What is Forex Trading? – An Introduction to the World of Currency Trading
A Brief History of the Forex Currency Market
The creation of the gold standard monetary system in 1875 marked one of the most significant events in the history of the Forex currency market. As countries each attached an amount of their currency to be equal to an ounce of gold the changing price of gold between two currencies became the first standardized means of currency exchange in history.World War I brought with it the breakdown of the gold standard due to the major European powers not having enough gold to exchange for all the currency that the governments were printing off at the time in order to complete large military projects. The gold standard was used again between the wars, but by the start of World War II most countries had again dropped it, however gold never lost its spot as the ultimate form of monetary value.
In 1944 the Bretton Woods System was implemented and led to the formation of fixed exchange rates that resulted in the U.S. dollar replacing the gold standard as the primary reserve currency. This also meant that the U.S. dollar became the only currency that would be backed by gold. In 1971 the U.S. declared that it would no longer exchange gold for U.S. dollars that were held in foreign reserves, this market the end of the Bretton Woods System.
It was this break down of the Bretton Woods System that ultimately led to the mostly global acceptance of floating foreign exchange rates in 1976. This was effectively the “birth” of the current foreign currency exchange, although it did become widely electronically traded until about the mid 1990s.
What is the Forex Market used for?
Forex trading involves transactions in which one party purchases a quantity of one currency by paying in a quantity of another currency. The Forex market is a global decentralized financial market for the exchange of currencies. Around the world various financial centers act as hubs for trading between a wide range of different types of buyers and sellers 24 hours a day, except weekends. It is the foreign exchange market that determines the value of one country’s currency relative to another.
The primary reason the Forex market exists is to facilitate international trade and investment by giving businesses the ability to convert one currency into another. As an example, a U.S. business can import goods from Japan and pay in Japanese Yen, even though the business is based in America and operates in U.S. dollars. The Forex market also provides a medium for speculation which works to add deeper liquidity to the market, making exchange rates less volatile. The “carry-trade” is facilitated via the Forex market, this is a trade in which investors can buy high-yielding currencies against low-yielding currencies and profit from the higher yielding interest rate.
What are the Benefits of Trading the Forex market?
Some of the many benefits of trading the Forex market include the following:• Trading can be done from anywhere in the world with only an internet connection and a computer needed.
• Huge trading volume, this leads to dense liquidity making it easier to get in and out of positions at the price you want.
• Flexible trading hours; continuous operation 24 hours a day 5.5 days a week.
• Greater availability of leverage to enhance profit margins relative to account size than compare to other markets.
• Fewer variables to consider as compared to stock or commodity trading.
• No inherent market bias like the bullish bias stocks, this means greater opportunities to profit from the volatility in both rising and falling markets.
• Ease of accessibility and low start-up costs.
Advantages like the ones listed above and others are the reason why the Forex market has been referred to as the market closest to the ideal of “perfect competition”. According to the Bank for International Settlements, average daily turnover in global foreign exchange markets is estimated at $3.98 trillion, as of April 2010 a growth of approximately 20% over the $3.21 trillion daily volume recorded in April 2007.
Who Trades Forex?
• Large banks, central banks, and other financial institutions.
• Governments
• Currency speculators / Retail traders / brokers
• Institutional investors
• Corporations involved internationally
• Travelers / Tourists
Most Traded Forex Currencies
The most traded currencies by percentage of daily share as of April 2010 are:
1. United States dollar = 84.9%2. Euro = 39.1%
3. Japanese yen = 19.0%
4. Pound Sterling = 12.9%
5. Australian dollar = 7.6%
6. Swiss franc = 6.4%
7. Canadian dollar = 5.3%
8. Hong Kong dollar = 2.4%
9. Swedish Krona =2.2%
10. New Zealand = 1.6%
How are Forex Rates Determined?
• Economic factors – These include: economic policy made by government agencies and central banks, and economic conditions as described by and through economic reports as well as various economic indicators.
• Political conditions – International, national, and regional political conditions and events can have a large impact on the Forex currency markets.
• Market Psychology – The psychology of market participants can influence the foreign exchange market in numerous ways. Ultimately all economic variables are expressed through the filter of the human brain / trader psychology
• Trading Algorithms – Electronic trading based on algorithms (or computer / robot trading) is become more and more popular, as a result algorithmic trading is starting to have a large effect on Forex currency rates.
What is Forex Trading?
Forex trading as it relates to individual retail investors and traders is the speculation of the future rate of a particular currency pair. For example, traders who think that the rate of the EURUSD will go up might may decide to buy, or go long, the EURUSD in the Forex market. If a trader thinks the currency rate or price will go down they will sell, or go short, the particular currency pair they are interested in. All Forex trading done by retail traders and investors must be facilitated by a Forex broker, there are many broker’s available on the internet, here is a list of the brokers we recommend here at LTTTM: Forex brokers.Typically, Forex trading strategies can take a number of different forms, and it is really up to the individual trader to pick the method that works the best for them. However, these are a few of the more popular Forex trading methods:
• Indicator based trading methods – these trading methods involve analyzing “lagging” indicators to try and predict future price movement of a Forex currency pair.
• Robot trading systems – Forex trading “robots” have recently become quite popular on the internet, these robot trading systems are essentially computer programs that tell you exactly where to enter and exit and drastically reduce the need for human interaction.
• Scalping – This is a short-term trading strategy where traders jump in and out of the market quickly for small profits.
• Price action based directional trading – The trading method of price action is a Forex trading strategy that involves analyzing a “clean” or indicator-free price to chart make one’s trading decisions. The primary advantage of price action trading is that it makes use of the ‘core’ price data of the market; price, therefore it removes the clutter and confusion that other trading methods can bring, leaving your mind clear and calm.
Nial Fuller is considered a leading ‘Authority’ on Price Action Forex trading strategies. If you want to learn more about harnessing the power and simplicity of Price Action Trading Strategies please visit Nial Fuller’s Forex Trading Course Page. Nial’s Students get lifetime access to all of his advanced price action Forex Courses, video lessons, webinar tutorials, daily trade setups newsletter, live trade setups discussion forum, traders support line & free ongoing course updates.
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