What is FX? Unveiling the true face of the global foreign exchange market

The Essence of Forex Trading

FX (foreign exchange) is the world’s largest financial market. Simply put, it involves the trading of one currency for another. This concept may seem unfamiliar, but you might have participated in it already. When you exchange currency at the airport during international travel, that’s forex trading. For example, a traveler exchanges 10,000 New Taiwan Dollars for $3,400 USD at an exchange rate of 0.034. This process is essentially participating in the foreign exchange market.

The Forex Market: A Massive System Behind the Numbers

The forex market is a decentralized global trading network where currencies are constantly exchanged. Exchange rates fluctuate every second, and the market never stops moving.

In terms of scale, the daily trading volume of the FX market reaches up to $6.6 trillion (according to the Bank for International Settlements 2019 report). This figure far exceeds the NYSE’s daily trading volume of $200 billion, more than 30 times higher. However, it’s important to note that this $6.6 trillion encompasses all transactions in the global forex market.

The most relevant participants are those involved in the “spot” market, with a daily trading volume of about $2 trillion. Retail traders’ trading volume accounts for a small portion, estimated at only 3-5% of total forex trading, roughly $200-300 billion.

Two Sides of the Forex Market: Real Economy vs. Speculative Trading

A small portion of forex trading stems from genuine international trade and tourism needs (like the airport currency exchange mentioned earlier). However, the vast majority of trading volume in the global forex market is driven by speculation—traders buy a currency expecting to sell it later at a higher price for profit. This is why the market is so large and highly liquid.

The Market That Never Sleeps

Unlike stock or bond markets, the forex market operates nearly 24 hours a day, five days a week, closing only on weekends. Trading does not stop at market close but flows continuously across financial centers worldwide. When traders in New Zealand start trading, the market awakens, then passes through Sydney, Singapore, Hong Kong, Tokyo, Frankfurt, London, and finally New York, before cycling back to New Zealand to start again. This seamless flow of trading activity ensures the forex market remains constantly active.