What is forex?

Quite simply, its the global financial market that allows one to trade currencies.

If you think one currency will be stronger versus the other, and you end up correct, then you can make a profit.

Once upon a time, before a global pandemic happened, people could actually get on airplanes and travel internationally.

If youve ever traveled to another country, you usually had to find a currency exchange booth at the airport, and then exchange the money you have in your wallet into the currency of the country you are visiting.

You go up to the counter and notice a screen displaying different exchange rates for different currencies.

An exchange rate is the relative price of two currencies from two different countries.

You find “Japanese yen” and think to yourself, “WOW! My one dollar is worth 100 yen？! And I have ten dollars! Im going to be rich!!!”

When you do this, youve essentially participated in the forex market!

Youve 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 remaining (Tokyo is expensive!) and notice the exchange rates have changed.

Its these changes in the exchange rates that allow you to make money in the foreign exchange market.

What is forex？

The foreign exchange market, which is usually known as “forex” or “FX,” is the largest financial market in the world.

The FX market is a global, decentralized market where the worlds currencies change hands.

Due to the wide range of market participants, including central banks, financial institutions, corporations, hedge funds, and individual traders, exchange rates change by the second so the market is constantly in flux.

Only a tiny percentage of currency transactions happen in the “real economy” involving international trade and tourism like the airport example above.

Instead, most of the currency transactions that occur in the global foreign exchange market are bought (and sold) for speculative reasons.

Currency traders (also known as currency speculators) buy currencies hoping that they will be able to sell them at a higher price in the future.

Compared to the “measly” $200 billion per day volume of the New York Stock Exchange (NYSE), the foreign exchange market looks absolutely ginormous with its $7.5 TRILLION a day trade volume.

Thats a trillion with a “t”.

Lets 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 $20 billion each day. If we used a monster to represent the NYSE, it would look like this…

Looks intimidating. Looks like it works out. Some may even find it sexy.

You hear about the NYSE in the news every day… on CNBC… on Bloomberg…on BBC… heck, you even probably hear about it at your local gym. “The NYSE is up today, blah, blah”.

When people talk about the “market”, they usually mean the stock market. So the NYSE sounds big, its loud and likes to make a lot of noise.

But if you actually compare it to the forex market, it would look like this…

Oooh, the NYSE looks so puny compared to the forex market! It doesnt stand a chance!

Makes you wonder if the “S” in NYSE stands for “Stock” or for “Scrawny”？

The cryptocurrency market is even punier.

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, theres a catch!

That huge $7.5 trillion number covers the entire global foreign exchange market, BUT the “spot” market, which is part of the currency market thats relevant to most forex traders is smaller at $2 trillion per day.

And then, if you just want to count the daily trading volume from retail traders (that‘s us), it’s even smaller.

It is very difficult to determine the exact size of the retail segment of the FX market, but its estimated to be around 3-5% of overall daily FX trading volumes, or around $200-300 billion (probably less).

So you see, the forex market is definitely huge, but not as huge as the others would like you to believe.

Don‘t believe the “forex is a $7.5 trillion market” hype! The huge number sounds impressive, but a bit misleading. We don’t like to exaggerate. We just keepin it real.

Aside from its size, the market also rarely closes! Its open virtually around the clock.

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 Auckland/Wellington, then move to Sydney, Singapore, Hong Kong, Tokyo, Frankfurt, London, and finally, New York, before trading starts all over again in New Zealand!

What is traded in forex？

The answer is MONEY. Specifically, currencies.

Because you‘re not buying anything physical, forex trading can be confusing so we’ll use a easy (but imperfect) analogy to help explain.

Think of buying a currency as buying a share in a particular country, kinda like buying shares in a company.

The price of the currency is usually a direct reflection of the markets opinion on the current and future health of its respective economies.

In forex trading, when you buy, say, the Japanese yen, you are basically buying a “share” in the Japanese economy.

You are betting that the Japanese economy is doing well, and will even get better as time goes.

Once you sell those “shares” back to the market, hopefully, you will end up with a profit.

In general, the exchange rate of a currency versus other currencies is a reflection of the condition of that countrys economy, compared to other economies.

By the time you graduate from this School of Pipsology, youll be eager to start working with currencies.

Major Currencies

While there are potentially lots of currencies you can trade, as a new forex trader, you will probably start trading with the “major currencies”.

They‘re called “major currencies” because they’re the most heavily traded currencies and represent some of the worlds largest economies.

Forex traders differ on what they consider as “major currencies”.

The uptight ones who probably got straight As and followed all the rules as children only consider USD, EUR, JPY, GBP, and CHF as major currencies.

Then they label AUD, NZD, and CAD as “commodity currencies”.

For us rebels, and to keep things easy, we just consider all eight currencies as the “majors”.

Below, we list them by their symbol, country where theyre used, currency name, and cool nicknames.

Currency symbols always have three letters, where the first two letters identify the name of the country and the third letter identifies the name of that country‘s currency, usually the first letter of the currency’s name.

These three letters are known as ISO 4217 Currency Codes.

By 1973, the International Organization for Standardization (ISO) established the three-letter codes for currencies that we use today.

Take NZD for instance…

NZ stands for New Zealand, while D stands for dollar.

Easy enough, right？

The currencies included in the chart above are called the “majors” because they are the most widely traded ones.