If you've ever traveled to another
country, you usually had to find a currency exchange booth at the airport, and
then exchange the money you have in your wallet (if you're a dude) or purse (if
you're a lady) or man purse (if you're a metro sexual) into the currency of the
country you are visiting.
You go up to the counter and notice
a screen displaying different exchange rates for different currencies. You find
"Japanese yen" and think to yourself, "WOW! My one dollar is
worth 100 yen?! And I have ten dollars! I'm going to be rich!!!" (This
excitement is quickly killed when you stop by a shop in the airport afterwards
to buy a can of soda and, all of a sudden, half your money is gone.)
When you do this, you've essentially
participated in the forex market! You've exchanged one currency for another. Or
in forex trading terms, assuming you're an American visiting Japan, you've sold
dollars and bought yen.
Before you fly back home, you stop
by the currency exchange booth to exchange the yen that you miraculously have
left over (Tokyo is expensive!) and notice the exchange rates have changed.
It's these changes in the exchanges rates that allow you to make money in the
foreign exchange market.
The foreign exchange market, which
is usually known as "forex" or "FX," is the largest
financial market in the world. Compared to the measly $22.4 billion a day
volume of the New York Stock Exchange, the foreign exchange market looks
absolutely ginormous with its $5 TRILLION
a day trade volume. Forex rocks our socks!
Let's take a moment to put this into
perspective using monsters...
The largest stock market in the
world, the New York Stock Exchange (NYSE), trades a volume of about $22.4
billion each day. If we used a monster to represent NYSE, it would look like
this...
You hear about the NYSE in the
news every day... on CNBC... on Bloomberg...on BBC... heck, you even probably
hear about it at your local gym. "The NYSE is up today, blah, blah".
When people talk about the "market", they usually mean the stock
market. So the NYSE sounds big, it's loud and likes to make a lot of noise.
But if you actually compare it to
the foreign exchange market, it would look like this...
Oooh, the NYSE looks so puny
compared to forex! It doesn't stand a chance!
Check out the graph of the average
daily trading volume for the forex market, New York Stock Exchange, Tokyo Stock
Exchange, and London Stock Exchange:
The currency market is over 200
times BIGGER! It is HUGE! But hold your horses, there's a catch!
That huge $5 trillion number covers
the entire global foreign exchange market, BUT retail traders (that's us) trade
the spot market and that's about $1.49 trillion. So you see, the forex market
is definitely huge, but not as huge as the media would like you to believe.
Do you feel like you already know
what the forex market is all about? We're just getting started! In the next
section we'll reveal WHAT exactly is traded in the forex market.
