Forex is the market that explores the differences in currencies, and forex traders attempt to exploit these differences and fluctuations in order to make a profit. As you probably know, when you travel to another country, you spend money very differently.
This is because the currency is not the same in the country that you are now visiting. Thus, you have to consult an exchange rate to figure out the relationship between the two currencies. In fact, if you even exchanged money – one can say that you technically participated in the forex market, and simply didn’t know it!
If you’ve traveled extensively, you may have been surprised to notice that the second time you exchange the exact same amount of money – you get a different amount of money back. This might confuse you, until you realize that the currencies are constantly changing, and it’s these changes that allow traders to make money in the market.
One aspect of the forex market that most people who aren’t familiar with it don’t realize is how incredibly massive that it is. For example – what do you think the biggest trading market is? There are many that might say the New York Stock Exchange, because it’s what they are familiar with, through the media or movies. How many times have you heard the phrase “Wall Street” and thought of rich men in business suits who drive foreign cars? Well, believe it or not: in terms of numbers, the forex market puts the New York Stock Exchange to absolute shame. Specifically, the forex market has a trade volume of TRILLIONS of dollars….TRILLIONS! In comparison, the New York Stock Exchange has a trade volume of a little over 20 billion dollars a day.
Of course, while both are very substantial amounts that can present profitable opportunities, numbers don’t lie – the forex market dwarfs the other financial markets by a mile. However, there is an important fact that should be noted: the total trade volume of the forex, or FX market, includes all global financial markets, but traders represent a fraction of that volume.
It still is a very substantial number, and stands at around 1.8 trillion dollars, which, of course, is still an incredibly massive market. Regardless, the $5 trillion number can mislead others, but regardless, the point is, the forex market really has a massive amount of money constantly flowing through it.
The irony is that you certainly don’t hear about it the way that you hear about other stocks. If you tune into financial news and media, you will constantly hear about stocks, whether they are large corporations or small-cap or mid-size companies that are showing potential. You will often hear about a Fortune 500 company shifting strategies, introducing a new product or service, or about how a certain CEO has found a way to cut costs or use an effective advertising campaign to reconnect with consumers.
This isn’t to say that stock exchanges are large, but it is to say that even if you took all the major stock exchanges, this would still only equal out to about 80 billion dollars. In essence, there is something to be said about the media pushing a certain narrative that focuses on certain markets, while ignoring the biggest market of ever. Of course, that certainly doesn’t stop the money from flowing in, and traders from finding unique opportunities to profit.
Now, you might be asking, how does this all work? What exactly am I purchasing? There are investors who might completely understand the financial markets otherwise, and understand that they are buying shares in a retail company that is expanding, or a biotechnology company with the right patents, for example. They might check out the balance sheets, management, and the resistance on a chart, and develop a strategy for an entry point. After they enter the stock, they might feel comfortable about their position, and decide how long they want to hold the stock, to establish the right kind of risk/reward model that fits their psychology and portfolio. Now, the forex market? The FX market is much, much different.