Comprehensive Guide to Forex Trading: From Concepts to Market Operation Mechanisms

What exactly is Forex?

Forex (Foreign Exchange, abbreviated as Forex or FX) may seem complicated, but it is essentially the process of exchanging one currency for another. In daily life, you may have already been exposed to Forex—for example, exchanging currency at the airport when traveling abroad is the simplest form of participating in the Forex market.

Specifically, Forex trading refers to buying and selling based on exchange rate fluctuations to profit from the price difference. Unlike simple currency exchange, Forex traders leverage exchange rate changes to create profit opportunities.

A real-life example

Suppose you see the TWD to USD exchange rate at 0.034 at the airport, and you decide to exchange 10,000 TWD for 3,400 USD. At this moment, you are effectively selling TWD and buying USD—this transaction is completed on the Forex market. If the USD appreciates, later when you exchange the same USD back to TWD, you may earn a profit exceeding 10,000 TWD.

How does the Forex market operate?

The Forex market is the largest financial market in the world, and it is truly decentralized. Unlike stock exchanges, there is no physical trading hall; instead, trading occurs through electronic networks of global banks, brokers, and traders.

Massive trading volume

The daily trading volume of the Forex market reaches 6.6 trillion USD. What does this number tell us? For example, the New York Stock Exchange, the most famous in the US, has an average daily trading volume of only about 22.4 billion USD. This means the Forex market’s daily trading volume is 296 times that of the stock market.

Note that this 6.6 trillion USD includes Forex derivatives trading. The spot Forex market’s average daily trading volume is about 2 trillion USD. Among this, retail investors’ trading volume accounts for approximately 3-5%, about 200-300 billion USD daily.

Why do exchange rates keep fluctuating?

Exchange rates change every second, driven by factors such as:

• Economic data performance of various countries
• Central bank policy adjustments
• Changes in international political situations
• Supply and demand dynamics

Traders’ task is to predict how these factors will influence exchange rates, thereby judging whether a currency will appreciate or depreciate.

24/5 Trading Mechanism

The unique feature of the Forex market is its trading schedule. It is open 5 days a week, 24 hours a day, with a pause on weekends. Trading sessions start from Auckland/Wellington in New Zealand, then shift to Sydney, Singapore, Hong Kong, Tokyo, Frankfurt, London, and finally New York, forming a seamless global trading ring. This means no matter where you are, you can find suitable trading hours.

What is traded in the Forex market?

In simple terms: currencies. But unlike purchasing physical goods, Forex trading is an asset exchange activity.

We can understand it this way: buying a country’s currency is akin to buying a “stock” of that country’s economic prospects. The value of a currency directly reflects the market’s assessment of the economic health of its country.

Hypothetical scenario: You are optimistic about the US economic outlook and decide to buy US dollars. Six months later, the US economy develops positively, and the USD appreciates. At this point, exchanging your USD back into other currencies can yield a profit from the price difference.

Major currency pairs: a beginner’s choice

There are hundreds of currency pairs in the Forex market, but beginners usually focus on major currency pairs, which have the highest trading volume and liquidity.

Major currencies include:

• USD — the most actively traded currency worldwide
• EUR — the common currency of 19 Eurozone countries
• GBP — the official currency of the United Kingdom
• JPY — Japan’s currency
• CAD, AUD, CHF, NZD

Currency code composition

Each currency is represented by a three-letter code. The first two letters indicate the country, and the third letter indicates the currency name’s initial. For example:

• USD: US (United States) + D (Dollar)
• JPY: JP (Japan) + Y (Yen)
• EUR: EU (Europe) + R (Euro)

This standardized system was established by the International Organization for Standardization (ISO) in 1973, called ISO 4217 currency codes.

Core advantages of Forex trading

Extremely low trading costs

Forex trading does not require paying broker commissions, clearing fees, or transaction taxes. Retail Forex brokers mainly profit from the bid-ask spread. Under normal conditions, the spread (difference between buy and sell prices) is below 0.1%, and large trades can be as low as 0.07%—far lower than stock market costs.

Flexible trading scale

Futures markets have strict contract size regulations, but the Forex market allows traders to choose their position sizes freely. Many brokers permit opening positions with as little as 1,000 units of currency, greatly lowering the entry barrier.

Leverage mechanism

Forex trading offers leverage support, allowing traders to control large positions with a small amount of capital. For example, with 50:1 leverage, investing 50 USD margin can control a 2,500 USD trade—this magnification can increase profit potential but also requires careful risk management.

Unparalleled liquidity

A daily trading volume of 6.6 trillion USD guarantees market depth. Under normal circumstances, traders can execute buy and sell orders instantly without worrying about order execution issues.

Forex vs stock market

Trading time flexibility

Stock markets are only open about 6.5 hours daily (from 9:30 AM to 4:00 PM US time). In contrast, the Forex market operates 24 hours a day, allowing traders to schedule trades according to their own timetable.

Trading volume and liquidity

The daily trading volume of Forex is 6.6 trillion USD, far surpassing stocks. The NYSE’s daily volume is about 22.4 billion USD, and NASDAQ’s is around 20 billion USD. This huge liquidity difference means Forex offers faster execution and more stable prices.

Short selling mechanism

Stock markets have restrictions on short selling, but the Forex market does not. Whether the market is rising or falling, traders can find opportunities to trade.

Market influence factors

Stock prices are often affected by analyst opinions or earnings expectations, with a single earnings report potentially causing sharp volatility. The Forex market, involving global banks and real economic demand, tends to be more stable, with less influence from individual analyst opinions.

Forex vs futures market

Liquidity difference

The daily trading volume of Forex is 6.6 trillion USD, while the futures market is only about 30 billion USD. The vast difference in liquidity makes Forex a more accessible market.

Trading hours

Although futures have overnight trading, liquidity is significantly lower. In contrast, Forex provides a true 24-hour continuous trading environment.

Execution certainty

The Forex spot market generally offers fast execution and definite prices under normal conditions. Futures may have slippage risks and price delays.

Risk management

Forex trading platforms have automatic protection mechanisms: when account losses reach the margin requirement, the system automatically issues margin calls or forces liquidation to prevent losses from expanding. Futures markets lack such protections, and traders’ losses can exceed their account balances.

Summary: Why choose Forex?

With enormous trading volume, 24/5 operation, extremely low trading costs, and strong liquidity, the Forex market has become one of the top choices for investors worldwide. For investors looking to enter the financial markets, Forex offers a transparent, low-entry barrier, and abundant opportunities for investment.