The Beginner's Guide to the Forex Market
Learn About the Largest and Most Liquid Financial Market on Earth
What's that you say? You have never heard of the foreign exchange market before? Well actually that is no surprise, and since the major market players in this market are big banks and hedge funds, many individual investors tend to stick with stocks and bonds.
The foreign exchange or currency market has to do with the exchanging of one country's currency for another, and this market does around 1.5-2.5 trillion US dollars worth of volume every single day. Yes, trillion. To get a scope on how big that really is, it is about 30 times bigger than the average trading volume for the New York Stock Exchange (NYSE).
Though some currency exchanges are based on practical reasons such as vacationing in a foreign country or a multi-national corporation that needs local currency in order to do business, the vast majority of forex trading volume is speculative in nature and is done via an internet connection.
The currency market is unique because it has no central exchange and it operates 24-hours a day, literally following the sunlight around the world as financial centers in different countries come to life. This market exists as a teaming network of interconnected bank computer servers, and it is through this network (using an internet connection) that small individual investors can trade with small volume.
As little as seven years ago, the barriers to entry for trading the foreign exchange were so high that mostly only high net-worth individuals could trade this market (with a minimum trade volume set at $1 million, and another $10-15 million in reserve capital).
Because this financial market is so tremendous, no single party (not even a central bank) can significantly corner the market. This means that forex exchange rates tend to be much less volatile than equities, especially small cap stocks. Because trading volume for such equities is so small (relative to the forex market anyway), significant fundamental announcements can cause price shifts as high as 25% or more in one day.
The Major Currency Pairs
Though there are hundreds of different currencies in the world, over 90% of all forex trading volume is through seven different major currencies: The US dollar, the Euro, the British Pound, the Japanese Yen, the Canadian dollar, the Australian dollar, and the New Zealand dollar.
Since the United States dollar is presently the world's most dominant and widely-recognized currency, all of the other major currencies are quoted as an exchange rate relative to the dollar.
