Forex Basics #1 – Forex Is “Foreign Currency Exchange” forex basics The Forex market is a market of world currencies.
If you’ve ever traveled abroad and had to exchange your currency for the currency of another country, you made a “foreign currency exchange”. You participated in the Foreign Exchange Markets.
However, you probably weren’t exchanging your currency to make a profit. You simply wanted to have the proper currency acceptable for making purchases in the host country.
Conversely, about 90% of the currency exchange that occurs in the Forex market is motivated by profit…
…in other words, the majority of trading volume in Forex is based on speculation.
Forex Basics #2 – Forex By Any Other Name
The Forex market can and has been called many different things:
- Foreign Currency Exchange
- Foreign Exchange
- Currency Exchange
- Spot Forex
- Spot FX
- FX Market
Or any combination of the above. The list goes on, but for all intents and purposes, I’ll simply refer to it as the “Forex market”.
Forex Basics #3 – How Big is Big?
The Forex market is a trader’s paradise. It is the biggest and most liquid financial market in the world.
Since it is a global market, it’s open 24 hours a day, 5 days a week. It’s like your local convenience store…
…only bigger, much bigger…say, about $3.2 trillion bigger.
That’s the average daily trading volume of the Forex market.
We hear the word “trillion” thrown around so often these days in the media that we’ve forgotten how big this number really is.
Allow me to put it into perspective.
Think of how much money $1 million is. In conceptual terms, think of all those zero’s, or in physical terms, think of a pile of 10,000 $100 bills on the floor. (Now that would be a nice looking pile, wouldn’t it?)
Got the $1 million pictured in your mind?
Now imagine 1 million times that $1 million. That’s right…a million piles of 10,000 $100 bills, scattered all around you. That’s $1 trillion!
Okay, let’s take it one more step further.
Try to imagine 3 million piles of 10,000 $100 bills. It’s getting difficult, huh?
Add another 200,000 piles for good measure, and you’ve got yourself $3.2 trillion…the amount of money being traded per day in the Forex market.
If you were to combine the daily trading volume of all the stock markets in the world, the total still wouldn’t even come close to $3.2 trillion.
It’s no wonder the Forex market is so liquid.
This is great news for a speculator/trader because high liquidity keeps the “spread” low. The spread is the difference between the buy and sell price (we’ll get more into this in the Forex Trading section of this website).
High liquidity also makes for pretty stable price action (under “normal circumstances”, that is). The market is so big that trades as large as $10 million or even $100 million won’t be enough to jolt prices.
Forex Basics #4 – Trade While Everyone Else is Asleep
Unlike a market such as the New York Stock Exchange, there is no single place for currency exchange.
The Forex market is traded around the world. As one market closes, another one is open, making Forex trading times truly 24 hours a day (for 5 days a week).
Although I wouldn’t recommend it, you can literally trade all day and all night if you wanted to…
…just don’t forget to feed the cat!
Forex Basics #5 – Other Kids in the Forex Sandbox
Forex traders like you and I are the new kids on the block. Thanks to the Internet, Forex trading has become accessible to just about everyone with some risk capital and a dream.
But there are other, much bigger participants in the Forex interbank market.
International commercial banks
Hedgers looking to reduce or remove risk
Hedge funds and other speculators
Governments and Central Banks
These guys have been at it a lot longer than we have, so be careful out there!
Forex Basics #6 – It’s Really Mother Nature That Shapes The Sand
Some of the participants I mentioned roll with some heavy cash. They make multi-million dollar trades without breaking a sweat.
Although the Forex market is way too big for any of these power players to have any real influence, the market is still subject to some external forces.
I already mentioned Mother Nature. If a natural catastrophe occurred somewhere, it would definitely have an immediate influence on the market.
But it’s not just Mother Nature. Other forces have a major impact on the currency system and Forex trading in general:
- Economic growth
- Interest rates
- Monetary policy
- Other financial markets
- Political events
These are the real forces that shape the sands in the Forex sandbox. (Pretty poetic, huh?)
Forex Basics #7 – See the Forex For The Trees
Excuse the pun, but it’s something to keep in mind.
By learning the Forex Basics, you’ve built a foundation of knowledge upon which to build.
Next, we’ll move on to learning the finer details of Forex trading. Then, we’ll dive deeper still into the wonderful world of Forex Trading Systems.
As you learn more and more details, always be aware of the Forex Basics…the “Bigger Picture”.
It will keep your Forex knowledge balanced and well-rounded, which can only help your trading.