What is Forex?
Simply explained, Forex is a global financial market where currencies can be traded. By converting one money into another.
If you’ve visited another country, you’ll normally need to find a currency exchange counter at the airport and exchange the money in your wallet into the currency of the country you’re visiting.
You approach the counter and notice a screen with various exchange rates for various currencies. You notice “Japanese yen” and exclaim, “WOW! Is a dollar worth 100 yen? And I’ve got ten dollars! “I’m going to be wealthy!!!”
You are effectively participating in the currency market when you do this!
Forex trading is the process of exchanging one currency for another.
Assume you are an American visiting Japan and have sold your dollars to buy yen
Then, before flying back home, you stop by a currency exchange booth to exchange yen, only to discover that the exchange rate has changed. These variations in exchange rates are what allow you to profit in the forex market.
The foreign exchange market, also known as “forex” or “FX,” is the world’s largest financial market.
The foreign exchange market (FX market) is a global decentralized marketplace where world currencies are exchanged. Because exchange rates vary every second, the market is always in flux. Only a small percentage of currency transactions occur in the “real economy,” such as the airport example above, which involves international trade and tourism.
In contrast, the majority of currency transactions in the global foreign exchange market are bought (and sold) for speculative purposes.
In comparison to the New York Stock Exchange (NYSE), which can exceed $200 billion per day, the forex market appears to be very enormous, with a daily trading volume of $6.6 TRILLION.
Let us pause for a moment to consider our use of monsters.
The New York Stock Exchange (NYSE), the world’s largest stock exchange, trades in excess of $200 billion in daily activity. This is what the NYSE would look like if we used a monster to represent it.
It appears intimidating. Some may even find it seductive.
Every day, you hear about the NYSE in the news… CNBC, Bloomberg, the BBC, and you might even hear it at your local gym. “The NYSE rose today, blah, blah.”
When individuals refer to “the market,” they usually refer to the stock market. So the NYSE appears to be large and packed.
But if you really compare it to the forex market, it will look like this…
Of fact, the NYSE appears insignificant in comparison to the currency market! When it comes to the FX market, the NYSE does not stand a chance.
Examine the charts of average daily trading volume for the FX market, the New York Stock Exchange, the Tokyo Stock Exchange, and the London Stock Exchange:
image source: forexearlywarning
The foreign exchange market is over 200 times larger! SUPER LARGE! But wait, there’s something else going on.
That massive $5 trillion total includes the whole worldwide foreign exchange market, but the “spot” market, which is relevant to most forex dealers, is far smaller at $2 trillion per day. Then, if you only want to compute the daily trading volume of retail traders (i.e. us), the figure is considerably lower.
Although it is difficult to quantify the retail FX market, it is estimated to account for 3-5% of overall daily FX trading volumes, or $200-300 billion (probably less).
So, while the forex market is unquestionably substantial, it is not as large as some claim. Don’t be fooled by the claim that “forex is a $6.6 trillion market”! The big figure is stunning, although it is somewhat deceptive. We don’t like to exaggerate. We’re only being honest.
In addition to its size, the market rarely closes! It is open almost continuously. The FX market is open 24 hours a day, five days a week, with the exception of weekends.
The forex market, unlike the stock or bond markets, does not close at the end of each business day. Trading just shifts to various financial centers throughout the world.
Next Lesson: What is Traded On Forex?