What Is Forex?
Forex, or FX, refers to the Foreign Exchange Market.
By Definition – It is the global currency marketplace where we have all participated whenever we travelled or exchanged money. These transactions mainly happen over the counter (OTC).
However, in the non-physical market, traders speculate on how a currency may increase or decrease in value in comparison to another currency without owning or exchanging either. This is known as derivative trading which is accessible via CFDs (Contracts for Difference).
Forex is the largest financial market in the world, determining exchange rates and allowing participants to exchange one currency for another. To give you some idea of how large the market is – trading was averaged at $6.6 trillion per day in April 2019. That number increased since April 2016 when the average was $5.1 trillion and is expected to grow exponentially!
One of the main advantages of the Forex market is its size and liquidity; allowing participants the opportunity to take part in the safest and most accessible financial marketplace in the world.
Through FX, a retail trader only requires a minimal sized account to enter into real-world trading within minutes.
Another important aspect of FX trading that separates it from any other financial market is that it is open 24/5. This enables participants the flexibility to take part in trading whenever and wherever they are, as long as they have a stable internet connection. So for retail traders who may only be able to trade after “working hours”, this is extremely appealing.
There are various participants within Forex. Investment banks, hedge funds, insurance companies, brokers to individual traders.
Some market participants act as middlemen that enable traders to be involved in speculating market movements from the comfort of their home. The financial institutions (mostly banks) that are involved with huge quantities of Forex trading are called dealers or market makers as they provide liquidity (money). This is where other brokers, private funds would go in order to complete transactions. Then offer services to the retail trader.
So, if company A wants to purchase EURUSD and company B wants to sell it, they go to the dealer (liquidity provider) to arrange the quotes and conditions, before deciding whether to complete the transaction.
The currencies available to the market participants are always traded in pairs (example: EUR/USD, USD/JPY, GBP/NZD etc.)
1 USD = 108 JPY (Japanese Yens)
1 USD = 0.99 CHF (Swiss Franc)
History of the Forex Market
The exchange of currency has always existed throughout history. It didn’t have the size and shape of the current Forex market, but people were able to trade their gold coins for example, for food or other supplies like raw materials, livestock, or services. If a coin weighed more, therefore containing more gold, it could be exchanged for several coins that held less gold.
This is the reason why most of the currencies circulating today have their value pegged to silver or gold.
Fast forward to the year 1880 and there is some other interesting periods and milestones of the market’s development. Many consider it to be the beginning of the Forex market as we know it today. This is the year when the gold standard began.
Adoption of the Bretton Woods system
1944 – The time when the next milestone was set was right after World War II when the Bretton Woods Accord (monetary management system among the United States, Japan, Australia, Western European countries and Canada) was signed.
The system in its core obligated each of the members to adopt a monetary policy that would tie currency to gold, maintaining the external exchange rates within the range of one per cent. The system also enabled the International Monetary Fund (IMF) to bridge any temporary imbalances of payments.
During World War II, 730 delegates from 44 countries attended the so-called Bretton Woods Conference which took place in the Mount Washington Hotel, Bretton Woods, New Hampshire.
The Bretton Woods monetary system had a very short life span and on the 15th of August 1971, the US unilaterally terminated convertibility of the USD (US Dollar) to Gold. That was the end of it.
The Rise of the Digital Era
In June 1973, Reuters replaced the telephones and telex, which were previously used for trading quotes, by introducing computer monitors.
A joint venture between Reuters and Ultronic Systems Inc. brought the first computerized trading terminal. Large banks, brokerages and telecom authorities were the first to utilize these new innovative systems.
The road to success was filled with a lot of uncertainty and development issues. Take a moment and think about it…. The internet as we know it today had not yet been invented. Pioneers in the technological sectors such as Microsoft and Apple had only just been founded. Google had not yet been imagined. The technology available to us today was the realms of science fiction back then – yet through these basic computer systems, they managed to vastly improve the trading process.
Retail trading isn’t a new phenomenon. Some sources claim this began in 1973, while others insist on 1982.
January 1st, 1981, a notorious date that marks another milestone. The People’s Bank of China allowed domestic businesses to participate in the Forex market. Later that year South Korea terminated the Forex controls and were also allowed free trading.
Retail trading as we know it today came in the early ’90s when banks started developing their own trading platforms allowing customers to place orders themselves. This is also the time when internet trading was introduced (thanks to the retail Forex brokers), which required significantly lower initial capital to enter the markets due to leveraged accounts.
Nowadays, many retail brokers already have their own trading platforms that are accessible across a variety of devices, allowing us to trade anywhere at any given moment.
Retail trading has become so popular that literally anyone with an internet connection can participate in the Forex market and earn money.
It is important, however, to mention – that without proper education the risk for incurring losses increases. So, in order to become a profitable trader, it is essential to learn from the educational resources that are available on the platforms of most reputable brokers and trading bots.
As we’ve highlighted the Forex market is the largest market in the world and whether you like it or not, there is a very strong chance that you yourself have participated in the market.
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