Master the World's Largest Financial Market: The Complete Guide to Forex Trading

How Big Is the Foreign Exchange Market?

What is Forex? In simple terms, forex is the process of exchanging one currency for another. But when this process occurs in the financial markets, it gives rise to a massive investment domain—foreign exchange trading.

Imagine seeing $6.6 trillion flowing globally every day, and you’ll understand why the forex market is called the largest financial market in the world. In comparison, the New York Stock Exchange (the world’s largest stock exchange) has an average daily trading volume of only $22.4 billion. This means the daily trading volume of the forex market is over 290 times that of the stock market.

Although the overall figures are enormous, the activity of retail investors is relatively small—estimated to account for only 3-5%, roughly $200 billion to $3 trillion. However, this still indicates that ordinary investors have ample opportunities to participate in this market.

Why Is Forex Trading Worth Paying Attention To?

Forex trading has advantages that are hard to match in other financial markets:

Unparalleled Flexibility in Timing

The forex market is open 24 hours a day, Monday through Friday. Trading begins in New Zealand, then sequentially passes through Sydney, Singapore, Hong Kong, Tokyo, Frankfurt, London, and finally New York. Unlike stock markets, which are limited by fixed trading hours, forex traders can participate flexibly according to their schedules.

Significant Cost Advantages

Forex trading usually involves no commissions. Brokers mainly profit from the bid-ask spread, which is typically below 0.1%, and can be as low as 0.07% for large transactions. In contrast, stock trading costs are much higher.

Flexible Trading Sizes

Unlike futures markets with standard contracts (e.g., 5,000 ounces of silver), forex traders can trade small positions of 1,000 currency units. This flexibility greatly lowers the barrier to entry.

Highest Liquidity

Thanks to the enormous trading volume, the forex market’s liquidity far exceeds that of other markets. Under normal conditions, traders can buy and sell instantly, with prices being clear and execution swift.

Leverage Tools

Forex brokers typically offer leverage of 50:1. This means that with a $50 margin, you can control a $2,500 position. Leverage amplifies profit potential but also increases risk—something traders must fully understand as a double-edged sword.

Core Concepts of Forex Trading

What is the exchange rate?

The exchange rate is the relative price of two currencies. For example, the USD to TWD exchange rate is 0.034, meaning $1 can be exchanged for 0.034 TWD. In daily life, when you exchange currency at the airport, you are essentially participating in forex trading.

Currency Code System

All international currencies follow the ISO 4271 standard (established by the International Organization for Standardization in 1973), using three-letter codes. The first two letters represent the country, and the third letter represents the currency’s initial. For example, USD (US dollar), EUR (Euro), JPY (Japanese Yen).

Major Currency Pairs

The seven most traded major currency pairs in the forex market cover the world’s most developed economies: USD, EUR, CAD, GBP, CHF, AUD, JPY, NZD. For beginners, focusing on these major pairs is relatively easier to get started.

Forex vs Stocks: Who Has the Advantage?

Limitations of the Stock Market

The NYSE has about 2,800 stocks, and NASDAQ has 3,300 listed companies. While it seems there are many choices, traders need to spend time researching each company. In contrast, the forex market only requires tracking seven major currency pairs to grasp core opportunities.

Stock trading is limited by exchange operating hours (US Eastern Time 9:30-16:00), whereas the forex market operates around the clock.

Liquidity and Risk Management

The forex market’s daily trading volume is $6.6 trillion, far surpassing that of stocks. Strong liquidity means easier entry and exit positions.

In terms of risk management, forex platforms automatically close positions when losses reach a certain margin requirement, protecting traders from margin calls. Futures markets may allow losses to exceed account funds.

Influence of Analysts

Stock prices are easily affected by analyst forecasts—a disappointing earnings report can trigger sharp stock price swings. Forex trading is different. Currency trading is a necessary activity for global banks and multinational corporations, with exchange rate fluctuations mainly driven by macroeconomic factors, and analyst opinions have less influence.

Short Selling Opportunities

The forex market imposes no special restrictions on short selling. Whether bullish or bearish, trading opportunities always exist.

Forex vs Futures: Scale and Stability

The daily trading volume of futures markets is only $30 billion, less than 0.5% of the forex market. The gap in liquidity directly impacts price stability and execution speed.

Futures markets have overnight trading, but liquidity is far less than the spot forex market. This means futures traders may face larger price swings and execution delays.

In risk control, the forex market’s automatic close mechanisms are more stringent, while futures traders may face over-loss liabilities.

Who Drives the Forex Market?

Besides real economy demands like international trade and tourism, most forex trading stems from speculative activities. Traders analyze economic data, central bank policies, international relations, and other factors to judge whether a country’s currency will appreciate or depreciate, profiting from exchange rate fluctuations.

For example, when a clear trend of yen depreciation is established, many traders borrow yen to buy dollars, betting on the yen weakening.

The Ultimate Advantage of Forex Trading

Forex is the largest global financial investment market, offering unparalleled transparency. Compared to other markets, forex trading has low costs, flexible timing, ample liquidity, and manageable risks. These features make forex an ideal entry point for investors worldwide to start their financial trading journey. Whether you want to diversify your investment portfolio or seek short-term trading opportunities, the forex market provides abundant opportunities.