What is foreign exchange? Understand in one article how the world's largest financial market is traded

The True Scale of the Foreign Exchange Market: Why It Matters

What is foreign exchange? Simply put, it is the act of exchanging one currency for another. But it’s much more than just currency swapping.

The foreign exchange market (Foreign Exchange, Forex or FX) is the largest financial market in the world, with a daily trading volume of up to $6.6 trillion. How big is this number? Compare it— the New York Stock Exchange’s daily trading volume is about $22.4 billion, making the size of the forex market 290 times larger.

Even so, the average daily trading volume of the spot forex market is only $2 trillion, with retail investors accounting for about 3-5% of the total, roughly $20-30 billion. What does this mean? Although the forex market is enormous, it remains a blue ocean for retail traders.

What is forex trading? Starting with everyday examples

Imagine you are planning a trip abroad. You go to the currency exchange at the airport and exchange New Taiwan Dollars for US Dollars. At that moment, you are participating in forex trading.

Specifically, suppose Bill is traveling to the United States. He sees on the screen at the airport that the exchange rate for TWD to USD is 0.034. He decides to exchange 10,000 TWD for 3,400 USD. In this process, Bill sells TWD and buys USD—that’s the essence of forex trading.

Exchange rates are the relative prices of two different currencies. Because of factors like national economic strength, fiscal policies, and international relations, exchange rates fluctuate every second. Most forex traders aim to analyze these fluctuations and predict whether rates will rise or fall— for example, when the yen clearly depreciates, many borrow yen to buy dollars.

How does forex trading work? 24/5 global operation

The forex market is a global, decentralized market, and it is the only financial market that operates 24/5.

Trading occurs five days a week, 24 hours a day, with the market closing only on weekends. Unlike stock or bond markets that close after each trading day, the forex market seamlessly shifts across financial centers worldwide: starting from Auckland, New Zealand, then moving to Sydney, Singapore, Hong Kong, Tokyo, Frankfurt, London, and finally New York, before restarting in New Zealand.

What does this mean? No matter where you are, you can trade at any time. Office workers can trade in the evening, students can participate on weekends— the forex market has no time restrictions.

What is traded in the forex market? The currencies themselves

Unlike buying stocks, forex trading involves buying currencies. But since there is no physical delivery, it might seem abstract for beginners.

You can think of buying currencies as buying stocks of a country: the currency’s price directly reflects the market’s view of that country’s current and future economic prospects.

Suppose you expect the US economy to improve, so you buy US dollars. If your judgment proves correct and the US economy indeed gradually improves, you can sell the dollars back into the market for profit—buy low, sell high. The exchange rate of one currency relative to others essentially reflects that country’s economic condition compared to other economies.

What are major currencies? Trading volume determines everything

Although many currency pairs are tradable in the forex market, beginners usually prefer to trade major currency pairs—these are the most traded and most liquid currencies.

Major currencies include: US Dollar (USD), Euro (EUR), British Pound (GBP), Japanese Yen (JPY), Canadian Dollar (CAD), Swiss Franc (CHF), Australian Dollar (AUD), New Zealand Dollar (NZD). They represent the world’s largest economies.

What is a currency code?

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

This standard was established by the International Organization for Standardization (ISO) in 1973, called ISO 4271 currency codes. Since the US dollar is the most frequently traded currency globally, it also has nicknames like Buck or Greenback. The name Greenback originated during the US Civil War in 1861, when the dollar’s back was printed in a distinctive green color.

Why do investors choose forex trading? Five core advantages

1. Low costs

Forex trading does not require paying commissions to brokers. Retail forex brokers earn income through the bid-ask spread, which is usually below 0.1%, and can be as low as 0.07% for large-volume trades. This is much lower than the costs associated with stocks or futures.

2. No minimum trading size

In futures markets, lot sizes are set by exchanges (e.g., silver futures standard lot is 5,000 ounces). But forex trading allows small-scale trading, with many brokers permitting traders to open positions as small as 1,000 units of currency.

3. 24/5 trading

From the opening of the Australian market on Monday morning to the closing of the New York market on Friday, traders can trade anytime and anywhere, without being limited by exchange hours.

4. Leverage advantage

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

5. Strong liquidity

The forex market’s enormous trading volume ensures high liquidity. Under normal market conditions, traders can execute buy and sell orders instantly, with rapid and reliable price execution.

Forex vs stocks: Why is forex more advantageous?

The NYSE has about 2,800 stocks, and NASDAQ lists around 3,300 companies. In contrast, the seven most traded currency pairs attract more attention and analysis.

Trading hours: Stock markets only trade during exchange hours (e.g., 9:30 am to 4:00 pm in the US), while the forex market operates seamlessly 24 hours.

Liquidity and volume: The daily trading volume of $6.6 trillion in forex far exceeds the stock market, offering greater liquidity.

Short selling restrictions: Forex has no special restrictions on short selling; both bullish and bearish positions have ample trading opportunities.

Impact of professional analysts: Stock markets are more susceptible to fluctuations based on analyst expectations, but forex is a necessity for global banks generating billions in revenue, so analyst opinions have less impact on exchange rates.

Forex vs futures: Market comparison at a glance

Liquidity and scale: The daily $6.6 trillion forex volume vastly surpasses the $30 billion futures market, making forex the largest and most liquid market in the world.

Trading hours: Forex operates 24 hours, while futures have limited overnight liquidity and trading hours.

Execution efficiency: Forex transactions can be executed quickly and at reliable prices under normal conditions, whereas futures and stocks cannot guarantee instant execution.

Risk management: Spot forex markets tend to have lower risks. When losses exceed margin requirements, platforms automatically send margin calls or close positions. Futures markets differ: positions may be liquidated at prices worse than the account’s losses, and traders may bear excess losses.

Summary: What is the core value of the forex market

What is forex? It is not only the act of exchanging currencies but also the largest, most transparent, and lowest-cost financial investment market in the world.

With advantages like 24/5 trading, high liquidity, low costs, and leverage, forex has become the preferred channel for investors worldwide. Whether for simple currency exchange during travel or complex strategies for professional investors, the forex market operates seamlessly, waiting for every participant to discover its opportunities.