Understanding the English definition of foreign exchange: The global trading market behind Forex and FX

The English term for foreign exchange is Foreign Exchange, abbreviated as Forex or FX, representing the world’s largest financial trading system. When you exchange one currency for another, you are already participating in the foreign exchange market. Forex trading involves buying and selling different currencies to profit from the differences in exchange rates. Simply put, the core concept of foreign exchange in English is currency trading—a massive financial activity happening worldwide every second.

Whether you’re traveling abroad, engaging in international trade, or simply investing and managing wealth, forex is closely related to our daily lives. So, how does this seemingly complex world of forex actually operate?

Understanding Forex Trading Through Daily Transactions

Imagine you’re traveling abroad, and at the airport exchange counter, you see a screen displaying real-time exchange rates for various currencies. These rates are the relative prices between two different currencies. For example, if the TWD to USD exchange rate is 0.034, you can exchange 10,000 TWD for 340 USD. In this process, you are effectively an participant in the forex market.

This currency trading based on exchange rate fluctuations is the foundation of forex trading. From everyday currency exchanges during travel to large-scale operations by global banks and investment institutions, forex is everywhere. Market participants develop trading strategies by analyzing future exchange rate trends—for example, when the yen weakens, many traders borrow yen to convert into dollars, hoping to profit from the movement.

How the World’s Largest Financial Market Operates

The forex market is the largest financial market in the world and is a fully decentralized global trading system. Currencies from all countries are traded here 24 hours a day, five days a week.

The reasons for exchange rate fluctuations are diverse, including a country’s economic strength, fiscal policies, international situations, and more. Because these factors are constantly changing, the forex market remains in a state of dynamic adjustment. Compared to international trade and travel currency exchanges in the real economy, most trading activity today is driven by speculation—traders profit by predicting the direction of exchange rate movements.

Impressive Market Size

The daily trading volume in the forex market exceeds other financial markets by a wide margin. It reaches about $6.6 trillion USD per day, nearly 300 times the average daily trading volume of the New York Stock Exchange, which is about $224 billion. The spot forex market alone trades approximately $20 trillion USD daily. Even if only retail traders (estimated to account for about 3-5% of the market) participate, it still involves capital flows of $200–$300 billion.

Unique Trading Hours

The forex market is open almost 24 hours a day, five days a week, closing only on weekends. Trading begins in Auckland/Wellington, New Zealand, then shifts to Sydney, Singapore, Hong Kong, Tokyo, Frankfurt, London, and finally New York, before restarting in New Zealand. This global relay ensures continuous liquidity in the forex market.

The Seven Major Currencies and Currency Code System

Although the forex market supports trading in numerous currency pairs, beginners usually focus on the major currencies, which have the highest trading volume and represent the world’s main economies.

Major currencies include: US Dollar (USD), Euro (EUR), Canadian Dollar (CAD), British Pound (GBP), Swiss Franc (CHF), Australian Dollar (AUD), Japanese Yen (JPY), New Zealand Dollar (NZD). These currencies are actively traded, with relatively predictable price movements, making them the preferred targets for forex traders.

The Logic Behind Currency Codes

Each currency has a three-letter international standard code. The first two letters represent the country, and the third letter indicates the currency’s name. For example, USD stands for US Dollar: “US” for the United States, “D” for Dollar.

Origin of ISO 4271 Standard

In 1973, the International Organization for Standardization (ISO) established a standardized three-letter currency code system, known as ISO 4271. This standardization has unified the identification system for global currency trading.

Interestingly, the US dollar, being the most frequently traded currency worldwide, has spawned several nicknames. The most famous is Greenback, which originated during the American Civil War in 1861—because the back of the dollar bill featured a prominent green design, hence the name.

The Five Core Advantages of Forex Trading

Compared to other financial markets, forex offers multiple benefits for investors.

Low-Cost Trading

Forex trading does not require paying traditional commissions to brokers. Most retail forex brokers earn through the bid-ask spread, which is usually below 0.1%, and can be as low as 0.07% for large trades. This makes forex one of the most cost-efficient trading options.

Flexible Trading Sizes

Futures markets impose strict contract sizes (e.g., silver futures are 5,000 ounces), but forex traders can choose their trading volume freely. Many brokers allow opening positions as small as 1,000 units of currency, greatly lowering entry barriers.

24-Hour Trading

From the opening in Australia on Monday morning to the close in New York on Friday afternoon, the forex market operates nonstop. Traders can trade anytime, anywhere, according to their schedules, without being restricted to fixed trading hours.

Leverage Effect

Forex trading supports leverage, enabling traders to control larger positions with a small amount of capital. For example, a 50:1 leverage means that with $50 margin, you can control $2,500 worth of currency; with $500 margin, you can control $25,000. This amplifies potential gains (and losses).

High Liquidity

With a daily trading volume of $6.6 trillion USD, the forex market’s liquidity is extremely high. Under normal conditions, traders can execute buy and sell orders instantly without worrying about insufficient liquidity causing delays.

Comparing Forex, Stocks, and Futures Markets

Differences from the Stock Market

The stock market offers a wide selection but is relatively limited—America’s largest exchanges have about 2,800 (NYSE) and 3,300 (NASDAQ) stocks. In contrast, the most active seven major currency pairs in forex provide higher ease of operation.

Stock trading is limited by exchange hours (US markets typically open at 9:30 AM and close at 4:00 PM), whereas forex offers seamless 24-hour trading. Due to the much higher trading volume and liquidity, traders face fewer restrictions on short selling, and profit opportunities exist whether markets rise or fall.

More importantly, forex relies less on analyst opinions. Stock prices often fluctuate sharply due to earnings reports exceeding or missing expectations, but forex reflects the interests of banks and global financial institutions worth billions of dollars, making the market’s reaction to individual analyst views more rational.

Differences from the Futures Market

The average daily trading volume in futures is about $30 billion USD, far less than forex’s $6.6 trillion USD. Although futures do allow overnight trading, their liquidity is comparatively lower.

The spot forex market provides quick execution and definite prices under normal conditions, whereas futures and stocks may not guarantee this. Risk management features include automatic margin calls or position closures when losses exceed margin requirements, limiting risk exposure. In contrast, futures can allow losses to exceed account balances, requiring traders to bear the excess.

Thanks to its global reach, transparency, and low entry costs, the forex market has become an effective channel for investors worldwide. Now, you have a comprehensive understanding of the definition of forex in English and how trading works.