Starting from Zero: The Complete Guide to the World's Largest Financial Market - Forex Trading

What Exactly Is Forex? Understanding It in the Simplest Way

Have you ever thought that when you exchange currency at the airport while traveling abroad, you’re actually participating in the world’s largest financial market? This market is called the Foreign Exchange Market.

Foreign exchange (English: Foreign Exchange, abbreviated as Forex or FX) is straightforward — it’s the exchange of one currency for another. For example, when you fly from Taiwan to the US, you need to convert New Taiwan Dollars into US Dollars. The screen at the currency exchange counter shows the real-time exchange rate. For instance, 1 TWD = 0.034 USD. If you exchange 10,000 TWD, you get 3,400 USD. In this process, you’ve completed a foreign exchange transaction.

Forex trading isn’t just about currency exchange during travel; it refers to investors buying and selling different currency pairs to profit from exchange rate fluctuations. You can think of it this way: when you believe the US dollar will appreciate, you buy it; when it rises, you sell for a profit — this is what millions of investors worldwide do every day.

An Unimaginably Massive Market

How big is the forex market? The numbers will tell you.

Daily trading volume reaches 6.6 trillion USD. To give you a sense, the New York Stock Exchange — the world’s top stock exchange — has a daily trading volume of only about 22.4 billion USD. In other words, the forex market’s daily volume is 294 times that of the NYSE. And this is just the average.

However, it’s important to note that out of this 6.6 trillion USD, only about 2 trillion USD is spot trading (actual buying and selling of currencies), with derivatives making up the majority. If we look only at retail investors’ trading volume, it’s estimated to be around 20 to 300 billion USD, accounting for just 3-5% of the total. Even retail traders have enough liquidity to execute trades smoothly.

Most notably, this market operates nearly 24 hours a day. From the opening in New Zealand on Monday morning to the closing in New York on Friday, the forex market seamlessly connects major financial centers worldwide: Auckland → Sydney → Hong Kong → Tokyo → Frankfurt → London → New York → back to Auckland. You can trade whenever you want — the freedom surpasses traditional stock markets.

What Is Being Traded in Forex?

Simply put — currencies. But what you’re buying isn’t physical cash; it’s a view on a country’s economic outlook.

Imagine buying a currency like buying a company’s stock. The value of the US dollar reflects the market’s assessment of the US economy. If you expect the US economy to improve, with faster GDP growth and rising federal funds rates, the dollar should appreciate. Buying dollars now and selling after they rise can bring profits. Conversely, if you think Japan’s economy is weak and the yen will depreciate, you can borrow yen to buy other currencies, then profit when the yen falls.

The essence of exchange rates is risk pricing. They reflect a country’s economic conditions relative to others, including interest rate policies, inflation rates, trade balances, and more. Every second, banks, central banks, hedge funds, and corporations worldwide adjust their positions based on the latest information, causing exchange rates to fluctuate constantly.

Major Currency Pairs: What Beginners Should Know

While there are hundreds of currency pairs available in the forex market, beginners usually focus on 7 major pairs. These currencies represent the world’s largest economies:

• USD — United States, representing the strongest economy globally
• EUR — Euro, used by 19 EU countries
• GBP — British Pound
• JPY — Japanese Yen
• AUD — Australian Dollar
• CAD — Canadian Dollar
• CHF — Swiss Franc

These three-letter currency codes are not arbitrary. The first two letters indicate the country (e.g., US = United States), and the third letter indicates the currency name’s initial. So USD is the US dollar. Since 1973, the ISO 4217 standard has established these codes to ensure global consistency.

The US dollar has the highest trading volume and is nicknamed many things — “Buck” or “Greenback.” The latter originated during the Civil War in 1861, when the dollar’s back featured a prominent green design. Today, whenever the dollar appreciates or depreciates, it impacts global financial markets.

Why Do Investors Favor Forex Trading?

The forex market attracts investors worldwide mainly because of these reasons:

Extremely low costs, nearly zero commissions. Most forex brokers do not charge commissions but profit from the bid-ask spread. Retail traders typically see spreads below 0.1%, sometimes as low as 0.07%, much cheaper than stock trading costs.

No minimum trading size. Futures markets specify contract sizes (e.g., silver futures are 5,000 ounces), but forex allows flexible trading. You can trade as little as 1,000 units or as much as 1 million units — entirely up to you.

Leverage amplifies gains. Forex brokers often offer 50:1 leverage, meaning depositing $50 in margin can control a $2,500 position. This enables small capital to potentially earn larger returns, but also increases risk proportionally.

Deep liquidity and fast execution. With daily volumes of 6.6 trillion USD, you can buy or sell instantly at transparent prices. Unlike stocks, where slippage can occur, the forex market generally provides reliable execution under normal conditions.

Market is open 24/5, no short-selling restrictions. Unlike stock markets, which have restrictions on shorting, forex allows you to go long or short freely. Opportunities exist whether the market is rising or falling.

Forex is a necessity for the global economy and hard to manipulate. Stock markets can be heavily influenced by company earnings reports or analyst ratings, causing volatility. Forex, driven by global banks and central banks, with daily trading in the trillions, is less susceptible to manipulation, offering a more objective environment for retail investors.

Forex vs Stocks: Which Is More Worth Trading?

Liquidity and trading hours advantage — stock markets usually operate limited hours (e.g., US stocks from 9:30 am to 4:00 pm), while forex runs 24 hours a day, 5 days a week. The daily forex volume of 6.6 trillion USD far exceeds the combined global stock markets’ liquidity.

Simplified choices — thousands of stocks make selection difficult. Forex has only 7 major currency pairs, making it easier for beginners to learn.

Unlimited shorting — stock shorting is restricted and costly, whereas forex allows unrestricted short selling.

High transparency — driven by central banks and global banks, forex behavior tends to be rational. Stocks are influenced by company reports and analyst opinions, leading to more subjective volatility.

Forex vs Futures: Comparing Stability

Absolute liquidity leader — forex’s daily volume of 6.6 trillion USD dwarfs the futures market’s 30 billion USD daily volume. Deep liquidity means your orders are more likely to be filled quickly.

More flexible trading hours — futures have overnight trading but with lower liquidity. Forex is active 24/5, allowing trading at any time.

Price execution certainty — under normal conditions, forex provides definite transaction prices, while futures and stocks may experience slippage.

Better risk control — forex platforms often automatically warn or close positions when losses approach margin requirements, preventing losses exceeding your capital. Futures can result in losses beyond your account balance, requiring additional funds.

Proper Understanding to Start Forex Trading

The forex market is the world’s largest financial investment venue, with a daily trading volume of 6.6 trillion USD. Thanks to low costs, high liquidity, 24-hour trading, and flexible leverage, forex has become a key choice for investors worldwide.

But behind these advantages lie risks. Leverage amplifies both gains and losses. Exchange rate fluctuations are influenced by multiple countries’ policies and are difficult to predict precisely. Therefore, before entering the forex market, it’s essential to learn the basics, develop risk management strategies, and practice with small live accounts. These preparations are crucial.

The door to forex is open to everyone, but success requires knowledge, discipline, and patience. Now that you understand what forex is, how to trade, and why it’s worth paying attention to, the next step is to create a trading plan suited to your risk tolerance.