Introduction to Trading

  • What is Forex?

    Forex means Foreign Exchange and this is the simultaneous buying of one currency and selling of another. The foreign exchange market is the largest and most liquid financial market in the world with a daily average traded value of $1.9 trillion. Here, traders can buy, sell, exchange, and speculate on currencies. The Forex market is open 24 hours a day, five days a week and operates across nearly every time zone, which makes for an active market in a continual state of flux, with prices changing all the time.

    History and Evolution

    With the discovery of new lands and colonization, a sophisticated currency system based on the price of a commodity developed. Monarchs realized the potential of currency devaluation, printing more to create a deficit and reduce commodity prices. This led to the forex system we know today, where a currency’s value can be compared and traded globally.
Currency trading and exchange dates back to Ancient Egypt in 259 BC. A barter system was initially used, with one commodity traded for another based on its value.

    The forex market came into existence during the 1970s as a direct result of the elimination of government-imposed restrictions on foreign exchange. This significant development occurred following the introduction of the Bretton Woods system, which was established to regulate and set guidelines for financial interactions among nations in the aftermath of World War II. Under the Bretton Woods system, countries had previously adhered to fixed exchange rates. However, as time progressed, economies transitioned and opted for a more flexible approach by adopting floating exchange rates instead. This paradigm shift allowed currency values to fluctuate freely based on market forces rather than being bound by rigid, predetermined rates. This shift in the foreign exchange landscape played a pivotal role in shaping the forex market as we know it today.
The forex market has continued to grow steadily, with some substantial bouts of volatility in the late 1990s, and again during the global financial crisis of 2007-2009. Today it is the world’s largest financial market, with an average daily volume of about $5 trillion, and is continuing to grow.

    Importance in the Global Economy

    The foreign exchange market plays a crucial role in the global economy. It involves various participants such as investors, multinational firms, and buyers/sellers of goods and services. The market’s impact is seen in the prices of goods, balance of trade, and currency strength. Nations often engage in currency revaluations or devaluations to influence the market, leading to speculation and lasting effects. Due to fluctuating exchange rates, the market has become international, with transactions occurring outside the country of the currency.