The foreign exchange (currency or forex or FX) market exists wherever one currency is traded for another. It is by far the largest financial market in the world, and includes trading between large banks, central banks, currency speculators, multinational corporations, governments, and other financial markets and institutions. The average daily trade in the global forex markets currently around US$ 1.9 trillion. Retail traders (individuals) are a small fraction of this market and may only participate indirectly through brokers or banks.
With an expanding global economy, you may already be currency trading without realizing it. Every time you purchase a foreign product, you have traded the value of your currency for the exchange traded value of the foreign product. Believe it or not, that is a simplified explanation of the basic process of Forex trading. In the Forex, banks, investment firms, large corporations and individual traders buy and sell world currencies such as the Euro, British Pound, Swiss Franc, and Japanese Yen in exchange for the value of another currency. The Forex market has long been recognized as an uncommon investment opportunity by major banks and financial institutions.
The Foreign Currency Exchange market, commonly referred to as the Forex, is the largest market in the world trading in excess of $1.5 trillion per day. Trading in the Forex market is a challenging opportunity where above average returns are available to educated investors who are willing to take above average risk.
You might ask, "Why trade the Forex?" The answer is quite simple, its called leverage. Leverage your money and your time. Frankly, no other market provides the leverage that the Forex can. You can effectively control US$10,000 by investing US$100…that is 100 to 1 leverage. Also, you can trade almost anytime that is best for you. The Forex is open 24 hours a day from Sunday evening through Friday afternoon.
Furthermore, the Forex market is simpler to trade than stocks and futures. In the Forex market you may buy or sell currencies. You can make profits when the market is going up if you bought the market. You also can make profits when the market is going down if you sold the market. There are no restrictions when selling (shorting) as found in the U.S. stock markets. And, there are no required contracts sizes, expiration dates, and other constraints found in the futures market.
Benefits of Forex Trading
- Open 24 hours a day from Sunday evening thru Friday afternoon.
- Continuous liquidity…almost always a buyer for every seller and vice versa.
- Low dealing costs with pip spreads as little as 2 - 3 pips on major currency pairs.
- 100:1 & 200:1 leverage reduces the need for large amounts of capital.
- Two-way market: traders participate in bull or bear markets.
- Low capital requirement to start – as little as $500 to open an account.
- Standard, Mini, and Micro accounts (accounts designed to fit your trading budget!)
- Trade management with Stop Loss orders, Trailing Stops, and Hedging.
- Most of all…Above average profit potential.
History of Forex
The Foreign Exchange market originated in 1973. However, money has been around in many forms since the time of the Pharaohs. The Babylonians are credited with the first use of paper bills, and receipts. Middle eastern moneychangers were the first currency traders exchanging coins of one culture for another. During the middle ages, the need for another form of currency besides coins emerged as the method of choice. These paper bills represented transferable third party payments of funds; this made foreign exchange much easier for merchants and traders and caused the regional economies to flourish.
During the Middle Ages to WWI, the Forex market was relatively stable and without much speculative activity. After WWI the Forex market activity increased ten fold even though the Great Depression in 1931 created a serious lull in Forex activity. From 1931 until 1973, the Forex market went through a series of changes such as the Bretton Woods Accord which occurred toward the end of World War II.
WWII vaulted the US dollar from a has been currency after the stock market crash of 1929 to the benchmark by which most currencies were compared. The Bretton Woods Accord was established to create a stable environment by which global economies could re-establish themselves. The Bretton Woods Accord pegged world currencies to the US dollar and the US dollar was pegged to gold at a price of $35 per ounce. Pegging the dollar to gold and the pegging of the other currencies to the dollar brought stability to the world Forex situation.
In December of 1971, the Smithsonian agreement allowed for greater fluctuation band for the currencies. In 1972, the European community attempted to move away from dependency on the dollar by establishing the European Joint Float between West Germany, France, Italy, the Netherlands, Belgium and Luxemburg. Both agreements failed to accomplish their objectives and collapsed in 1973 signifying the official switch to the free-floating system. Governments were now free to peg their currencies, semi-peg or allow them to freely float. In 1978, the free-floating system was officially mandated. Europe tried, in a final effort to gain independence from the dollar, by creating the European Monetary System in July of 1978. This, like previous agreements, failed in 1993.
The major currencies today move independently of other currencies. The currencies are traded by anyone who wishes. This has caused a recent influx of speculation by banks, hedge funds, brokerage houses and individuals. Central banks intervene on occasion to move or attempt to move currencies to their desired levels. The underlying factor that drives today's Forex markets, however, is supply and demand. The free-floating system is ideal for today's markets.
Article source: Wikipedia.org
