The world's largest trading market revealed: Why are investors all trading forex?

Foreign Exchange Names and Definitions

Foreign Exchange is the English term for 外匯, commonly abbreviated as Forex or FX, referring to the act of exchanging and trading different currencies. In the financial world, foreign exchange trading involves buying and selling two different currencies to profit from the differences in exchange rates.

Simply put, when you exchange TWD for USD or EUR for JPY, you are participating in the foreign exchange market. However, professional investors do so with strategic methods, not just passive currency exchanges during travel.

Why Has the Foreign Exchange Market Become the First Choice for Global Investors?

Almost zero transaction costs, extremely low entry barriers

In forex trading, no commission is required. Most retail forex brokers earn through the spread (the difference between buy and sell prices), which usually does not exceed 0.1%, and can drop to 0.07% with large volume trading. Compared to other financial markets, this cost advantage is significant.

24/7 Trading

The forex market is a truly global decentralized market. Operating 24 hours a day, 5 days a week, it starts with Australia opening on Monday, then sequentially through Tokyo, Hong Kong, Singapore, London, and finally New York closing on Friday, then restarting in the Southern Hemisphere. Traders can participate anytime and anywhere without being limited by fixed trading hours.

High liquidity, fast trade execution

The daily trading volume of the forex market reaches 6.6 trillion USD, far surpassing the NYSE’s daily volume of 22.4 billion USD. This means your buy and sell orders can be executed quickly, with high price certainty and almost no slippage risk.

Leverage support, small capital can control large positions

The forex market offers leverage, allowing traders to control larger positions with less margin. For example, 50:1 leverage means investing $50 can control a $2,500 trade. This is a powerful tool for retail investors with limited funds.

Multiple trading options, no restrictions on short selling

The forex market imposes no special restrictions on short selling. Whether the market is rising or falling, whether you are bullish or bearish, trading opportunities exist. This advantage far exceeds the restrictions on short selling in stock markets.

What Exactly Does the Forex Market Trade?

In essence, forex trading is trading the currencies themselves. Buying a currency can be thought of as buying the “stock” of that country’s economy. The price of a currency directly reflects the market’s assessment of that country’s economic outlook.

For example: If you predict the US economy will strengthen, you can buy USD. When US economic data improves and the USD appreciates, selling USD will generate profit. Conversely, if the economy weakens, the opposite applies.

Exchange rates fluctuate every moment, influenced by factors such as national economic strength, fiscal policies, and international relations. Most forex trading is speculative, based on these fluctuations, rather than real economic demand.

Major Currency Pairs You Need to Know

Although the forex market involves many trading pairs, beginners usually focus on the most traded major currencies, representing the world’s largest economies:

• USD - The most frequently traded currency globally
• EUR - European Economic Area
• JPY - Major Asian economy
• GBP - United Kingdom and its economic zone
• CHF - Safe-haven asset
• CAD - Commodity currency
• AUD - Resource-based economy
• NZD - Commodity currency

Currency codes consist of three letters, with the first two representing the country, and the third representing the currency name’s initial letter. For example, USD = US (United States) + D (Dollar). This system was established by ISO 4271 in 1973 and is still in use today.

Interestingly, the US dollar is nicknamed “Greenback” because of its prominent green color on the back, a term originating during the American Civil War in 1861.

Forex vs Stocks: Why Choose the Former?

• Flexible trading hours: Stock markets operate only during exchange hours (e.g., 9:30 am to 4:00 pm EST), while forex operates 24/5 seamlessly.
• Liquidity and execution certainty: With a daily volume of 6.6 trillion USD, forex is more liquid than stocks, making it easier to execute trades quickly and at desired prices.
• Freedom to short sell: Stock markets have restrictions on short selling, but forex allows full two-way trading.
• Less influence from analysts: Since forex is essential for global banks and generates billions in revenue, its movements are driven more by macroeconomic factors than individual analyst opinions or specific events.

Forex vs Futures: Which Is Better?

• Liquidity gap: Forex’s daily volume of 6.6 trillion USD vastly exceeds futures’ 300 billion USD, over 200 times more.
• Trading continuity: Futures have overnight trading but lack the continuous 24-hour liquidity of spot forex.
• Execution stability: Forex provides fast execution and reliable prices under normal conditions, unlike futures and stocks.
• Risk management: Forex platforms have automatic margin calls and risk limits; futures can lead to losses exceeding account funds, increasing trader responsibility.

The Reality of Forex Market Size

Although the daily trading volume of the forex market is 6.6 trillion USD, it’s important to clarify that the spot forex market accounts for about 2 trillion USD daily. Retail traders’ daily volume is estimated at only 3-5%, roughly 200-300 billion USD, possibly less.

This does not mean retail traders have no opportunities; rather, it shows that even within such a vast market, individual investors still have ample liquidity and trading space.

How Does the Forex Market Operate?

The forex market is a fully decentralized global market with no single exchange or central clearinghouse. Banks, hedge funds, corporations, and individual investors all trade within it. Exchange rates fluctuate continuously, driven by economic data, policy changes, and international events.

Investors aim simply to analyze exchange rate trends and buy low, sell high. For example, if you believe the yen will depreciate, you might borrow yen to buy USD, then sell USD after the yen depreciates to profit.

Summary: Why Choose Forex Trading?

As the world’s largest financial market, forex offers low costs, high liquidity, 24-hour trading, flexible leverage, and transparency, making it an effective investment channel for global investors. Compared to stocks and futures, forex trading features higher transparency, lower entry barriers, and more trading opportunities.

Whether you are an investor seeking higher returns or a beginner interested in global economics, the forex market is worth your in-depth understanding and participation.