A Quick Guide to the Forex Market: From Zero Basics to Investment Introduction

What Exactly Is Foreign Exchange Trading?

Foreign Exchange (Forex or FX) may seem mysterious, but it is simply the act of exchanging one currency for another. Unlike currency exchange at airports in daily life, Forex trading refers to the investment activity where traders predict currency fluctuations and buy or sell different currency pairs to profit.

Imagine: you believe the US dollar will appreciate, so you buy USD/JPY. When the dollar indeed appreciates, you sell USD and earn the difference. In this process, the exchange rate is the relative price between two currencies—constantly fluctuating due to multiple factors such as national economic strength, fiscal policies, and international situations.

Why Is the Forex Market So Large?

Forex is the largest financial market in the world. According to data, the daily trading volume reaches $6.6 trillion—compared to only about $22.4 billion on the New York Stock Exchange. This means the scale of forex trading is roughly 300 times that of the New York stock market!

Despite the enormous total trading volume, retail traders account for only about 3-5%, roughly $200-300 billion. The spot forex market’s daily trading volume is about $2 trillion, enough to accommodate all kinds of traders.

The market’s vast size stems from its global nature. The forex market operates 5 days a week, 24 hours a day, starting from Auckland, New Zealand, then shifting to Sydney, Singapore, Hong Kong, Tokyo, Frankfurt, London, and New York, forming a seamless global trading network. Investors can find trading opportunities regardless of their location.

What Is Traded in the Forex Market?

The answer is: Currencies.

You can think of buying currencies as investing in the economic prospects of a country. Currency prices usually reflect the market’s expectations of that country’s current and future economic conditions. If the US economy looks promising, the dollar will appreciate; if not, it will depreciate. Traders profit by buying low and selling high based on their judgments.

Among the many tradable currency pairs, major currency pairs are the most popular. Major currencies are those with the highest trading volume, representing the world’s main economies, including the 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).

Each currency has a standard code—composed of three letters, with the first two representing the country and the third the currency’s initial letter. For example, USD (United States Dollar). This coding system was established by the International Organization for Standardization in 1973 and is called ISO 4217.

Core Advantages of Forex Trading

Very Low Costs — Most forex brokers do not charge commissions, earning profit through the spread. Retail traders typically see spreads below 0.1%, and large-volume trades can be as low as 0.07%.

Flexible Trading — No minimum trading size restrictions. You can start trading with as little as 1,000 units of currency, unlike futures markets which have fixed contract sizes.

Leverage Amplification — Forex offers leverage mechanisms, allowing traders to control larger positions with a small amount of margin. For example, with 50:1 leverage, a $50 margin can control a $2,500 position.

High Liquidity — The daily trading volume of $6.6 trillion ensures quick execution and high price certainty.

No Time Restrictions — Unlike stock markets with fixed opening and closing hours, the forex market is open 24 hours a day, giving traders the freedom to choose entry and exit times.

Forex vs Stocks: Why Choose Forex?

Although the NYSE has 2,800 stocks and NASDAQ lists 3,300 companies, just seven major currency pairs cover the world’s main economies.

Stock markets are limited by trading hours (US stocks from 9:30 am to 4:00 pm), whereas forex is a true 24-hour, continuous market. Stocks can be highly volatile due to analyst expectations, but forex, as a global financial necessity, is less influenced by analyst opinions and tends to be more rational. Additionally, forex allows short selling without special restrictions, providing opportunities for both bullish and bearish strategies.

Forex vs Futures: Who Has the Greater Advantage?

Forex’s daily trading volume ($6.6 trillion) far exceeds that of the futures market (about $30 billion), creating a huge liquidity gap. Although futures do have overnight trading, they are still relatively thin compared to the spot forex market.

In terms of execution, forex offers fast and guaranteed price execution, whereas futures and stocks do not. Regarding risk management, if a forex trader’s losses exceed the margin, the platform automatically triggers margin calls or closes positions; in futures trading, losses can exceed the account balance, requiring traders to bear the risk themselves.

Summary

With its enormous trading volume, 24/7 trading mechanism, low transaction costs, and flexible leverage, the forex market has become the top choice for global investors. Whether for hedging risks or seeking profit opportunities, forex’s transparency and accessibility open a new financial door for investors worldwide.