orex or the so-called foreign exchange market represents simply the process of converting one currency into another for a variety of reasons. If this is the first time you hear about Forex, you will be surprised that you have probably made a Forex transaction at least once in your life.
Can you guess when was that?
Hint: You woke up one morning and decided to make adventurous travel to Switzerland. You bought flight tickets.The the next thing you remember is that you were at the airport being unable to buy even a bottle of water with your dollars.
Then you exchanged your dollars into Swiss francs.
Boom! This was your FIRST Forex transaction. You sold your 100 dollars in order to buy 80 francs.
Do you remember what happened on your way back to your country?
You tried to get rid of the Swiss francs that you have left and buy dollars in exchange. But you noticed that the price of buying dollars was different.
This was because the exchange rate had changed.
An exchange rate is the relative price of two currencies from two different countries.
However, converting one currency to another is not only used for tourism or commerce, but also for trading. The CHANGE in these exchange rates between currencies allows traders to make PROFITS.
How does Forex work?
Forex is the largest financial market in the world. The unique part is that there is no central marketplace.
Every transaction is made electronically via computer networks between traders around the world.
The market is open 24 hours a day and exchange rates can change any second so the market is constantly in flux.
Traders make most of their transactions by predicting the change in the exchange rates. They are also called currency speculators, because their predictions are speculative for how the price will change in the future.
Everybody knows about the New York Stock Exchange. These Wall Street guys really love to make noise. You hear about them on the news, in the supermarket, even maybe in the gym.
We don’t want to steal their thunder but…
.. the fact many people don’t know is that NYSE’s day volume trade has to be multiplied 276 times to reach Forex day volume trade.
This is exactly how enormously big the Forex market is.
Accordingly NYSE day trade volume is about $22.4 billion per day and Forex day trade volume equals to $6.6 TRILLION per day.
If you have difficulties imagining it, don’t worry you are not the only one.
Let’s try to visualize it!
You know what our planet looks like, right?
Now let’s see what Saturn looks like. You have seen images, but can you actually say how big Saturn is? It is enormous.
Saturn’s surface is almost 122 times bigger than Earth’s surface.
Compared to Saturn, our planet doesn’t look so big anymore, it is like a small ant.
It looks like our planet (NYSE) doesn’t stand a chance against Saturn (Forex).
To be more precise, look at the graph of the average daily trading volume for Forex, New York Stock Exchange, Tokyo Stock Exchange, and London Stock Exchange:
But the numbers don’t always tell the real story! Watch out!
There are actually three markets that trade Forex – spot market, forwards market and futures market.
Most of the transactions, we are looking for, are made in the spot market. Its day volume equals $2 trillion.
When you take out only the retailer traders, the amount becomes even smaller, estimated approximately around $200-300 billion (maybe less).
The magic is gone, isn’t it?
This $6 trillion sounded nice, but we are searching for the real numbers.
Like we already mentioned, it is open 24 hours and there is no one who can endure not sleeping at all.
At least we still don’t know about such a creature and we are waiting for Elon Musk to invent it or find it on his way to Mars.
That’s why trading just shifts to different financial centres around the world.
The day starts when traders wake up in Auckland/Wellington, then move to Sydney, Singapore, Hong Kong, Tokyo, Frankfurt, London, and finally, New York, before trading starts all over again in Wellington!
Did Forex catch your attention already? See what exactly is traded in the forex market on the next page.