An average person might think that the foreign exchange market is something exotic, a world completely different that exists on its own. But you would be surprised to find out that it plays an important role in our daily lives. As an example, imagine a restaurant owner whose business is located somewhere in the United States. If that restaurant owner wants to order wine from Spain or Portugal, they have to pay the price in euros, not in US dollars. Therefore, the local currency has to be exchanged into the currency which is used in the country they are purchasing the wine from.
Or maybe you are more into traveling and if that is the case, you probably know that whenever you enter a different country, you need to exchange the money you have with you in order to pay for accommodations, taxi from the airport, or for anything else you plan to do while you are out of your own country.
Both examples are closely related to forex, and as you can see, it is entwined into our existence whether you are aware of it or not.
Forex, which is short for foreign exchange market, is the world’s largest and most thrilling international market you can find at the moment. It is open twenty-four hours a day, five days a week, and traders from all around the globe are actively participating in it. Forex is not fixed to one place only but it spans over the time zones, with the exchanges happening in all of the major global financial centres such as New York, London, Hong Kong, and Sydney. The result of this is the biggest financial market, even exceeding the famous New York’s stock exchange, with the average of$2000 billion dollars traded on a daily basis.
But none of this would be possible if it weren’t for the rapid development of the new technologies and the possibility to connect and bring people together buysing the internet.
Forex was once available to the selected group of people such as financial institutions, large banks, and wealthy individuals. However, the internet accessibility made it available to anyone. It doesn’t matter if you are an investor, a small business owner, a housewife or a student – you can learn the basics and start participating in foreign exchange market.
Ancient and medieval times
The origins of foreign exchange market can be traced back to the ancient times. The trade of money-changing existed in more developed areas of flourishing countries such as Greece and Egypt. The people who did this were usually goldsmiths and this laid the foundations to the gold standard – an important topic which will be discussed later on. The goldsmiths even took a small fee for their services and by doing that, they created the first known exchange market.
The first banks were introduced during the medieval times. Medici, a wealthy Italian family, decided to make international textile trading easier by opening banks in different cities. They also kept records about the rates and differences between domestic and foreign currencies.
Gold Standard System
The watershed moment regarding foreign exchange market came with the introduction of Gold Standard System. As previously mentioned, gold and silver were used as currencies and that was becoming quite risky because whenever a new goldmine was discovered, the value of gold or silver dropped significantly.
Gold Standard System was introduced in 1875 and the idea behind it was that each country exchanges the gold for the currency. In order for this to work, each country was supposed to have a gold reserve. The difference in the price of gold was the exchange rate between two currencies.
The start of the World War I was the beginning of the end of Gold Standard System. The powerful countries involved in the conflict simply ran out of gold for the exchange and this concept was scrapped.
It should be noted that Gold Standard System almost made a comeback in the years before the World War II but it was simply outdated and the full return to that system was impossible.
Bretton Woods System
After the World War II, the countries were in need of a monetary system and that is where Bretton Woods System came in. The US dollar became the central currency and it was the only one closely tied to the gold reserves. However, it failed and in 1971 President Richard Nixon announced that the system will be no longer used.
Bretton Woods System paved the way for the current foreign exchange market and it also gave the world the well-known IMF – International Monetary Fund.
The exchange rates today
In 1976, the gold standard was completely abandoned and the governments are left to choose from the following exchange rate systems, and those are dollarization, pegged rate, and floating rate.
Dollarization is one nation’s decision not to have their own currency but to use US dollars. Pegged rate means that country’s currency is fixed to the other currency and therefore, it depends on it. And finally, floating rate means that the currency is free to change its value depending on the current market situation.
The basics of forex trading including pros and cons
When you first come across the foreign exchange market, it may seem intimidating and tough but once you master the basic terms and get into the entire process, forex becomes your playground. The possibilities of great investment are everywhere, and if you perform wisely and clever, there is a chance you could profit from it.
So why should you get involved in forex trading? There are numerous benefits, such as previously mentioned accessibility. Indeed, half of the transactions are done by the large investment banks but more and more small traders are getting a hold of the market.
Another aspect which makes it attractive is fewer fees. There is no need to pay anything but the difference of value between the currencies which are being traded.
Also, forex gives you the possibility of more leverage. That means you have the opportunity to trade as much as $100,000 with only $2000 of the actual capital.
Pros and cons
Probably the most attractive feature of forex trading is the previously mentioned leverage. That means the small amount of invested money can do wonders if you invest it well. Sometimes, only one dollar can be worth ten times more and that gives you the possibility to wield large amount of money for a minimal investment.
The fact that you have the ability to trade from your home, whenever you want is also a plus. You don’t have to leave your living room in order to be a part of the foreign exchange market. Also, there are many ways to learn and broaden your knowledge thanks to the internet. There are numerous web sites that offer tools and lessons in order for you to be successful in the business.
But there is a downside as well. Forex trading is extremely fast paced and you can lose money quickly. The value of a currency is simply not stabile and the biggest challenge is to carefully decide where to invest your capital because you can never be too sure. Also, as good as the previously mentioned leverage sounds, it can turn against you, making your losses even greater.
The 24-hours accessibility is amazing but it can be an enormous problem. The values change quickly and they can drop fast any time of the day, even when you are sound asleep. Some people use software in order to be active on the market even when they are resting, but it is not advised to depend solely on it.
Anything involving money and internet is a magnet for hackers. The forex is not an exception. Unfortunately, the identity and financial theft is common. It happens more often than you can imagine. There are also fake companies, software created with only one purpose – to gather as much information from you as possible, and so on. In order to be safe, you should give your details to acclaimed and well-known companies only. If something seems suspicious, it is better to stay away from it.
The foreign exchange market is a superb place to invest regardless of your background. There is no need to have a degree in economics in order to be successful. All it takes is the will to learn and enough time to track and follow the happenings which are occurring on forex daily. Surely, there are some terms you need to familiarize yourself with if you want to be a part of that world, but they are fairly easy to grasp. It is of course unrealistic to expect hundreds of dollars of profit right away, yet anything can be done if you are persistent and motivated enough.
And keep this in mind – you don’t have to be great to start but you have to start to be great.