What is Forex?
What is Forex? Simply talking, it’s the decentralized global market that allows the exchange of one currency for another.
FOREX MARKET: IT’S ALL IN THE EXCHANGE
If you’ve ever traveled overseas, you’ve made a forex transaction. Take a trip to Japan and you convert your Dollar into Japanese Yen. You go up to the counter and notice a screen displaying different exchange rates for different currencies. The forex exchange rate between the two currencies — based on supply and demand — determines how many Yens you get for your Dollar.
When you do this, you’ve essentially participated in the forex market! You’ve exchanged one currency for another. Or in forex trading terms, assuming you’re an American visiting Japan, you’ve sold dollars and bought yen.
Before you fly back home, you stop by the currency exchange booth to exchange the yen that you miraculously have left over (Tokyo is expensive!) and notice the exchange rates have changed.
It’s these changes in the exchanges rates that allow you to make money in the foreign exchange market.
FOREX MARKET: THE LARGEST MARKET IN THE WORLD
The Foreign Exchange market, which is usually known as
FX is the largest and most liquid financial market in the world.
Compared to the measly $22.4 billion per day volume of the New York Stock Exchange (NYSE), the foreign exchange market looks absolutely enormous with its $5 TRILLION a day trade volume.
Let’s take a moment to put this into perspective using monsters…
The largest stock market in the world, the New York Stock Exchange (NYSE), trades a volume of about $22.4 billion each day. If we used a monster to represent the NYSE, it would look like this…
Looks intimidating and some may even find it sexy.
You hear about the NYSE in the news every day… on CNBC… on Bloomberg…on BBC… When people talk about the “market”, they usually mean the stock market. So the NYSE sounds big, it’s loud and likes to make a lot of noise.
But if you actually compare it to the forex market, it would look like this…
Ooops, the NYSE looks so tiny compared to the forex market! It couldn’t stand a chance!
Check out the graph of the average daily trading volume for the forex market, New York Stock Exchange, Tokyo Stock Exchange, and London Stock Exchange.
The currency market is over 200 times BIGGER! It is HUGE! But hold your horses, there’s a catch!
That huge $5 trillion number covers the entire global foreign exchange market, BUT daily trading volume from retail traders (which is us) make up between 5-6% of overall volume, or between $300-400 billion.
So you see, the forex market is definitely huge, but not as huge as the others would like you to believe. We don’t like to exaggerate. We just keeping it real.
Aside from its size, the market also rarely closes!
FOREX MARKET: THE 24/5 MARKET
The forex market is open 24 hours a day and 5 days a week, only closing down during the weekend. (What a bunch of slackers!)
So unlike the stock or bond markets, the forex market does NOT close at the end of each business day.
Instead, trading just shifts to different financial centers around the world.
The day starts when traders wake up in Sydney then moves to Tokyo, London, Frankfurt and finally, New York, before trading starts all over again in Sydney!
In the next post, we’ll reveal WHAT exactly is traded in the forex market.