INTRODUCTION TO THE WORLD OF FOREX
Welcome to the world of forex trading. When people say they trade Forex, which means buying and selling money in the worldwide Foreign Exchange market, what they are saying is that they trade money. It is as simple as that: Forex traders buy and sell different types of money.
After all of the strategizing, technical analytics, and fundamental analysis, the basic Forextrade is betting that one country’s currency will be worth more than another country’s currency at some point in the future. You as a Forex trader might usea mathematically based diversification theory to minimize the risk of your Forex trading account Forex is the largest market in the world.
Forex traders exchange $4 trillion each day, but is forex the best market for you? The answer depends on what you are looking for. If you want a market that never sleeps, if you want the opportunity to trade at any time of the day, if you would like to make a boatload of money in a short amount of time, forex may be for you (it should be noted that you may also lose an incredible amount of money in a short amount of time). Traders with very little money can begin trading forex.
In forex, you may take relatively large trades with small amounts of money because of the favorable leverage requirements. There are many reasons to become a forex trader, but before jumping into the reasons, perhaps we should take a closer look at the characteristics of a forex trade.
The History of Forex
Before you get further into what it means to trade Forex, it would be best if you knew just a bit about the beginnings of the modern Forex and currency trading markets. Currency trading is and isn’t a new thing.It has its foundation in the Renaissance during the late 1400s with the beginning of the international banks offering letters of credit, currency conversion, and currency value speculation.
This was the real genesis of international bankingas it is today. In the modern era, with major banks being involved in currency trading, and now with individual traders being able to open private Forex accounts and trade over the Internet,the current face of currency trading is relatively new. During the last century and before the Forex trading of today, currencies were fixed in their exchange rates. What this means is that at any point in time between July 1944 and August 1971, each currency in world trade was convertible into another currency at a set exchange rate.
In addition to this set exchange rate was the fact that the U.S. dollar would be fully convertible into gold at a predetermined conversion rate. The set Gold/U.S. dollar exchange rate (XAU/USD) had the effect of making the U.S. dollar the only currency in the world that was fully backed by gold. If a country such as Switzerland had a $5 million USD that they had in their treasury’s reserves, they could make an arrangement to convert the$5 million USD in currency or book format directly into gold bullion.
The setexchange rates of foreign currencies and the free exchange ability of the U.S.dollar into gold was a result of an economic summit by all of the victorious nations following World War II.
The goal of the economic summit, known as the BrettonWoods conference, was to create a stable economic environment in which the war-ravaged countries could build upon, and use to grow and strengthen their economies. The Bretton Woods Agreement was the formal agreement and plan that helped develop economically prosperous post–World War II countries. It had the effect of establishing the U.S. dollar as the dominant reserve currency of the world.
This was due to the fact that many countries would then have U.S. dollars in their national currency reserves, mainly to help inthe conversion of their home currencies into the U.S. dollar in order to thenuse that currency to buy goods and commodities that were only priced and sold inU.S. dollars in the international marketplaces and on the international exchanges.
As an example, if a Luxembourg-based steel manufacturer needed to purchase iron ore for its factories, it would first convert Luxembourg francs to U.S. dollars (at a set rate), and then use the U.S. dollars to go into the open market and purchase the iron ore.
This converting and reconverting of various home currencies into and out of U.S. dollars had the effect of creating a huge need for U.S. dollars that were traded in the overseas market, outside of U.S. borders. In order to help the exchanges, and to insulate the Bretton Woods countries against economic hazard, the central banks of these countries built up and carried large reserves of U.S. dollars in their accounts at the Bank of International Settlements (http://www.bis.org/),at the International Monetary Fund (IMF; http://www.imf.org/), and in their owntreasuries (http://www.bis.org/cbanks.htm).