What is Forex Trading?
The Forex market is where entities such as banks, companies, governments and central banks, hedge funds, individuals, investors, and retail traders buy and sell the currency of one country against another. For example, if you speculate the Euro will rise against the U.S. dollar, you can buy the currency pair “EUR/USD” at a low price and then (if your speculation is correct) sell it at a higher price for a profit. If the U.S. dollar strengthens instead, you experience a loss. It may also be called the “Fx market,” “currency market,” “foreign currency market,” or something along those lines.
The most popular currencies in the Forex market are the U.S. dollar (USD), the Euro (EUR), the Great British Pound (GBP), and the Japanese Yen (JPY), with the most traded pair of currencies being the USD and the Euro. It’s the largest and most liquid market in the world and its average daily turnover is $3.98 trillion. It’s open 24 hours a day, 5 days a week (Monday through Friday), and the most important global trading centers are London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris, and Sydney. It has no central marketplace in the way that stocks are traded at the NYSE, and instead trading is done “over the counter.”
All major banks have a quote (price) for Forex, but not all banks will have the same quote. Brokers look at feeds telling them the different quotes from banks all over the world and make an approximate average of them. They essentially handle the transacting and trading for you, and when you buy currency, they are selling it to you and not to another trader.
Some advantages and basic features of the Forex market are:
- Trading anywhere in the world: All trading is done online, so all you need is a laptop and an Internet connection. There is no centralized trading location such as the NYSE and transactions are usually commission-free.
- Trading whenever you want: The Forex market has no “opening bell” – you can trade any time from Sunday around 5pm EST to Friday around 4pm PST.
- Fewer options to keep track of: Unlike the stock market where there are thousands of stocks to analyze, there are much fewer currency pairs to focus on in the Forex market.
- Higher liquidity: With daily trading volumes of over $4 trillion a day, investors can buy and sell at almost any time at lower trading costs than stocks would require.
- Profit possible in both rising and falling markets: Unlike stocks which generally require buying in a rising market in order to make a profit, with Forex trading a profit can be made in either a rising or falling market.
- Easy and inexpensive to start: You can start Forex trading with as little as $300, as there is favorable leverage offered.
- Opportune volatility: With Forex trading, volatility tends to translate into several high probability opportunities and chances for profit per day.
In 1876, the gold exchange standard was implemented. It meant all paper currency had to be backed by physical gold, with the idea that it would stabilize world currencies. Instead, it created boom/bust patterns, and the plan demised. It was abandoned around the start of WWII as European countries that were printing money to pay for their militaries did not have enough gold to back it all up.
A worldwide decision was then made to have fixed currency exchange rates. It resulted in the U.S. dollar being the primary reserve currency and the only one backed by gold – referred to as the “Bretton Woods System, started in 1944. The end of the Bretton Woods System later came in 1971 when the U.S. decided to no longer exchange gold for U.S. dollars held in foreign reserves.
The Bretton Woods System breaking down led to floating foreign exchange rates and the world’s acceptance of them in 1976. This could be marked as the birth of the Forex market, but it did not become widely traded until the mid-1990s.|