What Exactly is Forex?

That’s a very good question.

If you have ever traveled abroad, when you arrived at the airport, you had to exchange the money (dollars) that you had with you for the currency of the country at which you had arrived. So, for instance, if you are in France, it’s francs, Japan, it’s yen, the UK, it’s pounds sterling or GBP, and so on. You take your dollars out at the currency exchange booth and take whatever the going rate is for the exchange. You will see a screen displaying the different exchange rates for the different currencies, since you might have come from Australia, so it’s AUD (Australian Dollars), or Spain, where it’s euros.

So if you are in Japan, and you have $100 and the exchange rate says that your money is worth 10,000 yen, you think that you have become rich overnight. The disappointing part of this is that when you go to buy a beer, it costs 5,000 yen!

However, when you have exchanged your dollars for Japanese yen, you have just become a Forex trader. Sort of.

You have exchanged one currency for another. You have sold your dollars and you have bought yen.

When you decide that it is time to return home (which may be earlier than you thought, if a beer costs 5,000 yen) you go to the currency exchange again to change the remaining (few) yen that you have back into dollars. You will see that the rate you get for your yen has changed from what it was a week ago when you arrived. It could be more. It could be less. But it is the changes in the exchange rates that enable you to make money in the Forex market.

If I told you that you could change $100 into 10,000 yen, and then a few days later change your 10,000 yen back into dollars, but you would now get $110, you would do it all day long. You’d be a fool not to. That is how it works.

The foreign exchange market, or “Forex”, is the biggest financial market in the world. The New York Stock Exchange (NYSE) turns over about $22.4 billion a day. It sounds like a lot, until you realize that the Forex market turns over $5 TRILLION a day – around 200 times the volume of the NYSE!!

Let’s take a look at this. If you were walking on the beach and you found a pebble that would just fit in the palm of your hand, then that’s the NYSE. Just up ahead, you come across a rock on the beach that is 6’ high and 4’ across, and probably weighs around 5 tonnes. That’s the Forex market.

You hear about the NYSE all the time. On the news, on CNBC, Bloomberg, the BBC in the UK – probably even at your local bar. People will comment that the NYSE is down today, or up today. It sounds as though it is important – and it is. But compared to the Forex market, it isn’t even in with a fighting chance.

Take that pebble you have in your hand and compare it with the rock.

Find a graph or bar chart of the daily trading volumes of the Forex market, the NYSE, the London Stock Exchange and the Tokyo Stock Exchange. The Forex market is 200 times bigger than the other three combined.

However, there is a small caveat here. Well, not so small actually. While that vast $5 trillion figure covers the whole of the global foreign exchange market, the fact is that we traders are working in the Spot Market. That is only about $1.5 trillion. Eat your heart out. Yes, the Forex market is vast, but it is not quite as vast as you might have been led to believe by the media.

So now, you probably feel that you understand what the Forex market is about. However, we have only scratched the surface. In your next lesson, we’ll find out exactly WHAT is traded in the Forex market.