What is Forex?
Understanding Forex
Forex, at its core, is the worldwide platform for currency trading.
Profits arise when you predict the strengthening of one currency against another and are proven right.
Remember the days before the global health crisis, when international travel was common?
Traveling abroad often meant visiting a currency conversion kiosk at the airport, exchanging your home currency for that of your destination.
The Dynamics of Currency Conversion
At such kiosks, screens flash with varying currency conversion rates.
This rate indicates the comparative value of two different national currencies.
Say you come across the “Japanese yen” and realize that a single dollar of yours translates to 100 yen. With ten dollars in hand, it feels like a windfall! This simple act? It’s you taking part in the forex world.
You’ve just swapped currencies.
In the language of forex traders, for an American in Japan, it’s selling dollars to purchase yen.
Navigating Currency Fluctuations
When it’s time to return, you revisit the currency kiosk to change back your leftover yen. But wait, the rates differ now.
Such fluctuations in conversion rates are what present profit opportunities in the forex sector.
Deciphering Forex
Typically called “forex” or “FX,” this international currency marketplace is the planet’s financial giant.
This decentralized marketplace is where global currencies are traded, with rates shifting every moment.
A minor chunk of these transactions is linked to genuine international business and travel activities, like the airport illustration. Predominantly, these trades are speculative, where currency buyers aim for profit by selling at a higher rate later.
Stack the New York Stock Exchange’s daily trade volume of $200 billion against the forex market’s whopping $6.6 trillion, and the scale difference is stark.
Picture this with a fictional representation:
Envision the New York Stock Exchange as a formidable creature.
A creature that’s commonly discussed on media outlets, making its presence well-known. When people discuss “the market,” they often refer to stocks. So, the stock market, though loud and significant, pales in comparison to the forex arena.
Forex versus Stock Market
Against the gigantic backdrop of forex, the stock market appears minuscule. Does the “S” in NYSE stand for “Stock” or “Small”? 😄
The crypto market? Even smaller.
Consider a chart showing the daily trade volumes of major exchanges and the forex market:
Forex’s Immensity
Forex’s domain seems colossal at over 200 times larger. But let’s delve deeper.
The impressive $6.6 trillion includes the entire global forex market, but the segment most traders interact with, the “spot” market, sees about $2 trillion daily. The daily volume from individual traders like us? Considerably less. It’s challenging to ascertain, but estimates suggest retail forex trade volumes hover around $200-300 billion.
So, while immense, forex isn’t as gigantic as some proclaim.
Debunking the “$6.6 trillion market” myth. It’s grand but requires a nuanced view. We aim for authenticity over exaggeration.
Retail Forex Dynamics
One standout feature? Its near-constant operational hours.
Unlike stock or bond markets that shut shop post business hours, forex operates nearly incessantly.
With a 24/5 schedule, it doesn’t rest for weekends. Trading transitions across global financial hubs.
A Worldwide Phenomenon
Trading commences with Auckland/Wellington, transitioning through cities like Sydney, Tokyo, Frankfurt, and New York, only to restart in New Zealand.