Quite plainly, it’s the global financial market where people trade currencies. If you think a currency will be stronger versus the other, and you take a position that validates your thinking, then you can make a profit.
If you’ve ever gone to another country, you normally had to find a currency exchange station at the airport, and then swap the money you have in your wallet into the currency of the country you are visiting. Then you notice the screen with exchange rates for different currencies. An exchange rate is the relative price of two currencies from two separate nations.
You exchange your dollars for Swiss francs and, when you do this, you’ve effectively joined in the forex market. You’ve swapped one currency for another — or in forex trading terms, assuming you’re an American visiting Switzerland, you’ve sold dollars and bought Swiss francs.
Before you fly home, you visit the currency exchange booth to swap the Swiss francs that you have left and notice the exchange rates have shifted. These are the fluctuations in the exchange rates that may mean profit (or loss) in the foreign exchange market.
What is Forex?
The foreign exchange market, also known as “forex” or “FX,” is the largest financial market in the world. It’s a global, decentralized market where the world’s currencies change hands. Exchange rates change constantly so the market is always fluid.
International trade and tourism, like the airport example above, account for a very small percentage of transactions in the FX market. Instead, most of the currency transactions that take place in the global foreign exchange market are bought (and sold) by traders and speculators. Currency traders buy currencies anticipating that they can sell them at a higher price in the future.
Forex Market vs. the New York Stock Exchange
The New York Stock Exchange (NYSE), on average, has a daily trading volume of $2-6 billion. Sounds like a lot, right? But the foreign exchange market dwarfs that volume with its $5-6 trillion a day trade volume — trillion with a “t”.
Although you hear about the NYSE in business and financial news every day, if you actually compare it to the forex market, it looks like this…
Forex Market Trading Volume
Both Nasdaq and the NYSE look so tiny contrasted with the forex market. The currency market is over 200x larger. However, that large $5-6 trillion figure covers the entire global foreign exchange market. The “spot” market — which is the element of the currency market that’s relevant to most forex traders — is lesser at $2 trillion per day. And then, if you count just the daily trading volume from retail traders, it’s even smaller.
It is very tricky to establish the precise size of the retail FX market, but it’s assessed to be around 3-5% of total daily FX trading volumes, or around $200-300 billion — maybe less. So, the forex market is definitely massive, but not as massive as you might believe, at first glance.
Aside from its magnitude, the FX market also seldom closes. It’s open practically round the clock. The forex market is open 24 hours a day, 5 days a week — only closing during the weekend. The forex market does NOT close at the end of each business day, unlike the stock or bond markets. Instead, trading just shifts to various financial markets around the world.
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