Lesson: Foreign exchange

Pros and Cons of Forex

Pros

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  Accessible to individual investors through online trading platforms.
  
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  Open 24 hours a day world-wide.
  
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  Relatively light regulation or oversight.
  

Cons

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  Dominated by professionals and institutions with deep pockets.
  
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  Volatile prices subject to sudden swings based on news.
  
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  Relatively steep learning curve for newcomers.
  

Forex Terms

There are a number of terms that are used by Forex traders. Here are some of the basics.
Going long: Buying a currency on the belief that its value will increase in a matter of hours. Then it can be sold for a profit.
Going short: Selling a currency on the belief that its value will decrease. It can then be repurchased at a lower price.
Currency pair: Every Forex transaction is an exchange of one currency for another. A currency pair quote looks like this: USD/GBP = $1.15. In this example, the U.S. dollar is the base currency, and the British pound is the quote currency. A trader who wishes to buy British pounds will pay $1.15 for each.
The ask: The price the trader will pay to buy a currency pair.
The bid: The price the trader will pay to sell a currency pair.
The spread: The difference between the buying price and the selling price.

Major Currency Codes on the Forex

Just seven currency pairs represent the majority of trades on the Forex. They are:
EUR/USD (Euro/U.S. dollar)
USD/JPY (U.S. dollar/Japanese yen)
GBP/USD (British pound/U.S. dollar)
AUD/USD (Australian dollar/U.S. dollar)
USD/CAD (U.S. dollar/Canadian dollar)
USD/CHF (U.S. dollar/Swiss franc)
NZD/USD (New Zealand dollar/U.S. dollar)

How Big Is the Forex Market?

The daily trading volume on the forex market dwarfs that of the stock and bond markets.
According to the latest triennial survey conducted by the Bank for International Settlements (BIS), trading in foreign exchange markets averaged $6.6 trillion per day in 2019.2 By contrast, the total notional value of U.S. equity markets on Dec. 31, 2021, was approximately $393 billion.5