## The World's Largest Financial Market: A Deep Dive into Forex Meaning and Trading Operations

The foreign exchange market is the largest financial investment platform globally, with a daily trading volume of up to 6.6 trillion USD, far surpassing the New York Stock Exchange's 224 billion USD. What exactly is traded in this enormous market? And how does it operate?

## Forex Meaning: Currency Exchange and Exchange Rate Fluctuations

**Foreign Exchange (Forex or FX)** simply means exchanging one currency for another — but forex trading is not just about currency exchange; it is an investment activity based on differences in exchange rates.

Imagine Bill exchanging currency at the airport: he has 10,000 TWD, with an exchange rate of 0.034, receiving 3,400 USD. In this process, Bill is actually selling TWD and buying USD, thus participating in the forex market. Exchange rates are the relative prices of two currencies and fluctuate every second due to factors like national economic strength, fiscal policies, and international relations.

Besides international trade and tourism demands in the real economy, most forex market transactions are driven by speculation — traders analyze the ups and downs of exchange rates to profit from volatility.

## 24-Hour Global Decentralized Market

The forex market is a global decentralized market, with no central trading location, but a network of banks, institutions, and retail traders worldwide. Its most unique feature is its trading hours: operating 24 hours a day, 5 days a week, only closing on weekends.

Trading begins with the opening in Auckland/Wellington, then shifts to Sydney, Singapore, Hong Kong, Tokyo, Frankfurt, London, and finally New York, completing a cycle of global financial centers. This allows traders to trade freely according to their schedules.

## What Does Forex Trade?

Forex trading targets a very straightforward asset — **currencies**. Although we do not buy physical currencies, we can understand it as investing in the economic prospects of specific countries. Currency prices usually reflect market expectations of the current and future economic conditions of those countries.

For example, if you expect the US economy to improve, you might buy USD. If your expectation proves correct and the US economy gradually improves, you can sell USD when the exchange rate rises to profit from the difference. The exchange rate of one currency relative to others essentially reflects the economic condition of that country compared to other economies.

## Major Currency Pairs and Currency Codes

The forex market offers many tradable currency pairs, but beginners typically prefer the most traded **major currency pairs**, including USD, EUR, CAD, GBP, CHF, AUD, JPY, and NZD, representing the world's largest economies.

All currencies have a standardized code: three letters, with the first two representing the country, and the third representing the currency's initial letter. For example, USD for US Dollar, EUR for Euro, JPY for Japanese Yen. This coding system was established by the International Organization for Standardization in 1973 and is called ISO 4217 currency codes.

## The Core Advantages of Forex Trading

**Low entry costs** are the primary advantage of forex trading. Forex transactions do not require commissions, and most retail trades incur no clearing or transaction fees; brokers mainly profit from the bid-ask spread. Under normal conditions, spreads are usually below 0.1%, and large-volume trades can go as low as 0.07%. Additionally, there are no specific size requirements, and traders can open positions with as little as 1,000 units of currency.

**Leverage amplifies gains** — another major benefit. Forex trading allows leverage, for example, 50:1, meaning $50 in margin can control a $2,500 position. This enables traders to control large trades with a small amount of capital.

**High liquidity and fast execution**. The average daily trading volume of 6.6 trillion USD ensures extremely strong liquidity, allowing traders to execute buy and sell orders instantly under normal market conditions, with prices being highly reliable.

**Time flexibility** supports 24-hour trading, from the opening in Australia on Monday to the closing in New York on Friday, enabling traders to operate at any time.

## Forex vs. Stock Markets

The two markets differ significantly. Stock markets only operate during exchange hours (e.g., 9:30-16:00 EST in the US), while the forex market operates seamlessly 24 hours a day.

There are about 2,800 to 3,300 stocks available for trading in stock markets, but the seven most traded currency pairs attract global investors' attention, with liquidity and trading volume far exceeding stocks.

Forex markets do not have restrictions on short-selling; whether long or short, trading opportunities always exist. Additionally, since forex generates billions of dollars in revenue for global banks, it is an essential part of the global market, and analyst opinions have less impact on exchange rates than in stock markets.

## Forex vs. Futures Market

The advantages of forex are even more evident. The daily forex trading volume is 6.6 trillion USD, while the futures market only sees about 300 billion USD, highlighting a huge gap in liquidity.

Although futures have overnight markets, their liquidity is much lower than the spot forex market, and execution speed and price certainty are not comparable. Most importantly, forex spot trading carries relatively smaller risks — when losses exceed margin requirements, trading platforms automatically trigger margin calls or close positions. In contrast, futures can expose traders to losses exceeding their account balances.

## Conclusion

Due to its immense trading volume, 24/7 operation, low entry costs, and strong liquidity, the forex market has become the preferred investment channel for global investors. By understanding the meaning of forex and grasping its market mechanisms, you can better evaluate whether this market suits your investment strategy.