fluctuations.

Imagine a scenario: Traveler Bill is visiting the United States. At the airport currency exchange counter, he sees real-time exchange rates displayed on the screen for various currencies. When he finds that the TWD to USD exchange rate is 0.034, he exchanges 10,000 New Taiwan Dollars for 3,400 US Dollars. This simple exchange process is actually the beginning of participating in the foreign exchange market.

“Foreign Exchange Trading” further evolves into a professional investment method—traders buy and sell currencies based on their judgment of exchange rate changes, not for travel or practical needs, but to profit from the fluctuations.

The Massive Scale and Global Layout of the Forex Market

The foreign exchange market is the largest financial market in the world in terms of trading volume and is a truly decentralized global market. Daily trading volume reaches up to 6.6 trillion USD, far surpassing the approximately 22.4 billion USD daily trading volume of the New York Stock Exchange.

Even though the actual spot forex market’s daily trading volume is about 2 trillion USD, retail trading accounts for about 3-5% (roughly 200-300 billion USD), which is still astonishing.

More notably, the forex market has a unique trading time characteristic—operating 24 hours worldwide. The market opens in New Zealand Auckland, then sequentially shifts to Sydney, Singapore, Hong Kong, Tokyo, Frankfurt, London, and New York, forming a seamless global trading loop.

Trading Pairs: Core Logic of Currencies and Exchange Rates

The essence of forex trading is currencies. Although intangible, it can be understood as: purchasing a currency is like buying the economic prospects of that country.

The price of a currency directly reflects market expectations of that country’s economic condition. If you are optimistic about the continued growth of the US economy, buying US Dollars is a reasonable choice. When the economy indeed performs well, the USD appreciates, and you can sell at a higher price, realizing profit from buying low and selling high.

Exchange rate is a concrete manifestation of this logic—it reflects a country’s relative economic strength compared to other economies. Factors such as national economic strength, fiscal policies, and international relations cause exchange rates to fluctuate every second.

Major Currency Pairs and Currency Code System

The forex market offers a wide variety of currency pairs, but beginners usually focus on major currency pairs—these are the most traded and represent the world’s largest economies.

Major currencies include: US Dollar (USD), Euro (EUR), British Pound (GBP), Japanese Yen (JPY), Swiss Franc (CHF), Canadian Dollar (CAD), Australian Dollar (AUD), and New Zealand Dollar (NZD).

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

This standardized code system was established by the International Organization for Standardization (ISO) in 1973, called ISO 4217 currency codes, ensuring uniformity in global transactions. Interestingly, the US dollar is nicknamed “Greenback” due to its green design on the back, a term originating during the US Civil War in 1861.

Core Advantages of Forex Trading

Low Cost, High Efficiency

Forex trading does not require paying commissions to brokers. Most retail forex brokers earn income through the bid-ask spread, which is typically less than 0.1%, and for large transactions, it can be as low as 0.07%. This is far lower than the trading costs in stock or futures markets.

Flexible Trading Sizes

Unlike futures markets that have standard contract sizes, forex trading has no minimum lot size restrictions. Many brokers allow traders to open micro positions of 1,000 units of currency, lowering the barrier to participation.

24-Hour Continuous Trading

The round-the-clock nature of the forex market is a unique advantage. Traders are not limited by exchange operating hours and can trade flexibly according to their schedules.

Leverage Power

Forex trading offers leverage mechanisms, allowing traders to control large positions with a small amount of capital. For example, 50:1 leverage means that a margin of $50 can control a position of $2,500. This greatly amplifies profit potential but also increases risk.

Excellent Liquidity

With a daily trading volume of 6.6 trillion USD, the market guarantees strong liquidity. Under normal market conditions, traders can execute buy and sell transactions instantly without worrying about liquidity issues.

Comparison Between Forex and Stock Markets

In terms of the number of stocks, the New York Stock Exchange has about 2,800 stocks, and NASDAQ lists around 3,300 companies. In contrast, the trading volume of the seven major currency pairs in the forex market is larger, with more regular volatility, making it more friendly to beginners.

Stock markets are limited by specific trading hours—US stock markets open at 9:30 AM and close at 4:00 PM Eastern Standard Time. The forex market, however, operates seamlessly 24 hours a day, allowing traders full autonomy in scheduling.

Additionally, the liquidity in the forex market far surpasses that of stocks. Forex pairs can be shorted without special restrictions, providing trading opportunities whether bullish or bearish.

More importantly, as an essential component of global banking and international trade, the forex market’s movements are less influenced by individual analysts or institutional opinions. In contrast, a company’s earnings report exceeding or falling short of expectations often causes sharp stock price fluctuations.

Comparison Between Forex and Futures Markets

Liquidity and Scale: The daily trading volume of the forex market is 6.6 trillion USD, far exceeding the 30 billion USD in the futures market, making it the most active market globally.

Trading Hours: The forex market operates 24 hours a day, while futures markets have overnight trading but with much lower liquidity compared to spot forex.

Trade Confirmation: Forex trading under normal market conditions offers quick execution and definite prices, whereas futures and stock markets cannot guarantee this.

Risk Management: The spot forex market limits risk through automatic margin calls or liquidation mechanisms. Futures markets may result in losses exceeding account funds, so traders must bear additional responsibilities.

Conclusion

The forex market, with its enormous scale, 24-hour convenience, low costs, and excellent liquidity, has become an important investment channel for global investors. Whether institutions seeking hedging or individual investors pursuing profits, the forex market offers ample opportunities. By understanding the basic principles of forex, mastering major currency pairs, and recognizing its unique advantages over stocks and futures, you will be better equipped to confidently step into this largest financial market in the world.